ECONOMICS Q2
Chapter 20 – Measuring of a nation’s income
Economic branches:
Microeconomics = the study of how individuals households and firms make decisions and
how they interact with one another in markets.
Macroeconomics = the study of economy as a whole. The goal is to explain the economic
changes that affect many households, firms and markets simultaneously.
o Why is average income high in some countries while it is low in others?
o Why do prices rise rapidly in some periods of time while they are more stable in
other periods?
o Why do production and employment expand in some years and contract in others?
o What, if anything, can the government do to promote rapid growth in incomes, low
inflation and stable employment?
When judging whether the economy is doing well or poorly, it is natural to look at the total income of
everyone in the economy is earning.
Gross domestic product (GDP) = market value of all final goods and services produced within
a country in a given period of time (current tangible goods and intangible services)
o The total income of everyone in the economy
o The total expenditure on the economy’s output of goods and services
Income must equal expenditure = every transaction has a buyer and a seller.
Every euro of spending by some buyer is a euro of income for some seller.
GDP adds together many different kinds of products into a single measure of the value of economic
activity. To do this, market prices are used to measure the amount people are willing to pay for
different goods, they reflect the value of those goods. All items produced in the economy and sold
legally in markets, and market values of the housing services provided by economy’s stock of housing
are included in the GDP. Rental housing is easy to calculate, but bought houses are calculated by
estimating the rental value (=rent is included both in his expenditure and in his income).
GDP includes only the value of final goods, because the value of intermediate goods is already
included in the prices of final goods. Otherwise it would be double counting.
Exclusion within GDP:
Items that are produced and sold illicitly, such as illegal drugs
Vegetables that grow in your garden
Quality of environment
Value of work carried out by housewives and husbands
Voluntary work
Value of childcare work by grandparents
GDP measures the value of production within the geographic confines of a country within a specific
interval of time, usually a year or a quarter.
Y = C + I + G + (N – X)
GDP = CONSUMPTION + INVESTMENTS + GOVERNMENT PURCHASES + (EXPORT – IMPORT)
Consumption spending by households on goods and services, with the exception of purchases of
new housing
Investments spending on capital equipment, inventories and structures, including household
purchases of new housing that will be used in the future to produce more goods and services
1
, ECONOMICS Q2
Government purchases spending on goods and services by local, state and national governments
which also includes salaries of government workers and spending on public works. Sometimes, the
government pays things for which no good or service is exchanged, this is called a transfer payment.
Net exports spending on domestically produced goods and services by foreigners (exports) minus
spending on foreign goods by domestic residents (imports)
GDP per capita gross domestic product divided by the population of a country to give a measure
of national income per head
Other measures of income:
Gross national product (GNP)
Net national product (NNP)
o GNP minus losses from depreciation
National income
o NNP minus indirect business taxes, plus business subsidies
Personal income
o Excludes retained earnings
o Includes interest income and income from government transfer programmes
Disposable personal income
o Income that is left for households after satisfying all their obligations to the
government
REAL GDP NOMINAL GDP
the measure of the value of output in the the production of goods and services valued at
economy which takes into account price current prices
changes over time inflation
GDP at constant prices GDP at current or market prices
Calculated using prices that existed at a Calculated by multiplying the output of goods
particular base year and services by the price of those goods and
services in the reporting year
2
, ECONOMICS Q2
1. The prices in the base year provide the basis for comparing quantities in different years
2. For the base year, real GDP always equals nominal GDP
3. GDP has risen
4. The increase is attributable to an increase in the quantities produced, because the prices are
being held fixed at base year levels
5. Price levels have gone up by 71% compared to base year
Because real GDP measures the economy’s production of goods and services, it reflects the
economy’s ability to satisfy people’s needs and desires real GDP is a better gauge of economic
well-being than is nominal GDP.
GDP does not directly measure those things that make life worthwhile, but it does measure our
ability to obtain the inputs into a worthwhile life.
GDP deflator = (nominal GDP / real GDP) x 100
GDP deflator = a measure of price level calculated as ratio
GDP deflator for the base year always equals 100
Measures the change in nominal GDP from the base year that cannot be attributable to a
change in real GDP
Policymakers should care about GDP, because it helps to see where the economy is heading. A larger
GDP means that a nation can afford better healthcare, better educational systems and more of the
material necessities of life.
3
Chapter 20 – Measuring of a nation’s income
Economic branches:
Microeconomics = the study of how individuals households and firms make decisions and
how they interact with one another in markets.
Macroeconomics = the study of economy as a whole. The goal is to explain the economic
changes that affect many households, firms and markets simultaneously.
o Why is average income high in some countries while it is low in others?
o Why do prices rise rapidly in some periods of time while they are more stable in
other periods?
o Why do production and employment expand in some years and contract in others?
o What, if anything, can the government do to promote rapid growth in incomes, low
inflation and stable employment?
When judging whether the economy is doing well or poorly, it is natural to look at the total income of
everyone in the economy is earning.
Gross domestic product (GDP) = market value of all final goods and services produced within
a country in a given period of time (current tangible goods and intangible services)
o The total income of everyone in the economy
o The total expenditure on the economy’s output of goods and services
Income must equal expenditure = every transaction has a buyer and a seller.
Every euro of spending by some buyer is a euro of income for some seller.
GDP adds together many different kinds of products into a single measure of the value of economic
activity. To do this, market prices are used to measure the amount people are willing to pay for
different goods, they reflect the value of those goods. All items produced in the economy and sold
legally in markets, and market values of the housing services provided by economy’s stock of housing
are included in the GDP. Rental housing is easy to calculate, but bought houses are calculated by
estimating the rental value (=rent is included both in his expenditure and in his income).
GDP includes only the value of final goods, because the value of intermediate goods is already
included in the prices of final goods. Otherwise it would be double counting.
Exclusion within GDP:
Items that are produced and sold illicitly, such as illegal drugs
Vegetables that grow in your garden
Quality of environment
Value of work carried out by housewives and husbands
Voluntary work
Value of childcare work by grandparents
GDP measures the value of production within the geographic confines of a country within a specific
interval of time, usually a year or a quarter.
Y = C + I + G + (N – X)
GDP = CONSUMPTION + INVESTMENTS + GOVERNMENT PURCHASES + (EXPORT – IMPORT)
Consumption spending by households on goods and services, with the exception of purchases of
new housing
Investments spending on capital equipment, inventories and structures, including household
purchases of new housing that will be used in the future to produce more goods and services
1
, ECONOMICS Q2
Government purchases spending on goods and services by local, state and national governments
which also includes salaries of government workers and spending on public works. Sometimes, the
government pays things for which no good or service is exchanged, this is called a transfer payment.
Net exports spending on domestically produced goods and services by foreigners (exports) minus
spending on foreign goods by domestic residents (imports)
GDP per capita gross domestic product divided by the population of a country to give a measure
of national income per head
Other measures of income:
Gross national product (GNP)
Net national product (NNP)
o GNP minus losses from depreciation
National income
o NNP minus indirect business taxes, plus business subsidies
Personal income
o Excludes retained earnings
o Includes interest income and income from government transfer programmes
Disposable personal income
o Income that is left for households after satisfying all their obligations to the
government
REAL GDP NOMINAL GDP
the measure of the value of output in the the production of goods and services valued at
economy which takes into account price current prices
changes over time inflation
GDP at constant prices GDP at current or market prices
Calculated using prices that existed at a Calculated by multiplying the output of goods
particular base year and services by the price of those goods and
services in the reporting year
2
, ECONOMICS Q2
1. The prices in the base year provide the basis for comparing quantities in different years
2. For the base year, real GDP always equals nominal GDP
3. GDP has risen
4. The increase is attributable to an increase in the quantities produced, because the prices are
being held fixed at base year levels
5. Price levels have gone up by 71% compared to base year
Because real GDP measures the economy’s production of goods and services, it reflects the
economy’s ability to satisfy people’s needs and desires real GDP is a better gauge of economic
well-being than is nominal GDP.
GDP does not directly measure those things that make life worthwhile, but it does measure our
ability to obtain the inputs into a worthwhile life.
GDP deflator = (nominal GDP / real GDP) x 100
GDP deflator = a measure of price level calculated as ratio
GDP deflator for the base year always equals 100
Measures the change in nominal GDP from the base year that cannot be attributable to a
change in real GDP
Policymakers should care about GDP, because it helps to see where the economy is heading. A larger
GDP means that a nation can afford better healthcare, better educational systems and more of the
material necessities of life.
3
