PowerPoint Presentations for
Principles of Macroeconomics
Sixth Canadian Edition
by Mankiw/Kneebone/McKenzie
Adapted for the
Sixth Canadian Edition by
Marc Prud’homme
University of Ottawa
MEASURING A
NATION’S
INCOME
Chapter 5
Copyright © 2014 by Nelson Education Ltd.
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MEASURING A NATION’S INCOME
Microeconomics: the study of how
individuals and how firms make decisions
and how they interact in markets
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MEASURING A NATION’S INCOME
Macroeconomics: the study of economywide phenomena, including inflation,
unemployment, and economic growth
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MEASURING A NATION’S INCOME
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Thinkstock
Gross domestic product
(GDP): measures the
total income of a nation;
the most closely
watched economic
statistic because it is the
best measure of a
society’s economic wellbeing
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THE ECONOMY’S INCOME
AND EXPENDITURE
For an economy as a whole,
income must equal expenditure.
CASH FLOW IN = CASH FLOW OUT
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FIGURE 5.1:
The Circular-Flow Diagram
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QuickQuiz
What two things does gross domestic
product measure?
How can you measure two things at once?
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THE MEASUREMENT OF
GROSS DOMESTIC PRODUCT
GDP: the market value of all final goods
and services produced within a country in
a given period of time
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“GDP Is the Market Value . . .”
GDP adds together many different kinds
of products into a single measure of the
value of economic activity.
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“. . . Of All . . .”
It includes all items produced in the
economy and sold legally in markets.
GDP also includes the market value of the
housing services provided by the
economy’s stock of housing.
There are some products, however, that
GDP excludes because measuring them is
so difficult.
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“. . . Final . . .”
GDP includes only the value of final
goods.
The reason is that the value of
intermediate goods is already included in
the prices of the final goods.
An important exception to this principle
arises when an intermediate good is
produced and is added to a firm’s
inventory of goods to be used or sold at a
later date.
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“. . . Goods and Services . . .”
GDP includes both tangible goods (food,
clothing, cars) and intangible services
(haircuts, housecleaning, dentist visits).
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“. . . Produced . . .”
GDP includes goods and services
currently produced.
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“. . . Within a Country . . .”
GDP measures the value of production
within the geographic confines of a
country.
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“. . . In a Given Period of Time”
GDP measures the value of production
that takes place within a specific interval
of time.
Usually that interval is a year or a
quarter.
GDP measures the economy’s flow of
income and expenditure during that
interval.
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FYI:
Other Measures of Income
• Gross national product
• Net national product
• National income
• Personal income
• Disposable personal income
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QuickQuiz
Which contributes more to the GDP: the
production of a kilogram of hamburger or
the production of a kilogram of caviar?
Why?
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Active Learning
GDP and Its Components
In each of the following cases, determine how much GDP and each
of its components is affected (if at all).
A. Debbie spends $200 to buy her husband dinner at the finest
restaurant in Boston.
B. Sarah spends $1800 on a new laptop to use in her publishing
business.
C. Jane spends $1200 on a computer to use in her editing business.
She got last year’s model on sale for a great price from a local
manufacturer.
D. General Motors builds $500 million worth of cars, but consumers
only
buy $470 million worth of them.
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Active Learning
Answers
A. Debbie spends $200 to buy her husband dinner at the
finest restaurant in Toronto.
Consumption and GDP rise by $200.
B. Sarah spends $1800 on a new laptop to use in her
publishing business. The laptop was built in China.
Investment rises by $1800, net exports fall by $1800,
GDP is unchanged.
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Active Learning
Answers
C. Jane spends $1200 on a computer to use in her editing
business. She got last year’s model on sale for a great
price from a local manufacturer.
Current GDP and investment do not change because
the computer was built last year.
D. General Motors builds $500 million worth of cars, but
consumers only buy $470 million of them.
Consumption rises by $470 million, inventory investment
rises by $30 million, and GDP rises by $500 million.
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THE COMPONENTS OF GDP
Y = C + I + G + NX
Y
: GDP
C
: Consumption
I
: Investment
G
: Government purchases
NX
: Net exports
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Consumption
Consumption: spending by households in
goods and services, with the exception of
purchases of new housing
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Investment
Investment: spending in capitalequipment, inventories, and structures,
including household spending on new
housing
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Government Purchases
Government purchases: spending in
goods and services by local, territorial,
provincial, and federal governments
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Net Exports
Net exports: the
value of a nation’s
exports minus the
value of its imports;
also called the
trade balance
Stuart Miles/Shutterstock
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Case Study:
The Components of Canadian GDP
 Table 5.1:
GDP: Total Expenditure and Its Components
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Case Study:
The Components of Canadian GDP
 Table 5.2:
GDP: Total Income and Its Components
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QuickQuiz
What are the four components of
expenditure?
What does it mean when net exports
have a negative value?
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REAL VERSUS NOMINAL GDP
 If total spending rises from one year to the next,
one of two things must be true:
1. The economy is producing a larger output
of goods and services.
2. Goods and services are being sold at
higher prices.
 When studying changes in the economy over
time, economists want to separate these two
effects.
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A Numerical Example
 Table 5.3 shows some data for an economy
that produces only two goods:
 Hot dogs
 Hamburgers
 The table shows the quantities of the two
goods produced and their prices in the years
2010, 2011, and 2012.
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TABLE 5.3:
Real and Nominal GDP
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The GDP Deflator
GDP deflator: a measure of the price level
calculated as the ratio of nominal GDP to
real GDP times 100
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The GDP Deflator
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QuickQuiz
Define real and nominal GDP.
Which is a better measure of economic wellbeing?
Why?
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Case Study:
Real GDP over Recent History
 Figure 5.2
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Case Study:
GDP, GNP, and Foreign Ownership
 Figure 5.3:
Foreign Ownership
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GDP AND ECONOMIC WELL-BEING
“GDP does not allow for the health of our children, the
quality of their education, or the joy of their play. It does not
include the beauty of our poetry or the strength of our
marriages; the intelligence of our public debate or the
integrity of our public officials. It measures neither our wit nor
our courage; neither our wisdom nor our learning; neither
our compassion nor our devotion to our country; it measures
everything, in short, except that which makes life
worthwhile. And it tells us everything about America except
why we are proud that we are Americans.”
Robert Kennedy (1968)
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Case Study:
Measuring Economic Well-Being in Canada
 Figure 5.4:
Economic Well-Being in Canada
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Case Study:
International Differences in GDP and the Quality of Life
 Table 5.4:
GDP, Life Expectancy, and Literacy
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Classroom Activity
GDP and Economic Well-Being
1. If GDP is a good measure of economic wellbeing, why is Switzerland’s gross domestic
product so much lower than India’s GDP or
China’s GDP?
2. What measures would be better to compare the
well-being of different countries?
3. How do you expect these direct measures to
correlate with per capita GDP?
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THE END
Chapter 5
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