Chapter
10
Measuring a Nation’s Income
GNP, Business Cycles
The Components of GDP
• Y = C + I + G + NX
– Identity
– Y = GDP
– C = consumption
– I = investment
– G = government purchases
– NX = net exports
2
Real Versus Nominal GDP
• Total spending rises from one year to the next
– Economy - producing a larger output of goods
and services
– And/or goods and services are being sold at
higher prices
• Nominal GDP
– Production of goods and services
– Valued at current prices
3
Real Versus Nominal GDP
• Real GDP
– Production of goods and services
– Valued at constant (or base year) prices
– Designate one year as base year
– Not affected by changes in prices
• For the base year
– Nominal GDP = Real GDP
4
Real Versus Nominal GDP
• The GDP deflator (all goods and services)
– Measure of the price level for all goods and
services – inflation at the national level
– Ratio of nominal GDP to real GDP times 100
– =100 for the base year
– Measures the current level of prices relative to
the level of prices in the base year
• Inflation
– Economy’s overall price level is rising
5
Real GDP over recent history
• The GDP data
– Real GDP grows over time
– Growth is not steady
• Recession
– Real GDP declines
– Lower income
– Rising unemployment
– Falling profits
– Increased bankruptcies
6
List of countries by GDP (nominal, Atlas
method) (10^6 current US$)(Top 10)
7
Figure 2
Real GDP in the United States
This figure shows quarterly data on real GDP for the U.S. economy since 1965.
Recessions—periods of falling real GDP—are marked with the shaded vertical bars. 8
Links
9
10
GNP Growth Rate
and the current “Great Recession”
Jun 30, 2014
4.06%
Dec 31, 2013
4.57%
Dec 31, 2012
3.47%
Dec 31, 2011
3.64%
Dec 31, 2010
4.56%
Dec 31, 2009
0.11%
Dec 31, 2008
-0.92%
Dec 31, 2007
4.40%
Dec 31, 2006
5.12%
Dec 31, 2005
6.52%
Dec 31, 2004
6.31%
Dec 31, 2003
6.42%
11
The Great Depression
and the War Years (WW II)
Dec 31, 1945
76.35%
Dec 31, 1944
118.27%
Dec 31, 1943
117.22%
Dec 31, 1942
89.93%
Dec 31, 1941
39.14%
Dec 31, 1940
21.20%
Dec 31, 1939
25.84%
Dec 31, 1938
30.84%
Dec 31, 1937
62.59%
Dec 31, 1936
42.69%
Dec 31, 1935
-4.01%
Dec 31, 1934
-27.55%
Dec 31, 1933
-45.32%
12
GNP Growth is Not Steady
13
The Business Cycle – Another Look
14
Business Cycle - Phases
15
GDP - Good Measure of Economic Well-being?
• GDP – “single measure of the economic wellbeing of a society”?
– Measures both economy’s total income and
total expenditure
– Larger GDP correlated with
• Good life
• Better healthcare
• Better educational systems
16
International differences in GDP
and the quality of life
• Rich countries - Higher GDP per person
– Better
• Life expectancy
• Literacy
• Internet usage
• Poor countries - Lower GDP per person
– Worse
• Life expectancy
• Literacy
• Internet usage
17
GDP - Good Measure of Economic Well-being?
• Does not consider how income is distributed
(GINI coefficient)
• A low Gini coefficient indicates a more equal
distribution,
– 0 corresponding to complete equality,
– higher Gini coefficients => more unequal
» 1 corresponding to complete inequality. When used as a
measure of income inequality,
» most unequal society will be one in which a single person
receives 100% of the total income and the remaining people
receive none (G = 1−1/N);
» and the most equal society will be one in which every
person receives the same income (G = 0).
18
Relative Income Distribution Rankings
• U.S., Gini coefficient of 0.450, ranks near the extreme
end of the inequality scale
– comparable income inequality: Cameroon,
Madagascar, Rwanda, Uganda, Ecuador.
• China, significantly more equal than the U.S.
with a Gini coefficient of 0.415
•
http://www.theatlantic.com/international/archive/2011/09/map-us-ranks-near-bottom-on-income-inequality/245315/
19
20
21
22
Equality of Distribution of Income
23
GDP - Good Measure of Economic Well-being?
• GDP – not a perfect measure of well-being
– Besides equality/inequality of distribution of
income
– Also doesn’t include value of
• Leisure
• Quality of the environment
• Almost all activity that takes place outside
markets (some legal, some not!)
24
Table
3
GDP and the quality of life
Country
United States
Japan
Germany
Russia
Mexico
Brazil
China
Indonesia
India
Pakistan
Bangladesh
Nigeria
Real GDP per
person (2005)
Life
expectancy
Adult literacy
(% of population)
Internet usage
(% of population)
$41,890
31,267
29,461
10,845
10,751
8,402
6,757
3,843
3,452
2,370
2,053
1,128
78 years
82
79
65
76
72
72
70
64
65
63
47
99%
99
99
99
92
89
91
90
61
50
47
69
63 %
67
45
15
18
19
9
7
3
7
0.3
4
The table shows GDP per person and three other measures of the quality of life for
twelve major countries.
25