Spring, 2017
The Income of Nations: Defining and
Measuring Macroeconomic Aggregates
Economic Department, Saint Louis University
Instructor: Xi Wang
Road Map
General Goods market
What does the life looks like before 1800?
What does the life looks like now?
It is a popular word
Motivation and Question
Road Map
Anwser to that question
• Q: How can we measure the total activity of millions of economic agents?
• A: This market value method is called National income accounts (Model).
And this market value will be called to be Gross Domestic Product(GDP).
• In U.S we have a special name for it: National Income and Product
Accounts (NIPA)
For more information on NIPA: http://www.bea.gov/iTable/index_nipa.cfm
NIPA is an accounting Model!
• NIPA is an accounting Model!
• It is a Model, so a simplified description of our world
• It gives us a method to add things up, but it is a simplified method!
• Why do I state it is A simplified Method? Since GDP ignore a lot of important issues; We
will see later.
Three Methods to Calculate GDP
• We have three methods to calculate GDP, and you will see that these
methods will give you the same answer.
• Production method
• Expenditure Method
• Income Method
Road Map
NIPA: Production=Expenditure=Income
• Gross Domestic Product (of U.S): the market value of all newly-produced and
final goods and services produced by factors of production( located in the US),
during some specified period of time, usually one year.
• Final Goods: Used by final consumers; The end product in a chain of production
• GDP is a measure of production, not a measure of sales to consumers. So
something that is produced is counted in GDP even if it is not sold to a
customer.(Then to whom?)(Inventory Investment)
And Even something sold to consumers is not counted in GDP!!!(imported goods)
NIPA: Production=Expenditure=Income
• Ok, The product need to be sold to someone. Customers or firm itself.
• Then there would be a banches of buyers. And this purchase would be
their expenditure.
• Those goods not sold to customers would be sold to frims themselves, or
understood as purchased by the frims themselves.
NIPA: Production=Expenditure=Income
• Where does the revenue of Poduction go?
• Say Revenue of firm A is $100 dollar, and A should hire labor as input to
production, which incurs cost 20. Then 20 is the income of workers(Labor
Income).And $80 would be profit, which is the income of firm
owner.(Capital Income)
• Hence Production=Expenditure=Income
Indentity: Circular Flows
Road Map
• Motivation and Introduction
• Methods to calculate GDP
• Production method
• Expenditure method
• Income method
Looking into Production Method deeper
• Gross Domestic Product (of U.S): the market value of all newlyproduced and final goods a n d s e r vi ce s p r o d u c e d b y f a c t o r s o f
production( located in the US), during some specified period of time,
usually one year.
• Market value of final goods?
• It sums up the market value that is added by each domestic firm in
the production process.(Value added)
Production, Example
$15 Billion+ $35 Billion, are Market value of
Final Goods!, But not all of them are provided
by Domestic Firms.
Dell=10+35-30
Best Buy=15-10
Value added = sale - other cost than labor.
Road Map
• Motivation and Introduction
• Methods to calculate GDP
• Production method
• Expenditure method
• Income method
Looking into Expenditure Method deeper
• Identity: Production=Expenditure=Income
• Recall the logic behind this first equation: All the product will be purchased
by buyers or manufactuers themselves.
• Value of fianl product supplyed by Domestic Firms = Expenditure by
Buyers (from worldwide).
• To calculate GDP by this method, let's categorize expenditures first
Expenditure Method, Categories
• Consumption. This is the market value of consumption goods and consumption services that
are bought by domestic households, except expenditures that are made on residential
construction
• (Private) Investment. This is the market value of new physical capital that is bought by
domestic households and domestic firms, residential houses, business inventories(Remember
the good purchased by himself?), business structures(factory, manufacture line)
•
Note: When macroeconomists talk about investment, they are referring only to purchases of new physical capital and not to financial
investments like purchases of stocks or bonds.
Expenditure Method, Categories
•
• (Private) Investment.
Consumption.
Expenditure Method, Categories
• Government expenditure. This is the market value of government
purchases of Goods and Services, only cost will be counted.
• Export. market value of all domestically produced goods and services that
are sold to households, firms, and governments in foreign countries
Expenditure Method, Categories
•
•
Government expenditure.
Export.
Expenditure Method, Categories
•
•
Import in Consumption.
Import in Investment
Looking into Expenditure Method deeper
• Y = C + I + G + X − M （national income accounting identity.）
2013 U.S GDP & Shares
• Y-C-G=I+X-M (Saving = Investment + Exports – Imports.)
Road Map
• Motivation and Introduction
• Methods to calculate GDP
• Production method
• Expenditure method
• Income method
Looking into Income Method deeper
• Labor income, income paid for people’s work.
• Capital income, income (or benefits) realized by the owners of physical
capital (for instance, a house) or other ownership (for instance, you own a
firm, lend money to someone).
• In English, You will have income since you offer labor, Loan, talent to the
firm.
Road Map
• Motivation and Introduction
• Methods to calculate GDP
• Production method
• Expenditure method
• Income method
• An example
• What does GDP miss?
Example
• The best milk LLC. hired 2 workers to produce 3 tons of milk.
• Price is $10/ton
• Revenue $30
• Wage bill $20
• Value added=$30-0=GDP(Production method)
• Labor income= Wage bill = $20
• Capital Income= profit =$30-$20=$10
• Income method of GDP = $20 +$10= $30
Road Map
• Motivation and Introduction
• Methods to calculate GDP
• Production method
• Expenditure method
• Income method
• An example
• What does GDP miss?
• Wealfare?
What Isn’t Measured by GDP?
• Home production
• Underground Economy.
• Negative Externalities
• Leisure
What Isn’t Measured by GDP?
• GDP is supposed to be a measure of standard of well-being. Does it do a good
job? How about inequality?
• GDP doesn’t capture, in a well-defined sense, changes in the way we live
• Can GDP represent how happy people feel?
What Isn’t Measured by GDP?
What Isn’t Measured by GDP?
• GDP is supposed to be a measure of standard of well-being. Does it do a
good job?
• GDP is a total number
• Well-being of a society should be measured by the living standard of an
average people.
• Or income of an average people.
• GDP per capita is the measure of standard of well-being.