Chap 10, Mankiw – Measurement of
national income
• Introduction and definition of the GDP
• Gross domestic product – meaning of the term
• Circular flow diagram and the methods of
calculating GDP
• Other measures of national income
• Quality of life and GDP
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I. Introduction and definition of the GDP
National income can be defined in various ways. The GDP defintion
is the most usual.
GDP =
• market value
• marketed goods vs. non-marketed goods:
• final goods and services
• produced
•within a country:
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II. 2 ways of measuring GDP:
1. expenditure method of calculating GDP:
GDP = Y =
C = consumption expenditure,
I = investment expenditure,
G = Government expenditure,
X = exports,
M = imports
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2. income method of calculating GDP
add “value-added” by all firms together;
value-added =
sum of value added by all firms =
Why?
4
III.The Circular-Flow Diagram – equivalence of the 2
methods of measuring GDP
Revenue
Goods &
Services sold
Market for
Goods
and Services
Firms
Inputs for
production
Wages, rent,
and profit
Spending
Goods &
Services
bought
Households
Market for
Factors
of Production
Labor, land,
and capital
Income
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III. Other ways of defining National Income
•
•
•
•
•
Gross National Product (GNP)
Net National Product (NNP)
National Income
Personal Income
Disposable Personal Income
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•
Gross national product (GNP) is the total income
•
It differs from GDP by
•
Net National Product (NNP) is the total income of
•
Depreciation is the wear and tear on the economy’s
NNP is an useful measure because
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•National
•It
Income (NI) is the total income earned by a nation’s
differs from NNP by excluding
this is excluded because
•Personal
income (PI) is the total earnings that
Unlike national income, it excludes
In addition, it includes
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•
Disposable personal income (DI) is the income
It equals personal income minus
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IV. Adjusting GDP for inflation
Recap: GDP is measured at market prices which fluctuate form
period to period
Real GDP:
Nominal GDP:
GDP deflator =
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Real and Nominal GDP
Year
Price of
Hot dogs
Quantity of
Hot dogs
Price of
Hamburgers
Quantity of
Hamburgers
2001
$1
100
$2
50
2002
$2
150
$3
100
2003
$3
200
$4
150
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Real and Nominal GDP
Calculating Nominal GDP:
2001
($1 per hot dog x 100 hot dogs) + ($2 per hamburger x 50 hamburgers) = $200
2002
($2 per hot dog x 150 hot dogs) + ($3 per hamburger x 100 hamburgers) = $600
2003
($3 per hot dog x 200 hot dogs) + ($4 per hamburger x 150 hamburgers) = $1200
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Real and Nominal GDP
Calculating Real GDP (base year 2001):
2001
($1 per hot dog x 100 hot dogs) + ($2 per hamburger x 50 hamburgers) = $200
2002
($1 per hot dog x 150 hot dogs) + ($2 per hamburger x 100 hamburgers) = $350
2003
($1 per hot dog x 200 hot dogs) + ($2 per hamburger x 150 hamburgers) = $500
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Real and Nominal GDP
Calculating the GDP Deflator:
2001
($200/$200) x 100 = 100
2002
($600/$350) x 100 = 171
2003
($1200/$500) x 100 = 240
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V. Quality of life vs. GDP
GDP is positively correlated with but not identical to economic wellbeing.
Factors that creates a difference between the two:
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GDP and Its Components (1998)
Government Purchases
Investment
Net Exports
18%
16%
-2 %
Consumption
68 %
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