Post on 26-Mar-2015
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Measuring a Nation’s Income
Professor Chris AdamAustralian Graduate School of ManagementUniversity of Sydney and University of New
South Wales
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INTRODUCTION
• Macroeconomics – study of economy as a whole– Explain economic changes that affect many households, firms and markets at
once
• Consider data that are used to monitor overall economy
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GROSS DOMESTIC PRODUCT
• GDP– Total income of everyone working in economy
– Total expenditure on economy’s output of goods and services
• For economy as a whole, income must equal expenditure
• Circular flow diagram
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GROSS DOMESTIC PRODUCT
• GDP is… the market value … use of prices
… of all … external sales; imputation
… final … vs intermediate
… goods and services … tangibles and intangibles
… produced … current production
… within a country … vs Gross National Product
… in a given period of time. quarterly; annually
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COMPONENTS OF GROSS DOMESTIC PRODUCT
• Algebra!
Y = C + I + G + NX
Y is GDP
C is consumption: household spending
I is investment: spending that creates future income
G is government: spending by government
NX is net exports: exports (foreign-purchased, domestic-produced g&s) minus imports (domestic-purchased, foreign-produced g&s)
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MEASURING GDP• Three methods:
– GDP expenditure: method described above
– GDP income: sum of factor incomes, consumption of fixed capital, net indirect taxes
– GDP production: market value of g&s produced minus cost of g&s used (“intermediate production”); also called “value added”
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DATA
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REAL vs NOMINAL GDP• Increase of GDP(E) over time
– We produced more g&s at the same prices?
– We paid more for the same g&s?
– Some combination?
• Nominal GDP: value of g&s produced now using current prices
• Real GDP: value of g&s produced now using previous (unchanging) prices
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REAL vs NOMINAL GDPNominal GDP
GDP deflator = x 100
Real GDP
• Real GDP has grown over time but not constantly
• GDP not measure “beauty of our poetry”, but can tell us if we can afford poetry
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WHAT GDP MISSES• Leisure reduction increases GDP but may reduce well-being
• Removal of environmental regulation may increase GDP but reduce quality of environment
• Use of market prices excludes non-market activities