Measuring GDP

PowerPoint Presentations for
Principles of
Macroeconomics
Sixth Canadian Edition
by Mankiw/Kneebone/McKenzie
Adapted for the
Sixth Canadian Edition by
Marc Prudhomme
University of Ottawa
MEASURING A
NATIONS
INCOME
Chapter 5
Copyright 2014 by Nelson Education Ltd.
5-2
MEASURING A NATIONS INCOME

Microeconomics: the study of how
individuals and how firms make decisions
and how they interact in markets
5-3

Macroeconomics: the study of economywide phenomena, including inflation,
unemployment, and economic growth
5-4
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 societys
economic well-being
5-5
THE ECONOMYS INCOME

AND EXPENDITURE
For an economy as a whole,
income must equal expenditure.
5-6
FIGURE 5.1:
The Circular-Flow Diagram
5-7
QuickQuiz
What two things does gross domestic

product measure?
How can you measure two things at once?
5-8
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
5-9
GDP Is the Market Value . . .

GDP adds together many different kinds
of products into a single measure of the
value
of economic activity.
5-10
. . . 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
economys stock of housing.
There are some products, however, that
GDP excludes because measuring them is
so difficult.
5-11
. . . 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 firms
inventory of goods to be used or sold at a
later date.
5-12
. . . Goods and Services . . .
GDP includes both tangible goods (food,

clothing, cars) and intangible services
(haircuts, housecleaning, dentist visits).
5-13
. . . Produced . . .
GDP includes goods and services

currently produced.
5-14
. . . Within a Country . . .
GDP measures the value of production

within the geographic confines of a
country.
5-15
. . . 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 economys flow of
income and expenditure during that
interval.
5-16
GDP at Market Price and GDP at

Factor Cost
GDPFC = GDPMP indirect taxes + business
subsidies
GDPFC = GDPMP (indirect taxes - business
subsidies)
GDPFC = GDPMP Net Indirect Taxes (NIT)
5-17
FYI:
Other Measures of
Income
Gross national product

Net national product
National income
Personal income
Disposable personal income
5-18
Gross national product

Gross national product (GNP) is the total income earned by a
nations permanent residents (called nationals). It differs from GDP
by including income that our citizens earn abroad and excluding
income that foreigners earn here.
For example, when an Indian citizen works temporarily in the United
States, her production is part of U.S. GDP, but it is not part of U.S.
GNP. (It is part of Indias GNP.) For most countries domestic
residents are responsible for most domestic production, so GDP and
GNP are quite close
5-19
Net national product

Net national product (NNP) is the total income of a nations
residents (GNP) minus losses from depreciation.
Depreciation is the wear and tear on the economys stock of
equipment and structures, such as trucks rusting and computers
becoming obsolete.
In the national income accounts, depreciation is called the
consumption of fixed capital.
5-20
National income
National income is the total income earned by a nations residents in
the production of goods and services.
It is almost identical to net national product.
These two measures differ because of the statistical discrepancy
that arises from problems in data collection.
5-21
Personal income
Personal income is the income that households and non-corporate
businesses receive. Unlike national income, it excludes retained
earnings, which is income that corporations have earned but have
not paid out to their owners. It also corporate income taxes, and
contributions for social insurance (mostly Social Security taxes).
In addition, personal income includes the interest income that
households receive from their holdings of government debt and the
income that households receive from government transfer
programs, such as welfare and Social Security.
5-22
Personal Income
Personal Income = National Income (or NNPFC)

corporate taxes undistributed profits
contributions to social insurance + Interest
from government debt + transfer payments
5-23
Disposable personal income

Disposable personal income is the income that households and
non-corporate businesses have left after satisfying all their
obligations to the government. It equals personal income minus
personal taxes.
DPI = Personal Income (PI) Personal

Taxes
DPI = C + S
5-24
Per capita income
Per capita income refers to the average income per

head of population in the county. It is equal to
National income divided by the countrys
population.
Per Capita Income =

Population
National Income
Total
QuickQuiz
Which contributes more to the GDP: the
production of a kilogram of hamburger or
the production of a kilogram of caviar?
Why?
5-26
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 years 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.
5-27
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.
5-28
Active Learning
Answers
C. Jane spends $1200 on a computer to use in her editing
business. She got last years 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.
5-29
THE COMPONENTS OF GDP

What Is Not Counted in GDP?
GDP excludes most items that are produced
and consumed at home and that never enter
the marketplace.
It excludes items produced and sold illicitly,
such as illegal drugs.

GDP (Y) is the sum of the following:
Consumption (C)
Investment (I)
Government Purchases (G)
Net Exports (NX)
Y = C + I + G + NX

Consumption (C):
The spending by households on goods and services, with the
exception of purchases of new housing.
Investment (I):
The spending on capital equipment, inventories, and structures,
including new housing.

Government Purchases (G):
The spending on goods and services by local,
state, and federal governments.
Does not include transfer payments because
they are not made in exchange for currently
produced goods or services.
Net Exports (NX):

Exports minus imports.
Table 1 GDP and Its Components
Copyright2004 South-Western
GDP and Its Components
Investment
16%
Government
Purchases
Net Exports
18%
-3 %
Consumption
69%
REAL VERSUS NOMINAL GDP

Nominal GDP values the production of goods
and services at current prices.
Real GDP values the production of goods and
services at constant prices.
Table 2 Real and Nominal GDP
The GDP Deflator

The GDP deflator is a measure of the price level
calculated as the ratio of nominal GDP to real
GDP times 100.
It tells us the rise in nominal GDP that is
attributable to a rise in prices rather than a rise
in the quantities produced.

An accurate view of the economy requires
adjusting nominal to real GDP by using the GDP
deflator.
The GDP Deflator

The GDP deflator is calculated as follows:
N o m in a l G D P
G D P d e fla to r =
100
R eal G D P
The GDP Deflator

Converting Nominal GDP to Real GDP
Nominal GDP is converted to real GDP as follows:
R e a l G D P20X X
N o m in a l G D P 20X X
100
G D P d e f la to r2 0 X X
The GDP Deflator
5-45
5-46
5-47
Y = C + I + G + NX
Y
: GDP
: Consumption
: Investment
: Government purchases
NX
: Net exports
5-48
Consumption
Consumption: spending by households
in goods and services, with the exception
of purchases of new housing
5-49
Investment
Investment: spending in capitalequipment, inventories, and structures,
including household spending on new
housing
5-50
Government Purchases
Government purchases: spending in
goods and services by local, territorial,
provincial, and federal governments
5-51
Net Exports
Stuart Miles/Shutterstock
Net exports: the

value of a nations
exports minus the
value of its imports;
also called the
trade balance
5-52
Case Study:
The Components of Canadian GDP
Table 5.1:
GDP: Total Expenditure and Its Components
5-53
Case Study:
Table 5.1:
GDP: Total Expenditure and Its Components
5-54
Case Study:
Table 5.2:
GDP: Total Income and Its Components
5-55
QuickQuiz
What are the four components of

expenditure?
What does it mean when net exports have
a negative value?
5-56

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.
5-57
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.
5-58
TABLE 5.3:
Real and Nominal GDP
5-59
The GDP Deflator

GDP deflator: a measure of the price
level calculated as the ratio of nominal
GDP to real GDP times 100
5-60
The GDP Deflator
5-61
QuickQuiz
Define real and nominal GDP.

Which is a better measure of economic wellbeing?
Why?
5-62
Case Study:
Real GDP over Recent History
Figure 5.2
5-63
Case Study:
GDP, GNP, and Foreign Ownership
Figure 5.3:
Foreign Ownership
5-64
5-65
Importance of National Income Data

1. to measure the performance and working of the
economy.
2. to understand the structure of the economy.
3. to measure the standard of living of the people.
4. to understand the functional and personal distribution of
income.
5. for international comparison of economies and standard
of living of the people.
6. for use in national economic planning and policy making.
5-67
5-68
5-69
5-70
5-71
5-72
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)
5-73
Case Study:
Measuring Economic Well-Being in Canada
Figure 5.4:
Economic Well-Being in Canada
5-74
Case Study:
International Differences in GDP and the Quality

of Life
Table 5.4:
GDP, Life Expectancy, and Literacy
5-75
Classroom Activity
GDP and Economic Well-Being
1. If GDP is a good measure of economic wellbeing, why is Switzerlands gross domestic
product so much lower than Indias GDP or
Chinas GDP?
2. What measures would be better to
compare the well-being of different
countries?
3. How do you expect these direct measures
5-76
THE END
Chapter 5
5-77

Measuring GDP

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PowerPoint Presentations for

Copyright 2014 by Nelson Education Ltd.

MEASURING A NATIONS INCOME

Copyright 2014 by Nelson Education Ltd.

MEASURING A NATIONS INCOME

Copyright 2014 by Nelson Education Ltd.

MEASURING A NATIONS INCOME

Copyright 2014 by Nelson Education Ltd.

THE ECONOMYS INCOME

Copyright 2014 by Nelson Education Ltd.

The Circular-Flow Diagram

Copyright 2014 by Nelson Education Ltd.

What two things does gross domestic

Copyright 2014 by Nelson Education Ltd.

GDP Is the Market Value . . .

Copyright 2014 by Nelson Education Ltd.

. . . Goods and Services . . .

GDP includes both tangible goods (food,

Copyright 2014 by Nelson Education Ltd.

GDP includes goods and services

Copyright 2014 by Nelson Education Ltd.

GDP measures the value of production

Copyright 2014 by Nelson Education Ltd.

. . . In a Given Period of Time

GDP at Market Price and GDP at

Copyright 2014 by Nelson Education Ltd.

Gross national product

Gross national product

Net national product

Copyright 2014 by Nelson Education Ltd.

Copyright 2014 by Nelson Education Ltd.

Personal Income = National Income (or NNPFC)

Copyright 2014 by Nelson Education Ltd.

Disposable personal income

DPI = Personal Income (PI) Personal

Per capita income

Per capita income refers to the average income per

Per Capita Income =

Copyright 2014 by Nelson Education Ltd.

Consumption and GDP rise by $200.

Investment rises by $1800, net exports fall by

Copyright 2014 by Nelson Education Ltd.

Current GDP and investment do not change

Consumption rises by $470 million, inventory

THE COMPONENTS OF GDP

THE COMPONENTS OF GDP

THE COMPONENTS OF GDP

THE COMPONENTS OF GDP

Net Exports (NX):

Table 1 GDP and Its Components

GDP and Its Components

REAL VERSUS NOMINAL GDP

Table 2 Real and Nominal GDP

Table 2 Real and Nominal GDP

Table 2 Real and Nominal GDP

The GDP Deflator

REAL VERSUS NOMINAL GDP

The GDP Deflator

The GDP Deflator

Table 2 Real and Nominal GDP

The GDP Deflator

Copyright 2014 by Nelson Education Ltd.

Copyright 2014 by Nelson Education Ltd.

Copyright 2014 by Nelson Education Ltd.