National Income. Sherif Khalifa. Sherif Khalifa () National Income 1 / 28

National Income Sherif Khalifa Sherif Khalifa () National Income 1 / 28

People with higher incomes enjoy higher standards of living. To judge whether the economy is doing well, we look at the total income that everyone in the economy is earning. Gross Domestic Product GDP measures the total income of a nation. GDP is thought to be the best single measure of economic well being. GDP measures the total income of everyone in the economy and the total expenditure on the economy s output. For an economy as whole, every dollar of spending by some buyer is a dollar of income for some seller. Sherif Khalifa () National Income 2 / 28

Revenue (=GDP) G & S sold Markets for Goods & Services Spending (=GDP) G & S bought Firms Households Factors of production Wages, rent, profit (=GDP) Markets for Factors of Production Labor, land, capital Income (=GDP) Sherif Khalifa () National Income 3 / 28

Definition Gross Domestic Product is the market value of all final goods and services produced within a country in a given period of time. Sherif Khalifa () National Income 4 / 28

Definition Gross Domestic Product is the market value of all final goods and services produced within a country in a given period of time. The diversity of products in the economy complicates the calculation of GDP. GDP adds together different kinds of products into one value of economic activity. The value of economic activity is calculated using market prices. Market prices measure the amount people are willing to pay for products, thus they reflect the value of those products. Sherif Khalifa () National Income 5 / 28

Definition Gross Domestic Product is the market value of all final goods and services produced within a country in a given period of time. GDP includes all items produced in the economy and sold legally in markets. GDP excludes items produced and sold illicitly. GDP excludes all items produced and consumed at home. Sherif Khalifa () National Income 6 / 28

Definition Gross Domestic Product is the market value of all final goods and services produced within a country in a given period of time. GDP includes the value of final goods and not intermediate goods, to avoid double counting. Final goods are intended for the end user. Intermediate goods are ingredients in the production of other goods. The value of intermediate goods is included in the prices of the final goods. An exception is when an intermediate good is produced and is added to a firm s inventory for sale at a later date. Sherif Khalifa () National Income 7 / 28

Definition Gross Domestic Product is the market value of all final goods and services produced within a country in a given period of time. GDP includes tangible goods and intangible services. Tangible goods include durable and non-durable goods. Durable goods are goods that last for a long period of time. Non-durable goods are goods that do not last for a long period of time. Sherif Khalifa () National Income 8 / 28

Definition Gross Domestic Product is the market value of all final goods and services produced within a country in a given period of time. GDP includes goods and services currently produced. GDP does not include items produced in the past. GDP does not include the sale of used items. Sherif Khalifa () National Income 9 / 28

Definition Gross Domestic Product is the market value of all final goods and services produced within a country in a given period of time. GDP measures the value of production within the geographic confines of a country. The items are included in GDP if they are produced domestically, regardless of the nationality of the producer. The production of citizens abroad is not included in the GDP of the citizen s country. Sherif Khalifa () National Income 10 / 28

Definition Gross Domestic Product is the market value of all final goods and services produced within a country in a given period of time. GDP measures the value of production that takes place within a specific interval of time. Usually the interval is a year or a quarter. When GDP is reported for a quarter, it represents GDP at an annual rate. This is the amount of income and expenditure during a quarter multiplied by 4. Sherif Khalifa () National Income 11 / 28

Gross Domestic Product increases from one year to another because: 1 The economy is producing a larger quantity of goods and services. 2 Goods and services are being sold at higher prices. Sherif Khalifa () National Income 12 / 28

Definition Nominal GDP is the production of goods and services valued at current prices. Nominal GDP uses current prices to place a value on the economy s production of goods and services. Definition Real GDP is the production of goods and services valued at constant prices. Real GDP uses constant base year prices to place a value on the economy s production of goods and services. Sherif Khalifa () National Income 13 / 28

Billions $12,000 Nominal and Real GDP in the U.S., 1965 2005 $10,000 $8,000 $6,000 Real GDP (base year 2000) $4,000 $2,000 Nominal GDP $0 1965 1970 1975 1980 1985 1990 1995 2000 2005 Sherif Khalifa () National Income 14 / 28

Year Hot Dog Hot Dog Hamburgers Hamburgers Prices Quantity Prices Quantity 2013 $1 100 $2 50 2014 $2 150 $3 100 2015 $3 200 $4 150 Sherif Khalifa () National Income 15 / 28

Year Hot Dogs Hamburgers Nominal GDP Expenditure Expenditure 2013 $1x100=$100 $2x50=$100 $200 2014 $2x150=$300 $3x100=$300 $600 2015 $3x200=$600 $4x150=$600 $1200 Sherif Khalifa () National Income 16 / 28

Year Hot Dogs Hamburgers Real GDP Expenditure Expenditure 2013 $1x100=$100 $2x50=$100 $200 2014 $1x150=$150 $2x100=$200 $350 2015 $1x200=$200 $2x150=$300 $500 Sherif Khalifa () National Income 17 / 28

Definition The GDP Deflator measures the current level of prices relative to the level of prices in the base year. GDP Deflator = Nominal GDP Real GDP X 100 Sherif Khalifa () National Income 18 / 28

Year Nominal GDP Real GDP ( GDP Deflator 2013 200 200 200 ) 200 x100 =100 2014 600 350 2015 1200 500 ( 600 ) 350 x100 =171 ( 1200 ) 500 x100 =240 Sherif Khalifa () National Income 19 / 28

Y : Gross Domestic Product C: Consumption Spending I : Investment Spending G: Government Spending NX : Net exports Y = C + I + G + NX Sherif Khalifa () National Income 20 / 28

Definition Consumption Spending is spending by households on goods and services, with the exception of purchases of new housing. Goods include durable goods and non-durable goods. Durable goods are goods that last a long time. Non-durable goods are goods that do not last a long time. Services include intangible items. For renters, consumption includes rent payments. For homeowners, consumption includes the imputed rental value of the house but not the purchase price or mortgage payments. Sherif Khalifa () National Income 21 / 28

Definition Investment Spending is spending on capital equipment, structures, and inventories, including household purchases of new housing. Includes business fixed investment, residential investment, and inventory investment. Business fixed investment is the purchase of new plant and equipment by firms. Residential investment is the purchase of new housing by households and landlords. Inventory investment is the increase in firm s inventories of goods. Sherif Khalifa () National Income 22 / 28

Definition Government Spending is spending by local, state and federal governments on goods and services. Includes the salaries of government workers and spending on public works. Excludes transfer payments, such as social security or unemployment benefits. Transfer payments are not made in exchange for a currently produced good or service. Includes defense and non-defense spending. Sherif Khalifa () National Income 23 / 28

Definition Net Exports equal the purchases of domestically produced goods by foreigners minus the domestic purchases of foreign goods. Net Exports = Exports Imports The purchases of domestically produced goods by foreigners is a country s exports. The domestic purchases of foreign goods is a country s imports. When a household, a firm or the government buys a good or a service from abroad, it increases imports. But it also increases either C, I, or G, and does not affect GDP. Sherif Khalifa () National Income 24 / 28

GDP is not a perfect measure of well being. GDP excludes leisure. GDP excludes the value of activity that takes place outside markets. GDP excludes the quality of the environment. GDP ignores the distribution of income. Sherif Khalifa () National Income 25 / 28

Drug Lords increase their production of cocaine. Sherif Khalifa () National Income 26 / 28

Drug Lords increase their production of cocaine. A cattle rancher sells meat to McDonald s to prepare Big Macs. Sherif Khalifa () National Income 26 / 28

Drug Lords increase their production of cocaine. A cattle rancher sells meat to McDonald s to prepare Big Macs. A company increases its production of paper that is used in Hallmark cards. A chef cooks a gourmet meal to his family. Sherif Khalifa () National Income 26 / 28

A collector sells a Mickey Mantle card to another collector. Sherif Khalifa () National Income 27 / 28

A collector sells a Mickey Mantle card to another collector. Ford produces cars in France. Sherif Khalifa () National Income 27 / 28

A collector sells a Mickey Mantle card to another collector. Ford produces cars in France. A family buys a new refrigerator. Sherif Khalifa () National Income 27 / 28

A collector sells a Mickey Mantle card to another collector. Ford produces cars in France. A family buys a new refrigerator. Consumption. Sherif Khalifa () National Income 27 / 28

A collector sells a Mickey Mantle card to another collector. Ford produces cars in France. A family buys a new refrigerator. Consumption. Chevrolet expands its factory. Sherif Khalifa () National Income 27 / 28

A collector sells a Mickey Mantle card to another collector. Ford produces cars in France. A family buys a new refrigerator. Consumption. Chevrolet expands its factory. Investment. Sherif Khalifa () National Income 27 / 28

Ford adds some of its Mustang cars to its inventory. Sherif Khalifa () National Income 28 / 28

Ford adds some of its Mustang cars to its inventory. Investment. Sherif Khalifa () National Income 28 / 28

Ford adds some of its Mustang cars to its inventory. Investment. Ford sells a Mustang car from its inventory. Sherif Khalifa () National Income 28 / 28

Ford adds some of its Mustang cars to its inventory. Investment. Ford sells a Mustang car from its inventory. Investment & Consumption. Sherif Khalifa () National Income 28 / 28

Ford adds some of its Mustang cars to its inventory. Investment. Ford sells a Mustang car from its inventory. Investment & Consumption. California paves Highway 101. Sherif Khalifa () National Income 28 / 28

Ford adds some of its Mustang cars to its inventory. Investment. Ford sells a Mustang car from its inventory. Investment & Consumption. California paves Highway 101. Government Expenditure. Your parents buy a bottle of French wine. Sherif Khalifa () National Income 28 / 28