Measuring a Nations Income Professor Chris Adam Australian

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Measuring a Nation’s Income Professor Chris Adam Australian Graduate School of Management University of

Measuring a Nation’s Income Professor Chris Adam Australian Graduate School of Management University of Sydney and University of New South Wales 1

INTRODUCTION • Macroeconomics – study of economy as a whole – Explain economic changes

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 2

GROSS DOMESTIC PRODUCT • GDP – Total income of everyone working in economy –

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 3

GROSS DOMESTIC PRODUCT • GDP is … the market value … use of prices

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 4

COMPONENTS OF GROSS DOMESTIC PRODUCT • Algebra! Y = C + I + G

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, domesticproduced g&s) minus imports (domestic-purchased, foreign -produced g&s) 5

MEASURING GDP • Three methods: – GDP expenditure: method described above – GDP income:

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” 6

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REAL vs NOMINAL GDP • Increase of GDP(E) over time – We produced more

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 17

REAL vs NOMINAL GDP Nominal GDP deflator = x 100 Real GDP • Real

REAL vs NOMINAL GDP Nominal 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 18

WHAT GDP MISSES • Leisure reduction increases GDP but may reduce well-being • Removal

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 19