ECON1010 Lecture Notes - Lecture 2: Happy Planet Index, Gdp Deflator, Capital Expenditure
Lecture 2
MEASURING A NATIONS INCOME
Learning Objectives
• Consider why an economy’s total ioe euals its total epeditue
• Learn how gross domestic product (GDP) is defined and calculated
• See the breakdown of GDP into its 4 major components
• Learn the distinction between real GDP and nominal GDP
• Consider whether GDP is a good measure of (economic) wellbeing
- Microeconomics is the study of how individuals, households and firms make decisions and how the
interact with one another in markets
- Macroeconomics = study of economy as a whole
o Goal is to explain the economic changes that affect many households, firms & markets at
once
o Answers questions such as
▪ Why is average income high in some countries & lower in others
▪ Why do prices rise rapidly in some periods while they are more stable in other
periods
▪ Why do production & employment expand in some years and contract in others
- Natural to look at the total income that everyone in the economy is earning to judge how well or
poorly a country is
- For an economy as a whole income must equal expenditure because
o Every transaction has a buyer & seller
o Every dollar of spending by some buyers is a dollar of income for some sellers
THE MEASUREMENT OF GROSS DOMESTIC PRODUCT (GDP)
- Measure of the total income and expenditure of an economy
- It is the total market value of all final goods and services produced within a country in a given period
of time
o Measured yearly or quarterly
- The equality of income and expenditure can be illustrated with the circular flow diagram
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- GDP is the market value..
o Output is valued at market prices
- Of all final…
o It records only the value of the final goods, not intermediate goods
- Goods and services
o It includes both tangible goods and intangible services
- Produced
o Includes all goods and services currently produced, not transactions involving goods
produced in the past
- Within a country
o Measures the value of production within the geographic confines of a country
- In a given period of time
o Measures the value of production that takes place within a specific interval of time (usually 1
year or 3 months)
- GNP is Gross National Product. It is a broad measure of a nations total economic activity. It is the
value of all finished goods and services produced in a country in one year
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 market
place
- It excludes items produced and sold illicitly, such as illegal drugs
GDP (Y) IS THE SUM OF THE FOLLOWING
- Consumption (C)
o the spending by the household on goods and services, with the exception of purchases of
new housing
▪ food bought from the store
▪ rent
- Investment (I)
o The spending on capital equipment, inventories and structures, including household
purchases of new housing
▪ Relates to firms
• Rmit buying a whole new set of computers
▪ Capital expenditure
- Government purchases (G)
o The spending on goods and services by local, state and federal governments
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find more resources at oneclass.com
