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Chapter 23

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Economics 10b
Gregory Mankiw

Chapter 23 Economics: Measuring a Nation’s Income • Gross Domestic Product (GDP): the total income of everyone in the economy o The most closely watched economic statistic because it is thought to be the best single measure of a society’s economic well-being • Inflation/deflation: the rate at which average prices are rising or falling • Unemployment: the percentage of the labor force that is out of work • Retail sales: total spending at stores • Trade deficit: the imbalance of trade between the U.S. and the rest of the world • Microeconomics: the study of how households and firms make decisions and how they interact in markets • Macroeconomics: the study of economy-wide phenomena, including inflation, unemployment, and economic growth • GDP measures the flow of money in two ways: o The total income of everyone (firms/individuals) in the economy o The total expenditure on the economy’s output of goods and services o For an economy as a whole, income must equal total expenditure because each transaction made by a buyer is received by a seller, dollar for dollar • Gross domestic product (GDP): the market value of all final goods and services produced within a country in a given period of time o GDP adds together many different types of products by using market prices, which measure the amount people are willing to pay for different goods and, thus, the value of said goods o GDP includes all items produced and sold, including housing  Rental housing value: rent equals both the tenant’s expenditure and the landlord’s income  The government includes owner-occupied housing in GDP by estimating rental value, intimating that the owner is renting to himselfrent here is included in both the homeowner’s expenditure and in his income, so it adds to GDP  GDP excludes: illicitly produced and sold items, items that are produced and consumed at home (never in the marketplace) o GDP includes only the value of final goods (not the intermediate goods, which are the components of the final goods; i.e. the paper a card is printed on)  UNLESS the intermediate good is added to a firm’s inventory of goods for use or sale at a later date  Additions to inventory add to GDP and reductions in inventory subtract from GDP o GDP includes tangible goods (food) and intangible services (doctor visit) o Goods and services must be currently producedit does not include items produced in the past (last model year/a used car sold from one person to another) o Measures domestic production of good/service within a country’s geographic confines o GDP is usually measured quarterly or annually o GDP measured at an annual rate is the figure reported for quarterly GDP multiplied by 4 (so amount of income and expenditure in one quarter multiplied by four) o When the government reports quarterly GDP, it presents the data after they have been modified by a statistical procedure called seasonal adjustment  Unadjusted data show that the economy produces more goods and services during some times of year than during others  When monitoring the condition of the economy, economists and policymakers often want to look beyond these regular seasonal changesgovernment adjusts the quarterly data to take out the seasonal cycle o Calculating GDP by total expenditure or total income should theoretically produce the same result, but does not as a result of imperfect data sources, producing statistical discrepancy • GDP’s four components add up to create GDP (Y): Y= C + I + G + NX o The equation is an identity, meaning that it must be true because of how the variables are defined o Consumption (C): spending by households on goods and services, with the exception of purchases of new housing  Durable goods: like automobiles and appliances  Nondurable goods: like food and clothing  Intangible goods: services  Household spending on education is also included in consumption of services o Investment (I): spending on capital equipment, inventories, and structures, including household purchases of new housing; purchases of goods to produce other goods  Includes expenditure on new housing  Inventory accumulation by a company instead of just selling a good is included under investment because it is like the company bought it for itself • If the company were to sell the good out of inventory, inventory investment will be negative, offsetting the positive expenditure of the buyer o Government purchases/government consumption expenditure and gross investment (G): spending on goods and services by local, state, and federal governments  Including the salaries of public workers & the expenditures on public works  It excludes transfer payments because they are not made in exchange for a currently produced good or service; they alter household income and do not reflect the economy’s production • Think of transfer payments as like negative taxes o Net Exports (NX): spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports) • Gross National Product (GNP): the total income earned by a nation’s permanent residents (nationals), differing from GDP by including income earned abroad and excluding the income of foreigners in the country • Net national product (NNP): the total income of a nation’s residents (GNP) minus losses form depreciation (the wear and tear on the economy’s stock of equipment and structures; also known as the consumption of fixed capital) • National income: the total income earned by a nat
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