III.

The Data of
Macroeconomics
Macroeconomics:
The study of economy-wide phenomena, including
inflation, unemployment, and economic growth.

A. Measuring a Nations Income and Growth

1.
2.
3.
4.
5.

Income and Expenditures

Definitions
Measurement
Real versus Nominal GDP
GDP and Well-being

B. Measuring Unemployment
C. Measuring the Cost of Living
Author: Prof. Sharif

A. Measuring a Nations Income

1. Income and Expenditure
Q: Why do we care about GDP (gross domestic product,
or total income)?

Author: Prof. Sharif

A. Measuring a Nations Income

1. Income and Expenditure, cont.
Consider the circular-flow diagram: it describes all
transactions between households and firms.
Revenue

Spending

Market for
outputs
Goods and
services sold

Goods and
services
bought

Firms

Households

Inputs for
production
Wages, rent, profit

Market for
inputs

Land, labor, capital

Author: Prof. SharifIncome

A. Measuring a Nations Income

1. Income and Expenditure, cont.
Point: (1) GDP measures both income and
expenditures.
(2) Output = Income = Expenditures

Author: Prof. Sharif

A. Measuring a Nations Income

2. Definitions
GDP: The market value of all final goods and services
produced within a country in a given period of time.

GNP: The market value of all final goods and services

produced by permanent residents of a nation in a given
period of time.

Author: Prof. Sharif

A. Measuring a Nations Income

2. Definitions, cont.
Y = C + I + G + NX
Consumption: spending by households on goods and

services, with the exception of purchases of new housing.

Investment: spending on capital equipment, inventories,

and structures, including household purchases of new
housing.

Government purchases: spending on goods and services by

local, state, and federal governments

Net exports: spending on domestically produced goods by

foreigners (exports) minus spending on foreign goods by
domestic residents (imports)

Author: Prof. Sharif

A. Measuring a Nations Income and Growth

3. Measuring GDP
Approaches:
Final goods approach: add up the total value of goods
and
services produced, categorized by ultimate
users.
(C + I + G + NX)
Value-added approach: calculate the value added at
each
stage of production.
Income approach: add up incomes received.

Author: Prof. Sharif

A. Measuring a Nations Income and Growth

3. Measuring GDP, cont.
Problems with measurement:
Quality changes
Service output
Nonmarket goods
These problems affect the ability of GDP to provide an
accurate measure of the economys performance.

Author: Prof. Sharif

A. Measuring a Nations Income

4. Real versus Nominal GDP
Q:

Last year, the state of Maryland gave me a 3% raise.

Did this raise make me better off?

Author: Prof. Sharif

A. Measuring a Nations Income

4. Real vs. Nominal GDP, cont.
Nominal GDP: the production of goods and services valued at
current prices.

Real GDP: the production of goods and services valued at

constant prices.

GDP deflator: a measure of the price level =

(Nominal GDP/Real GDP)*100

Author: Prof. Sharif

10

A. Measuring a Nations Income

5. GDP and Well Being
GDP fails, in many respects, to measure the things that
matter to us.
Q: Why then do we still care about GDP?

Author: Prof. Sharif

11

Gross National Product

Currently Produced
Sold through official market
Not Resold or used in further production
Produced by nationally owned resources
Value at Market Prices
It excludes: un/under reported and illegal, like
gambling, drinking, prostitution and narcotics.

Author: Prof. Sharif

12

Gross National Product

Two Exceptional Cases:
Self-consumption of production by
producers is valued and is included in
GNP. Thus, farmers consumption of its
own produced wheat, is a part of GNP.
Rent on owner-lived houses is computed
and included in GNP.
Author: Prof. Sharif

13

Gross National Product

Formula
GNP = GDP NIA
NIA = Net Factor Income Earned Abroad

Author: Prof. Sharif

14

Other Income Concepts

Here we have NNP and NDP.
The difference between the gross and net is
capital consumption, called Depreciation(D)
NNP = GNP - D
NDP = GDP - D
Author: Prof. Sharif

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