Macroeconomics: the study of the

economy as a whole. The goal of

macroeconomics is to explain the
economic changes that affect many
households firms and markets
simultaneously.
NATIONAL INCOME (CHAPTER
20)

4.
5.

6.

Eg. Paper company selling to a card

company
Goods and Services
Includes both tangible goods and
intangible services
Produced
Includes goods and services currently
produced
Eg. Sale of used core
Within a county
Measure the value of production within
the geographic confines of a country
E.g If Irish citizen works temporarily in
the UK, their production is part of UK
GDP
If a UK citizen owns a factory in
Bulgaria, the production at his factory
is not part of UK GDP (It is part of
Bulgarias GDP)
Therefore, items are included in a
nations GDP if they are produced
domestically, regardless of the
nationality of the producers.
in a given period of time
It measures the value of production
that takes place within a specific
interval of time (usually quarterly)

Gross Domestic Product (GDP): the

market value of all final goods and services
produced within a country in a given period of
time.

7.

GDP measures:
Total income of households in the
economy
Total expenditure on the economys
output of goods and services
Total income = total expenditure
GDP does not include:
Goods produced and sold illegally
Goods produced and consumed at
home
Intermediate goods
Goods and services produced in the
past

Components of GDP
GDP (Y) = Consumption (C) + Investment (I)
+ Government Purchases (G) + Net Exports
(NX)

1. Market value
GDP adds together many different
kinds of products into a single measure
of the value of economic activity
By using market prices
o Market prices measure the
amount people are willing to pay
for different goods. As such,
market prices are said to reflect
market value.
2. of all
Includes all items produced in the
economy and sold legally in markets
3. final
Doesnt include intermediate goods,
only final goods

1. Consumption (65% in UK 14): The

spending by households on goods and
services, with the exception of
purchases of new housing
2. Investment (17% in UK 14): The
spending on capital equipment,
inventories, and structures, including
new housing
3. Government Purchases (19% in UK
14): The spending on goods and
services by local and central
governments. This does not include
transfer payments (pensions,
unemployment benefits) because they
are many in exchange for currently
produced goods or services.
4. Net Exports (NX) (-2% in UK 14):
Exports minus imports
Other measures of Income
1. Gross national product (GNP): total
income earned by a nations
permanent residents. It differs from
GDP by including income that domestic
citizens earn abroad and excluding
income that foreigners earn in the
domestic country.

2. Net national product (NNP): total

income of a nations residents (GNP)
minus losses from depreciation.
Depreciation is the wear and tear on
the economys stock of equipment and
structures, such as lorries rusting and
computers becoming obsolete.
3. National income: total income
earned by a nations residents in the
production of goods and services. It
differs from net national product by
excluding indirect business taxes
(such as sales taxes) and including
business subsidies. NNP and national
income also differ because of a
statistical discrepancy that arises
from problems in data collection.
4. Personal income: income that
households and non-corporate
businesses receive. Unlike national
income, it excludes retained earnings,
which is income that corporations have
earned but have not paid out to their
owners. It also subtracts corporate
income taxes and contributions for
social insurance. In addition, personal
income includes the interest income
that households receive from their
holdings of government debt and the
income that households receive from
government transfer programmes,
such as welfare and social security
payments.
5. Disposable personal income:
income that households and noncorporate businesses have left after
satisfying all their obligations to the
government. It equals personal income
minus personal taxes and certain nontax payments (such as parking tickets)
When GDP is growing rapidly, the various
measures of income are usually growing
rapidly. When GDP is falling, other measures
are falling as well. For monitoring fluctuations
in the overall economy, it does not matter
much which measure of income we use.
Real VS. Nominal GDP
GDP can increase when:
- The economy is producing more goods
and services
- Those goods and services are being
sold at higher prices
Nominal GDP values the production of
goods and service at current prices or market
prices. Has not adjusted to inflation.
Real GDP values the production of goods
and services at constant prices.

Changes in real GDP consist of only the

changes due to production of more (or
fewer) goods and services.
- Adjusted to inflation
Real GDP uses constant base-year prices to
place a value on the economys production of
goods and services. Because real GDP is not
affected by changes in prices, changes in real
GDP reflect only changes in the amounts
being produced. Thus, real GDP is a measure
of the economys production of goods and
services. Real GDP reflects the economys
ability to satisfy peoples needs and desires.
Thus, real GDP is a better gauge of economic
well-being than is a nominal GDP.
GDP Deflator is a measure of the price level
calculated as the ratio of nominal GDP to real
GDP times 100

GDP deflator=

Nominal GDP
100
Real GDP

GDP and Economic Well-Being

- GDP per person indicates the mean
income and expenditure of the person
in the economy.
- Criticisms of GDP:
o Measures the wrong thing
o Ignores the potential for future
production and well-being
o Ignores how income is
distributed
1. Measures the wrong thing
Does not measure well-being
o Does not include leisure
o The value of almost all
activity that takes place
outside of markets such
as the value of the time
parents spend with their
children and the value of
volunteer work.
Richer countries tend to have:
o Better healthcare systems
o Better education systems
o Greater opportunities to
pursue other activities
outside of work
o Human Development
Indes more directly
account for such things

2. What about the future well-being?

GDP does not consider:
o The depletion of resources
o The impact on the
environment
This means that high levels of production
today might limit future production and wellbeing through a lack of resources or
environmental damage.
Changes to measure of GDP:
o Sustainable GDP
o Green GDP
3. The distribution of income
GDP per person tells the income
of the average person but not
the incomes of the richest and
poorest members of society
GDP is commonly used statistic to assess how
an economy is performing. It can be
augmented with data on human
development, sustainability and inequality to
provide a more complete picture of a
countrys economic well-being.
GDP and Recessions
Recession is a significant decline in economic
activity across the economy. Recession occurs
when there are two consecutive quarters of
negative economic growth as measured by a
country GDP.