This document discusses key concepts related to measuring a nation's income and GDP. It defines GDP as the total market value of all final goods and services produced within a country in a given period of time. GDP is measured using both the expenditure and income approaches. The expenditure approach sums consumption, investment, government purchases, and net exports. While GDP provides a useful measure of economic activity, it does not capture all factors that contribute to well-being.

1. CHAPTE
R
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2. Measuring a Nation’s Income
Microeconomics is the study of how individual
households and firms make decisions and how
they interact with one another in markets.
– Eg price of proton cars, demand for pizza and supply of rice …
Macroeconomics is the study of the economy as
a whole. Its goal is to explain the economic
changes that affect many households, firms,
and markets at once.
– Eg economic growth (real GDP growth), inflation and
unemployment …

3. Measuring a Nation’s Income
Macroeconomics answers questions like the
following:
 Why is average income high in some countries and
low in others?
 Why do prices rise rapidly in some time periods
while they are more stable in others?
 Why do production and employment expand in
some years and contract in others?

4. Nation’s Income
•Is the aggregate income of the country earned
by its nationals through the production of goods
and services for a certain period of time.

5. THE ECONOMY’S INCOME AND
EXPENDITURE
• When judging whether the economy is doing
well or poorly, it is natural to look at the total
income that everyone in the economy is
earning.

6. THE ECONOMY’S INCOME AND
EXPENDITURE
• For an economy as a whole, income must
equal expenditure because:
– Every transaction has a buyer and a seller.
– Every ringgit of spending by some buyer is a
ringgit of income for some seller.
Income = Expenditure

7. Figure 1 The Circular-Flow Diagram
Spending
Goods and
services
bought
Revenue
Goods
and services
sold
Labor, land,
and capital
Income
= Flow of inputs
and outputs
= Flow of dollars
Factors of
production
Wages, rent,
and profit
FIRMS
•Produce and sell
goods and services
•Hire and use factors
of production
•Buy and consume
goods and services
•Own and sell factors
of production
HOUSEHOLDS
•Households sell
•Firms buy
MARKETS
FOR
FACTORS OF PRODUCTION
•Firms sell
•Households buy
MARKETS
FOR
GOODS AND SERVICES

8. THE MEASUREMENT OF GROSS
DOMESTIC PRODUCT
• Gross domestic product (GDP) is a measure of
the income and expenditures of an economy.
• GDP is the total market value of all final goods
and services produced within a country in a
given period of time.

9. THE MEASUREMENT OF GROSS
DOMESTIC PRODUCT
• The equality of income and expenditure can be
illustrated with the circular-flow diagram.

10. THE MEASUREMENT OF GROSS
DOMESTIC PRODUCT
• “GDP is the Market Value . . .”
– Output is valued at market prices.
• “. . . Of All. . .”
– Includes all items produced in the economy and legally
sold in markets
• “. . . Final . . .”
– It records only the value of final goods, not intermediate
goods (the value is counted only once).
• “. . . Goods and Services . . .”
– It includes both tangible goods (food, clothing, cars) and
intangible services (haircuts, housecleaning, doctor visits).

11. THE MEASUREMENT OF GROSS
DOMESTIC PRODUCT
• “. . . Produced . . .”
– It includes goods and services currently produced, not
transactions involving goods produced in the past.
• “ . . . Within a Country . . .”
– It measures the value of production within the geographic
confines of a country.
• “. . . In a Given Period of Time.”
– It measures the value of production that takes place within
a specific interval of time, usually a year or a quarter (three
months).

12. THE COMPONENTS OF GDP
• GDP includes all items produced in the
economy and sold legally in markets.
• What Is Not Counted in GDP?
– GDP excludes most items that are produced and
consumed at home and that never enter the
marketplace.
– It excludes items produced and sold illicitly, such
as illegal drugs.

13. THE COMPONENTS OF GDP :
Expenditure approach
GDP (Y) is the sum of the following:
 Consumption (C)
 Investment (I)
 Government Purchases (G)
 Net Exports (NX)
Y = C + I + G + NX

14. • Consumption (C):
• The spending by households on goods and
services, with the exception of purchases of new
housing.
• Investment (I):
• The spending on capital equipment, inventories,
and structures, including new housing.
THE COMPONENTS OF GDP :
Expenditure approach

15. • Government Purchases (G):
– The spending on goods and services by state and
federal governments.
– Does not include transfer payments because they
are not made in exchange for currently produced
goods or services.
• Net Exports (NX):
– Exports minus imports.
THE COMPONENTS OF GDP :
Expenditure approach

16. • http://www.epu.gov.my/documents/10124/225
7e64f-b08d-41b7-bed0-b6e6498c38a3

17. Malaysia’s GDP and Its Components (2007)
Consumption, C Investment, I
Government purchases, G Net exports, NX

18. REAL VERSUS NOMINAL GDP
• Nominal GDP values the production of goods
and services at current prices.
• Real GDP values the production of goods and
services at constant prices.

19. REAL VERSUS NOMINAL GDP
• An accurate view of the economy requires
adjusting nominal to real GDP by using the
GDP deflator.

20. Table 2 Real and Nominal GDP
Prices and Quantities
Year Price of Quantity of Price of Quantity of
Fish balls Fish balls Chicken sausages Chicken sausages
2006 20 sen 100 50 sen 40
2007 40 sen 150 75 sen 80
2008 60 sen 200 RM1 120

21. Table 2 Real and Nominal GDP
Calculating Nominal GDP
2006 (20 sen per fish ball x 100 fish balls) + 50 sen per sausage x 40 sausages) = RM40
2007 (40 sen per fish ball x 150 fish balls) + 75 sen per sausage x 80 sausages) = RM120
2008 (60 sen per fish ball x 200 fish balls) + RM1 per sausage x 120 sausages) = RM240

22. Table 2 Real and Nominal GDP
Calculating Real GDP (base year 2006)
2006 (20 sen per fish ball x 100 fish balls) + 50 sen per sausage x 40 sausages) = RM40
2007 (20 sen per fish ball x 150 fish balls) + 50 sen per sausage x 80 sausages) = RM70
2008 (20 sen per fish ball x 200 fish balls) + 50 sen per sausage x 120 sausages) = RM100

23. The GDP Deflator
• The GDP deflator is a measure of the price
level calculated as the ratio of nominal GDP to
real GDP times 100.
• It tells us what portion of the rise in nominal
GDP that is attributable to a rise in prices rather
than a rise in the quantities produced.

24. The GDP Deflator
• The GDP deflator is calculated as follows:
G D P d e f l a t o r =
N o m i n a l G D P
R e a l G D P
× 1 0 0

25. The GDP Deflator
• Nominal GDP is converted to real GDP as
follows:
R e a l G D P
N o m i n a l G D P
G D P d e f l a t o r
2 0 X X
2 0 X X
2 0 X X
= × 1 0 0

26. Table 2 Real and Nominal GDP
Calculating the GDP deflator
2006 (RM40 / RM40) x 100 = 100
2007 (RM120/RM70) x 100 = 171
2008 (RM240/RM100) x 100 = 240

27. Real GDP of Malaysia
0
1000
2000
3000
4000
5000
1980 1985 1990 1995 2000 2005 2010
Year
Millions of Ringgit
(2000=100)

28. IS GDP A GOOD MEASURE OF
ECONOMIC WELL-BEING?
• GDP is the best single measure of the
economic well-being of a society.
• GDP per person tells us the income and
expenditure of the average person in the
economy.
• Higher GDP per person indicates a higher
standard of living.
• GDP is not a perfect measure of the happiness
or quality of life, however.

29. GDP AND ECONOMIC
WELL-BEING
• Some things that contribute to well-being are
not included in GDP.
– The value of leisure.
– The value of a clean environment.
– 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.

30. GDP per capita Life Expectancy Adult Literay Internet users
(PPP US$) (years) (% of ages 15 and above) (per 1,000 people)
Country 2005 2005 1995 - 2005 2005
United States 41,890 77.9 99.0% 630
United Kingdom 33,238 79.0 99.0 473
Japan 31,267 82.3 99.0 668
Singapore 29,663 79.4 92.5 571
Germany 29,461 79.1 99.0 455
Malaysia 10,887 73.7 88.7 435
China 6,757 72.5 90.9 85
Indonesia 3,843 69.7 90.4 73
India 3,452 63.7 61.0 55
Vietnam 3,071 73.7 90.3 129
Nigeria 1,128 46.5 69.1 38
Sierra Leone 806 41.8 34.8 2
Source : Human Development Report 2007/2008, United Nations.

31. Institutional Structures of Growth
–Strong property rights
–Patents and copyrights
–Efficient financial institutions
–Literacy and widespread education
–Free trade
–Competitive market system
LO3

32. Determinants of Growth
• Supply factors
–Increases in quantity and quality
of natural resources
–Increases in quality and quantity
of human resources
–Increases in the supply (or stock)
of capital goods
–Improvements in technology
LO3

33. Determinants of Growth
• Demand factor
–Households, businesses, and
government must purchase the
economy’s expanding output
• Efficiency factor
–Must achieve economic efficiency
and full employment
LO3

34. Summary
• Because every transaction has a buyer and a
seller, the total expenditure in the economy
must equal the total income in the economy.
• Gross domestic product (GDP) measures an
economy’s total expenditure on newly
produced goods and services and the total
income earned from the production of these
goods and services.

35. Summary
• GDP is the market value of all final goods and
services produced within a country in a given
period of time.
• GDP is divided among four components of
expenditure: consumption, investment,
government purchases, and net exports.

36. Summary
• Nominal GDP uses current prices to value the
economy’s production. Real GDP uses
constant base-year prices to value the
economy’s production of goods and services.
• The GDP deflator—calculated from the ratio
of nominal to real GDP—measures the level of
prices in the economy.

37. Summary
• GDP is a good measure of economic well-
being because people prefer higher to lower
incomes.
• It is not a perfect measure of well-being
because some things, such as leisure time and
a clean environment, are not measured by
GDP.