INTERNATIONAL SCHOOL OF BUSINESS Revision on Principle of Macroeconomics BY ISB ACADEMIC TEAM For further information and step-by-step guide to solving problems, please kindly refer to the Tutoring Videos uploaded on ISB Academic Team Facebook fanpage. Under no circumstances should one copy this document without author’s permission. Chapter 23: Measuring a Nation’s Income 2 Chapter 23: Measuring a Nation’s Income I- The Economy’s Income and Expenditure: - GDP measures two things at once: total income and total expenditure - Total income = total expenditure (Because money flow from buyer to seller.) Chapter 23: Measuring a Nation’s Income 3 II- The Measurement of GDP: ● Definition: Gross Domestic Product (GDP) is the market value of all final goods and services produced within a country in a given period of time. “GDP is the Market Value…” : using market prices, because market prices measure the amount people are willing to pay for different goods, they reflect the value of those goods.
of All…” : + including all legal product + excluding illegal drugs, items produced and consumed at home, never get into market.: Karen cleans her own house instead of hiring people to clean her house => The value Karen spent cleaning her house is not included in GDP) * NOTE: Housing Services. + For people who rent their houses, the rent is included in GDP. + For people who own their houses, estimated rental value is included in GDP. Final…” : Chapter 23: Measuring a Nation’s Income 4 + Final goods are goods purchased to consume.
+ Intermediate goods are goods purchased to produce other goods for sale. For example: - A purchases $5 of strawberries to eat. → Then strawberries are considered as Final goods and $5 will be added into GDP. - B purchases $5 of strawberries to make a 10-dollar-worth fruit salad to eat.
→ In this case, even though strawberries is used to make another good, B didn’t sale the salad but instead ate it. Therefore, strawberries are still considered as Final good and $5 is included in GDP. - C purchases $5 of strawberries to decorate a cake sold in his bakery for $15. → In this case, strawberries is used to make a cake for sale.
Therefore, strawberries are considered as Intermediate goods and a cake is a Final good → $15 will be added to GDP. Goods and Services…”: tangible goods (food, clothing, car) and intangible services (haircuts, housecleaning, doctor visits). Produced…” : GDP includes goods and services currently produced and does not includes transactions involving items produced in the past. For example: Ford produced a $500 car in 2018 but did not sale it until 2019.
➔ $500 is included in GDP of 2018 not GDP of 2019. Within a Country…” : within the geographic confines of a country, regardless of the nationality of the producer. Chapter 23: Measuring a Nation’s Income 5 For example: - If a Vietnamese owns a Pho restaurant in the USA, the Vietnamese owner’s income will be included in the GDP of the USA. - In contrast, if Ford builds a car factory in Ho Chi Minh city, the production of the factory will be included in the GDP of Vietnam.
In a Given Period of Time.” : Usually a year or a quarter (3 months) The Government reports the GDP for a quarter “at an annual rate” (the amount of income and expenditure during the quarter multiplied by 4) with seasonal adjustment. * NOTE: Another Measures of Income. GNP = GDP + income nationals earn abroad - income foreigner earn here = GDP + net transfer (net transfer = cash inflow - cash outflow) For example: - If a Vietnamese owns a Pho restaurant in the USA, the Vietnamese owner’s income will be included in the GNP of Vietnam. - In contrast, if Ford (a US company) builds a car factory in Ho Chi Minh city, the production of the factory will be included in the GNP of the USA.
III- The Components of GDP: Chapter 23: Measuring a Nation’s Income 6 GDP = C + I + G + NX With: C is Consumption; I is Investment; G is Government Purchases; NX is Net Exports. Consumption: Consumption is spending by households on goods and services, with the exception of purchases of new housing. For example: My purchases a Pizza for $15 and pays rent for $200. ➔ $215 is included in GDP as consumptions.
Investment: - Investment is the purchase of goods that will be used in the future to produce more goods and services. - Including: capital, equipment, inventories, structures, and household purchases of new housing. - Investment is different from financial investment (stocks, bonds, and mutual funds are called saving). For example: Apple produces $1000 of computers and adds all into inventory.
Chapter 23: Measuring a Nation’s Income 7 ➔ Inventory is included in Investment. So $1000 is included in GDP and counted as Investment. Government Purchases: - Government Purchases is spending on goods and services by local, state, and federal governments. - Including: the salaries of government workers as well as expenditures on public works.
*NOTE: Social Security benefit to the elderly and Unemployment Insurance are called transfer payments, they do not produce any goods or services. Therefore, they are not included in Government Purchases (not included in GDP). For example: The government pays the salary of an Army general. Net Exports: - Net Exports equal the foreign purchases of domestically produced goods (exports) minus the domestic purchases of foreign goods (imports).
- Domestic buyers buy goods from abroad do not affect GDP. For example: A Vietnamese buy a Honda car from Japan. →Net export decreases (Import increases), but Consumption increases by the same amount → GDP is unaffected. IV- Real versus Nominal GDP: Chapter 23: Measuring a Nation’s Income 8 ● Nominal GDP: the production of goods and services valued at current prices.
(P x Q) → Not corrected for inflation. ● Real GDP: the production of goods and services valued at constant prices. (Fixed Pbase x Q) → Corrected for inflation 1. The GDP Deflator: 𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃 GDP Deflator = x100 𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 Chapter 23: Measuring a Nation’s Income 9 - At the base year: Nominal GDP = Real GDP - GDP deflator reflects P level - GDP Deflator base year = 100 - GDP Deflator > 100 ⇒ inflation 𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟 𝑦𝑒𝑎𝑟 2 − 𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟 𝑦𝑒𝑎𝑟 1 Inflation = x100 𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟 𝑦𝑒𝑎𝑟 1 V- Is GDP a Good Measure of Economic Well-being? - GDP doesn’t measure what make life worthwhile, but it measures the ability to achieve it.
- Things contributing to good life are excluded in GDP. - GDP excludes value of activity take place out of the market, quality of environment, distribution of income among the economy. Which of the following is included in GDP? A. The sale of stocks and bonds B.
The sale of used goods Chapter 23: Measuring a Nation’s Income 10 C. The sale of services such as visits to a doctor D. All of above are correct 2. To compute GDP we a.
Simply sum the number of final goods and services b. Sum the cost of producing final goods and services c. Use weights determined by a survey regarding how much people value different sorts of goods and services to compute GDP as a weighted average. Sum the market value of final goods and services 3.
The simple circular-flow diagram illustrates that a. Production generates income so that income and production are the same b. The economy’s income exceeds its production c. The production of an economy exceeds its income d.
None of the above are correct. The local Chevrolet dealership has an increase in inventory of 25 cars in 2003. In 2004, it sells all 25 cars. Chapter 23: Measuring a Nation’s Income 11 a.
The value of increased inventory will be counted as part of GDP in 2003, but the value of the cars sold in 2004 will not cause 2004 GDP to increase. The value of increased inventory will not affect GDP in 2003, but will be included in 2004 GDP. The value of increased inventory will be counted as part of GDP in 2003 and the value of the cars sold in 2004 will increase 2004 GDP. None of the above are correct.S real GDP is reported each quarter.
These numbers are adjusted to make them measure at annual and seasonally adjusted rates. These numbers are adjusted to make them measure at annual rates, but no adjustment for seasonal variations are made. These numbers are at quarterly rates that have been seasonally adjusted. These numbers are at quarterly rates and have not been seasonally adjusted.
Always counted as an intermediate good b. Counted as an intermediate good if it is used by a company to make bread Chapter 23: Measuring a Nation’s Income 12 c. Counted as a final good if it is used by a consumer who bakes bread for his own consumption d. Both b and c are correct.S GNP is calculated from U.
Including income earned by foreigners in the U.S and excluding income earned by U. Including income earned by U.S citizens abroad and excluding income earned by foreigners in the U. Including income earned by foreigners in the U. Excluding income earned by U.S citizen, works only in Canada.
The value added to production from his employment is a. Included in both U. Included in only U. Included in only U.
Not included in either U. If in a given year an economy has consumption of $3000, investment of $2000, government purchases of $1500, tax of $1200, transfer payments of Chapter 23: Measuring a Nation’s Income 13 $400, depreciation of $300, export of $500 and import of $600. Then GDP will equal? A. A firm produces consumer goods and adds some to inventory in the third quarter of 2018.
In the fourth quarter the firm sells the goods at a retail outlet which leave their inventory diminished. As a result of these actions, what component(s) of 2019 real GDP change in the fourth quarter? A. Only investment and it decreases B. Only consumption and it increases C.
Investment decreases and consumption increases D. None of the above is correct. Steph buys a designer dress produced by an American-owned fashion shop in France.S GDP is unaffected, but U.S GDP increases, but U.S GNP is unaffected Chapter 23: Measuring a Nation’s Income 14 C.S GNP increases, but French GDP is unaffected D.S GDP is unaffected, but French GDP increases 12. Which of the following is included in the investment component of GDP? A.
Purchases of stocks and bonds B. Purchases of capital equipment that were manufactured in a foreign country by a foreign firm. The estimated rental value of owner-occupied housing D. None of the above is correct.
Transfer payments are A. Included in GDP because they represent income to individuals. Not included in GDP because they are not payments for currently produced goods or services. Included in GDP because the income will be spent for consumption.
Not included in GDP because taxes will have to be raised to pay for them. What components of US GDP (if any) would each of the following transactions affect? a. A family buys a new refrigerator. Chapter 23: Measuring a Nation’s Income 15 b.
Aunt Jane builds a new house. Ford sells a Mustang from its inventory. You buy a pizza. California repaves Highway 101.
Your parents buy a bottle of French wine. Honda expand its factory in Marysville, Ohio. Which of the following statements about nominal GDP and real GDP is most accurate? a. Nominal GDP is a better gauge of economic well-being than is real GDP.
Real GDP is a better gauge of economic well-being than is nominal GDP. Real GDP and nominal GDP are equally good measures of economic well-being. Whether real GDP or nominal GDP is a better measure of economic well-being depends on what sort of goods are produced.