MEASURING A NATION’S INCOMEETP Economics 102

Lecturer: Jack Wu

RECENT HOT MACROECONOMIC ISSUES

Sovereign Bond Crisis in Europe QE policy in America Fiscal Cliff in USA Depreciation of Japanese Yen (Abenomics) Soft Landing in China Taiwan’s recession

MAJOR MACROECONOMIC CONCERNS

National Income: Low Economic Growth Rate Employment Opportunity: High Unemployment

Rate Cost of Living: High Inflation Rate Trade: High Trade Deficit Direct Investment: Low FDI (Foreign Direct

Investment) Income Distribution: High Gini Coefficient Foreign Reserve: Shortage of foreign reserve

MAJOR ECONOMIC INDICATOR OF TAIWAN

YearGDP Per

Capita(US$)

GDP Growth Rate(%)

Average GDP

Growth Rate(10 year,%)

Unemployment Rate(%)

CPI Growth Rate(%)

AverageCPI Growth Rate(%)

Gini coefficient

Foreign reserve(billio

n US$)

1970 393 11.40 9.4 1.70 3.60 3.4 0.2941975 978 4.90 - 2.40 5.20 - 0.3121980 2385 7.80 9.8 1.23 19.00 10.4 0.2771985 3290 13.50 - 2.91 -0.20 - 0.290 225.61990 8124 3.80 7.7 1.67 4.10 3.1 0.312 724.41995 12918 6.38 - 1.79 3.70 - 0.317 903.12000 14704 5.80 6.2 2.99 1.30 2.6 0.326 1067.42001 13147 -1.65 - 4.57 -0.01 - 0.350 1222.12002 13404 5.26 - 5.17 -0.20 - 0.345 1616.62003 13773 3.67 - 4.99 -0.28 - 0.343 2066.32004 15012 6.19 - 4.44 1.62 - 0.338 2417.42005 16051 4.70 - 4.13 2.30 - 0.340 2532.92006 16491 5.44 - 3.91 0.60 - 0.339 2661.52007 17154 5.98 - 3.91 1.80 - 0.340 2703.02008 17399 0.73 - 4.14 3.53 - 0.341 2917.12009 16359 -1.87 3.2 5.85 -0.87 0.9 0.345 3482.02010 18503 4.72 - 5.21 -0.96 - 0.342 3820.12011 20006 4.07 - 5.39 1.42 - 0.342 3855.52012 20386 1.32 - 4.24 1.93 - - 4031.7

Source: Directorate-General of Budget, Accounting and Statistics, Statistic Abstract of National Income, Executive Yuan, Taiwan.

EXAMPLES OF MACROECONOMIC QUESTIONS

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?

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.

For an economy as a whole, income must equal expenditure because:Every transaction has a buyer and a seller.Every dollar of spending by some buyer is

a dollar of income for some seller.

GROSS DOMESTIC PRODUCT Gross domestic product (GDP) is a measure

of the income and expenditures of an economy.

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

The equality of income and expenditure can be illustrated with the circular-flow diagram.

DEFINITION OF GDP

“GDP is the Market Value . . .”Output is valued at market prices.

“. . . Of All 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).

DEFINITION OF GDP “. . . 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).

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.

FORMULA OF GDP

GDP (Y) is the sum of the following: Consumption (C) Investment (I) Government Purchases (G) Net Exports (NX)

Y = C + I + G + NX

COMPONENTS: C AND I 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.

COMPONENTS: G AND NX

Government Purchases (G):The spending on goods and services by

local, 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.

TAIWAN’S GDP (2012)

Consumption 8465030 (Million)

Investment 2795080 (Million)

Government Purchase 1746482 (Million)

Export 10325648 (Million)

Import 9254141 (Million)

GDP 14077099 (Million)

Net Income from Abroad 454191 (Million)

GNP 14531290 (Million)

NOMINAL VERSUS REAL 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.

EXAMPLE

Copyright©2004 South-Western

EXAMPLE: CONTINUED

Copyright©2004 South-Western

EXAMPLE: CONTINUED

Copyright©2004 South-Western

GDP DEFLATOR An accurate view of the economy requires

adjusting nominal to real GDP by using 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 the rise in nominal GDP that is attributable to a rise in prices rather than a rise in the quantities produced.

THE GDP DEFLATOR The GDP deflator is calculated as follows:

G D P d efla to r =N o m in a l G D P

R eal G D P 1 0 0

EXAMPLE: CONTINUED

Copyright©2004 South-Western

THE GDP DEFLATOR Converting Nominal GDP to Real GDP

Nominal GDP is converted to real GDP as follows:

R eal G D PN o m in a l G D P

G D P d efla to r2 0 X X2 0 X X

2 0 X X

1 0 0

GDP AND 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.

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.

OTHER MEASURES OF INCOME

Gross National Product (GNP) Net National Product (NNP) National Income (NI) Personal Income (PI) Disposable Personal Income (DPI)

GROSS NATIONAL PRODUCT

GNP is the total income earned by a nation’s permanent residents. It differs from GDP by including income that citizens earn abroad and excluding income that foreigners earn here.

NET NATIONAL PRODUCT

NNP is the total income of a nation’s residents (GNP) minus losses from depreciation (“consumption of fixed capital).

NATIONAL INCOME

NI is the total income earned by a nation’s residents in the production of goods and services.

It differs from NNP by excluding indirect business taxes (such as sales taxes) and including business subsidy.

PERSONAL INCOME

PI is the income that households and non-corporate businesses receive.

Unlike NI, it excludes retained earnings and subtracts corporate income taxes and contributions for social insurance. It also includes interest incomes from holding government bonds and government transfer payments.

DISPOSABLE PERSONAL INCOME

DPI is the income that households and non-corporate businesses have left after satisfying all their obligations to the government (such as personal taxes).

GREEN GDP

Green GDP is an index of economic growth with the environmental consequences of that growth factored in.

Green GDP=Traditional GDP- environmental/ecological costs

GDP(PPP)

Gross Domestic Product (GDP) at Purchasing Power Parity (PPP)

GDP PER CAPITA 2012GDP per capita (nominal)

GDP per capita(Purchasing Power Parity)

Singapore 51162 60410

Japan 46736 36266

Hong Kong 36667 51494

South Korea 23113 32272

Taiwan 20328 38749

Malaysia 10304 16922

China 6076 9162

Thailand 5678 10126

GDP PER CAPITA (PPP) WORLD RANKING

Ranking GDP (PPP) Ranking GDP(PPP)

3. Singapore 60410 19. Taiwan 38749

5. Hong Kong 51494 20. Belgium 37883

6. USA 49922 21. Denmark 37657

8. Switzerland 45418 22. UK 36941

9. Canada 42734 23. Finland 36395

10. Australia 42640 24. Japan 36266

11. Austria 42409 25. France 35548

15. Sweden 41191 26. Israel 32312

18. Germany 39028 27. Korea 32272

DISCUSSION QUESTIONS Identify the immediate effect of each of the

following circumstances on U.S. GDP and its components.

a. James receives a unemployment compensation check.

b. John buys an Italian sports car. c. Henry buys domestically produced

tools for his construction company.