MACROECONOMICS
National Income
Nations Income
National income of the country is the monetary value of the countrys output produced in a given period of time. Income should be equal to expenditures, it is a healthy sign for any economy. We measure National Income in different ways but the sound component represent National Income measuring is Gross Domestic Product. The economists and the policymakers use to monitor the performance of the overall economy by the Data that reflect the economic changes that macroeconomists try to explain, this considers gross domestic product or simply
GDP, which measures at once: the total income of the nation and the total expenditures of the nation. GDP is the most closely watched economic statistic because it is thought to be the best single measure of a societys economic wellbeing.
Gross Domestic Product
GDP is the market value of all final goods and services produced within the country in a given period of time.
Market value
GDP adds together many different kind of products into a single measure of the value of economic activity, to do this it uses market prices. Because market prices measure the amount people willing to pay for different goods, they reflect the value of those goods.
Of All..
Its includes all items produces in the economy and sold legally in markets. It also excludes most items that are produced and consumed at home and therefore never enter the marketplace. It also excludes illicitly items such as illegal drugs, because it is difficult to measure them.
final
Final means the product is used immediate consumption. GDP includes only the final goods, the reason is that intermediate goods is already include in the price of the final goods.
Goods and Services
GDP include all tangible (goods which have physical existence or a solid look to describe) and intangible (any activity which is physically not exist but has to perform).
Produced
GDP includes goods and services currently produced. It does not include transactions involve items produced in past.
Within the country
GDP measure the value of the production within the geographic confines of a country, items are included I n a nations GDP if they are produced domestically, regardless of the nationality of the producer.
In a given period of time
GDP measures the value of production that takes place within a specific interval of time. Usually a year or a quarter. GDP measure the economys flow of income and expenditure during that interval.
Measuring a National Income
To understand how the economy is using its scarce resources, economists are often interested in studying the composition of GDP (National Income) among various types of spending.
Measuring a National Income
To measure GDP (which denote as Y) is divided into four components: consumption (C), investment (I), government expenditures (G), and the net export (NX):
Y=C+I+G+NX
National Income Components
Consumption: spending by households on goods and services. Investment: spending on capital equipments, inventories, and structures etc. Government Purchases: spending on the good and services by local, state, and federal government. Net Exports: spending on domestically produces goods and services by foreigners (exporters) minus spending on foreign goods and services by domestic residents (importers).
NX= export - import
Real vs Nominal GDP
Real GDP: the production of goods and services valued at constant prices
RGDP=BASE PRICE X CURRENT YEAR QUANTITY
Nominal GDP: the production of goods and services valued at current prices N NGDP=CRT YEAR PRICE X CRT YEAR QYT
The GDP Deflator
a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100
Nominal GDP GDP deflator = ---------------- 100 Real GDP
Short coming of GDP
GDP is a good measure of economic well-being because people prefer higher to lower incomes. But it is not a perfect measure of well-being. Non-market activities not included i.e. house wives, labor of carpenter reappearing his own home. For GDP excludes the value of leisure; decline in average work week, since 1900 in USA from 53 hours to about 35 hours, more paid vacations, holidays has shortened the work years. Improved product quality not considered. Under ground economy; gambling, smuggling, drug dealing perfectly legal activities but fall income not declared and the value of a clean environment; more production may be cause more pollution.
Gross National Product
GNP measures the total income earned by the national residents of the country.
GNP = GDP + Factors Payment From Abroad Factor Payments to Abroad
Factors payment refers wages, profit and rents either made by national in abroad or made to foreigners.
Other National Income Components
Net National Product: NNP = GNP Depreciation (consumption of fixed assets) National Income: NI = NNP Indirect Business Tax (Sales Taxes) Personal Income: PI = NI Corporate Profit Social Insurance Contribution Net Interest + Dividends + Govt Transfer Payments + Personal Interest Income Disposable Income: Personal Income Personal Taxes (car parking tax)
SAVING AND INVESTMENT IN THE NATIONAL INCOME ACCOUNTS
Recall that GDP(Y) is both total income in an economy and the total expenditure on the economys output of goods and services.
Y=C+I+G+NX We simplify our analysis by assuming that the economy is closed; that do not engage in international trade, now export and import are zero. Y=C+I+G To see what this identity can tell us about financial markets,, subtract C & G both sides of the equation Y-C-G=I The amount of National Income (Y) after paying for Consumption( C) and Govt purchase (G) is called National Saving, now S=I The amount collect by Govt from households in form of Tax and the amount paid by Govt to household in form of transfer payment e.g. Social Securities and Welfare, now S=Y-C-G or S=(Y-T-C) + (T-G) S= Private Saving + Public Saving