PRINCIPLES OF MACROECONOMICS

Lecture 2
Measuring A Nation’s Income

References:
N.G. Mankiw, “Principles of Economics”, 8th edition, chapter 23
NEU, “Economics”, chapter 14

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 Real GDP in the United States

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 Vietnam’s GDP, 1995-2003
700,000 10.0
9.3 605,586 9.0
600,000
8.2 535,762 8.0

500,000 6.8 484,493 7.3 7.0

441,646 6.8 7.1
400,000
5.8 399,942 6.0
361,016
335,989 5.0
313,623 4.8 313,247
292,376
300,000 272,036 256,272 273,666
244,596 4.0
228,892 213,833 231,264
195,567 3.0
200,000

2.0
100,000
1.0

0 0.0
1995 1996 1997 1998 1999 2000 2001 2002 2003

3/2023 GDP (bio VND)

nominal Macroeconomics
real GDP (bio VND)- DMH growth rate of GDP (%) 4
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 Content

I. Definition of GDP

II. Computing GDP

III. Application of GDP

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 1. Defition GDP
Gross Domestic Products
➢ G - is total the market value
➢ P - of all final goods and
services
➢ D - produced within a country
➢ in a given period of time

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Other indicators of income
❖ other indicators of income
➢ GNP = GDP + Net Factor Income from Abroad

➢ NNP = GNP – Depreciation

➢ NI = NNP – statistical discrepancy

➢ PI = NI – Profit for re-invest + Transfer

➢ DI = PI – Net direct tax (income tax) – Fees

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 GDP vs. GNP
◼ GDP: Gross Domestic Products ◼ GNP: Gross National Products
◼ Gross: total market values ◼ Gross: total market values
◼ Products: all final goods and ◼ Products: all final goods and
services services
◼ Domestic: produced within the ◼ National: produced by national
location resources

Foreign resources VN resources VN resources

GDP Produced in VN Produced in VN Produced abroad GNP
 Other measure of income
GDP Gross Domestic Products

GNP Gross National Products GNP = GDP + NFA

NNP Net National Products NNP Depreciation

NI National Income = NNP – Stat. Discrepancy Depreciation

Personal Income
Personal Income Profit for re-invest
PI Depreciation
and Transfer

Disposable Income Net direct tax Profit for re-invest

DI Fees… and Transfer
Depreciation
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11
 ▪ is the market value
II. Calculating GDP ▪ of all final goods and services
▪ produced within a country

1. Real and nominal values of GDP

❖ Real vs. Nominal GDP
➢ current prices:

GDPtn = Σ Qit Pit

➢ relative prices (base-year)

GDPtr = Σ Qit Pi0

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Real and nominal values of GDP
❖ Economic Growth and Deflator
GDPrt – GDPrt-1
Growth rate of GDPrt = * 100 (%)
GDP rt-1

GDPnt
The GDP Deflatort = * 100
GDPrt

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 Example 1: Assume an economy that produces
only 2 goods: Book and Pen. Calculate:

1. Nominal and Real GDP of each year

2. GDP growth rate of each year
3. GDP deflator and inflation rate of each year
Year Price of Quantity Price of Quantity
pen of pens book of books
1999 3 100 10 50
2000 (base-yr) 3 120 12 70
2001 4 120 14 70
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Example 2
◼ Suppose that the price increases over time
for every year
◼ Is it true or false to conclude that nominal
GDP is always higher than real GDP for the
same year?

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 II. 2. The three approaches to GDP

1. Expenditure approach

2. Income approach

3. Production approach / Value-added Ap.

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 The Macroeconomic Circular Flows
X IM
Revenue TR Consumption C
Market for final goods
Sell goods- and services Buy goods-
services services
I
G S

Firms Government Households

Te Td

Yd = Y - Td

Inputs for Prod. Market for K, L, R, T

production factors
Prod. Cost Income Y
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(incld. Profit)
 Approach 1: GDP by expenditures
◼ Components of GDP
1. C – Consumption: spending by HHs on goods and services

2. I - Investment: spending on capital equipment, inventories, and

structures, incl. HHs purchases of new housing

3. G – Government Spending: spending on public goods and services

4. NX = X – IM : Net Exports spending on domestically produced goods

and services by foreigners (exports) minus spending on foreign produced
goods and services by domestic residents (imports)

➔ GDP = C + I + G + NX

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 Components of US GDP
Government Spending
Investment 18% Net Exports
16% -2 %

Consumption
68 %

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Approach 2: GDP by sources of
incomes
◼ Sources of income
1. Wage, salary – w
2. Interest – i
3. Rental – r
4. Profits – Pr
5. Owners’ Income - OI
◼ Adjust GDP by sources of incomes to GDP by
market price (Expenditure approach): incl. Te
➔ GDP = w + i + r + Pr +OI + Te

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Approach 3: GDP by production
processes – Added Values
◼ Total added values of all production
processes:
GDP = Σ VAi
◼ Calculate VA
VA = Total revenue – Cost for intermediate goods

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Approach 3:
GDP by values added
◼ 1 Vinacafe pack đ50.000 50.000

◼ NEU canteen: 50.000đ 35000 15000

◼ Metro: 35.000đ 23000 12000

◼ Vinacafe: 23.000đ 15000 8000

◼ Farms 15.000đ 15000

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 III. Applications of GDP
❖ Nominal and Real GDP
❖ Measuring the size of economy
❖ GDP Deflator
❖ Other indicators
❖ Economic Welfares

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 III. Applications of GDP
❖ Economic Welfares:
➢Real GDP and Per capita GDP
➢Per capita GDP by purchasing power parity
➢Economic Welfare:
• Add: Goods produced and consumed at home,
underground economy, …
• Minus: Pollutions, …
• Distribution of Income
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