Economics

  THE  MACROECONOMY

3.1 BASIC NATIONAL ECONOMY INDICATORS

 

    DISCOVERING CONNECTIONS 

   Have you ever thought about the economic activity that goes on in an economy? Firms hire labour and use capital goods to produce goods and services. People sell their labour to earn income so they can spend on goods and services and become consumers. The government intervenes in various ways, with taxes and transfers and with ensuring the provision of non-market services such as health, law and order, and education. People buy goods from abroad – and firms sell some of their output overseas. Or to put it in another way, output is produced, and income is earned and spent. Think and answer the questions below.

• Is it possible to measure the overall performance of the economy?
• What is a key way in which the performance of an economy can be monitored?
• What are the objectives of macroeconomic policy?

 

READING 

Text 1

As you read the text, analyze the definition of GDP.

    Gross Domestic Product

  The total amount of goods and services produced, or the total amount of income earned, or the total amount of expenditure undertaken, all tell us something about the overall performance of the economy in providing resources for the members of the society. If we could measure these totals, we could examine whether the resources available to the residents of a country were changing through time, or try to compare the country’s situation with that in other nations. Of course, there is such a measure. It is called GDP and it is a key way in which we try to monitor the performance of an economy.

  Here is a definition of GDP:

  Gross domestic product (GDP) is the market value of all final goods and services produced within a country in a given period of time. Let's consider each phrase in this definition with some care.

  "GDP is a Market Value ..." You have probably heard the adage, “You can't compare apples and oranges”. Yet GDP does exactly that. GDP adds together many different kinds 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 are willing to pay for different goods, they reflect the value of those goods. If the price of an apple is twice the price of an orange, then an apple contributes twice as much to GDP as does an orange.

  "Of All . . ." GDP tries to be comprehensive. It includes all items produced in the economy and sold legally in markets. GDP measures the market value of all the goods. GDP also includes the market value of the housing services provided by the economy's stock of housing. There are some products, however, that GDP excludes because measuring them is so difficult. GDP excludes items produced and sold illicitly, such as illegal drugs. It also excludes most items that are produced and consumed at home and, therefore, never enter the marketplace. Vegetables you buy at the grocery store are part of GDP; vegetables you grow in your garden are not.

  "Final. . ." GDP includes only the value of final goods. The reason is that the value of intermediate goods is already included in the prices of the final goods. Adding the market value of the intermediate goods to the market value of the final goods would be double counting.

  "Goods and Services . . ."GDP includes both tangible goods (food, clothing, cars) and intangible services (haircuts, housecleaning, doctor visits). When you buy a CD by your favorite singing group, you are buying a good, and the purchase price is part of GDP. When you pay to hear a concert by the same group, you are buying a service, and the ticket price is also part of GDP.

  "Produced . . ."GDP includes goods and services currently produced. It does not include transactions involving items produced in the past. When General Motors produces and sells a new car, the value of the car is included in GDP. When one person sells a used car to another person, the value of the used car is not included in GDP.

  "Within a Country . . ."GDP measures the value of production within the geographic confines of a country. When a Canadian citizen works temporarily in the United States, his production is part of U.S. GDP. When an American citizen owns a factory in Haiti, the production at his factory is not part of U.S. GDP. (It is part of Haiti's GDP.) Thus, items are included in a nation's 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 that interval is a year or a quarter (three months). GDP measures the economy's flow of income and expenditure during that interval.

  When the government reports the GDP for a quarter, it usually presents GDP “at an annual rate”.

  In addition, when the government reports quarterly GDP, it presents the data after they have been modified by a statistical procedure called seasonal adjustment. The unadjusted data show clearly that the economy produces more goods and services during some times of year than during others. (As you might guess, December's Christmas shopping season is a high point.) When monitoring the condition of the economy, economists and policymakers often want to look beyond these regular seasonal changes. Therefore, government statisticians adjust the quarterly data to take out the seasonal cycle. The GDP data reported in the news are always seasonally adjusted.

  Economists distinguish between nominal GDP and real GDP. Nominal GDP is the value of all final goods based on the prices existing during the time period of production. Real GDP is the value of all final goods produced during a given time period based on the prices existing in a selected base year. In other words, the prices in the base year provide the basis for comparing quantities in different years.

  As we have just seen, nominal GDP reflects both the prices of goods and services and the quantities of goods and services the economy is producing. By contrast, by holding prices constant at base-year levels, real GDP reflects only the quantities produced. From these two statistics, we can compute a third called the GDP deflator, which reflects the prices of goods and services but not the quantities produced. The GDP deflator is calculated as follows: 

Vocabulary Focus

Ex. 1. Match the words from A with their equivalents from B.

 

Ex. 2. Match the verbs and nouns below to make adjective-noun partnerships that are found in the text.

Ex. 3. Make the opposite to the following words by adding negative prefixes: il-; ex-; in-; non-; un-. Use the dictionary if necessary.

Legally; comprehensive; include; market; tangible; available; adjusted..

Ex. 4. Match the words in column A with their English equivalents in column B:

 

Ex. 5. Match the words from A with their definitions from B.

Comprehension 

Ex. 1. Based on your understanding of the text, are the following TRUE or FALSE?

1. Gross domestic product is the market value of all intermediate and final goods and serviced produced within a country in a given period of time.
2. Market prices measure the amount people are willing to pay for different goods and reflect the value of those goods.
3. GDP includes all items produced in the economy and sold both legally and illegally in the markets.
4. GDP does not include the market value of the housing services providedby the economy.
5. GDP excludes most items that are produced and consumed at home.
6. The value of intermediate goods is not included into the value of the final goods.
7. GDP excludes intangible services.
8. GDP is the market value of all final goods and services produced by nation’s residents no matter where they are located.
9. GDP measures the value of production that takes place within a specific interval of a time, which is usually a month.

Ex. 2. Answer the questions.

1. What factors are taken into account to describe the overall performance of the economy?
2. How can Gross Domestic Product be defined?
3. How do they manage to compare the value of absolutely different goods?
4. How do you understand the fact that GDP tries to be comprehensive?
5. Does GDP include the value of intermediate good?
6. What are the tangible goods and intangible services that GDP includes?
7. Does GDP include transactions involving items produced in the past?
8. Are items produced abroad by subsidiaries included in a nation’s GDP?
9. What are most common intervals for measuring GDP?
10. How do real and nominal GDP differ?
11. What is the GDP deflator?

Text 2

 

Other Measures of Income

  When the U.S. Department of Commerce computes the nation's GDP every three months, it also computes various other measures of income to get a more complete picture of what's happening in the economy. These other measures differ from GDP by excluding or including certain categories of income. What follows is a brief description of five of these income measures, ordered from largest to smallest.

  Gross national product (GNP) is the total income earned by a nation's permanent residents (called nationals). It differs from GDP by including income that our citizens earn abroad and excluding income that foreigners earn here. For example, when a Canadian citizen works temporarily in the United States, his production is part of U.S. GDP, but it is not part of U.S. GNP. (It is part of Canada's GNP.) For most countries, including the United States, domestic residents are responsible for most domestic production, so GDP and GNP are quite close.

  Net national product (NNP) is the total income of a nation's residents (GNP) minus losses from depreciation. Depreciation is the wear and tear on the economy's stock of equipment and structures, such as trucks rusting and light bulbs burning out. In the national income accounts prepared by the Department of Commerce, depreciation is called the “consumption of fixed capital”.

  National income is the total income earned by a nation's residents in the production of goods and services. It differs from net national product by excluding indirect business taxes (such as sales taxes) and including business subsidies. NNP and national income also differ because of a “statistical discrepancy” that arises from problems in data collection.

  Personal income is the income that households and noncorporate businesses receive. Unlike national income, it excludes retained earnings/profit, which is income that corporations have earned but have not paid out to their owners. It also subtracts corporate income taxes and contributions for social insurance (mostly Social Security taxes). In addition, personal income includes the interest income that households receive from their holdings of government debt and the income that households receive from government transfer programs, such as welfare and Social Security.

  Disposable personal income is the income that households and noncorporate businesses have left after satisfying all their obligations to the government. It equals personal income minus personal taxes and certain nontax payments (such as traffic tickets).

  Although the various measures of income differ in detail, they almost always tell the same story about economic conditions. When GDP is growing rapidly, these other measures of income are usually growing rapidly. And when GDP is falling, these other measures are usually falling as well. For monitoring fluctuations in the overall economy, it does not matter much which measure of income we use. 
 

  Ex.1 Match the Russian word-combinations with their English equivalents:

  A                                                                                   B