Measuring a Nation’s Income

.title[
# Measuring a Nation’s Income
]
.subtitle[
## Macroeconomics for Students of Accounting, Finance and Digital Applications
]
.author[
### Lyuben Ivanov, PhD; Georgi Ganev, PhD
]
.institute[
### Sofia University St Kliment Ohridski
]
.date[
### Spring Term 2024/2025
]

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_No one pretends that <s>democracy</s> gross domestic product is perfect or all-wise. Indeed it has been said that <s>democracy</s> gross domestic product is the worst <s>form of Government</s> way to measure overall economic well-being except for all those other <s>forms</s> ways of measurement that have been tried from time to time..._
<hr style="background-color: black; margin: 0em 0em 0em 0em;">
<span style="float: right; font-variant: small-caps; ">Winston Churchill (1947) &nbsp;</span>
]
]

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# Macroeconomic Indicators

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The very basis for macroeconomics as an academic discipline is the understanding that
there is an aggregate result from the actions of a multitude of of individual economic agents.
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Macroeconomic indicators (such as **gross domestic product**, **price level**, and **unemployment**) try to reflect precisely this aggregate result.
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Macroeconomic facts are not immediately available for human senses &mdash; they cannot be seen, heard, touched, tasted or smelled.
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Macroeconomic indicators can only be measured using a set of tools, but the very method and tools of measurement depend on the theoretical understanding about the workings of the economic system.
]

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# Macro Indicators (Communism)
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Under communism:
-  the main macroeconomic indicator was the _Net Material Product_, which largely ignored value added by services (considered a part of non-fundamental "superstructure");
-  measuring prices was not necessary because the central government body responsible for the planning set 
them administratively;
-  measuring unemployment was not necessary because, at least on paper, all people willing (and even not willing) to work were employed.
]

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# Macro Indicators (Democracy)
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Under market democracy:
-  the main macroeconomic indicator is the _Gross Domestic Product_, which considers value added in services
as important for satisfying human needs and wants as value added in manufacturing;
-  the price level is determined by a number of factors and its measurement is of prime importance for macroeconomic policies;
-  the level of unemployment is determined by a number of factors and its measurement is of prime importance for macroeconomic policies; 
]

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# Circular-Flow Model Revisited

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# Circular Flow and National Accounts

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<div style="text-align:center;">For an economy as a whole, income must equal expenditure! </div>
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# Circular Flow and National Accounts

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Two different ways to measure newly created value in a country (to account for aggregate economic flows):

1.  <span style="font-variant: small-caps;">The income method</span>, which measures total incomes derived by production through participating in the resource/factor markets;

2. <span style="font-variant: small-caps;">The expenditure method</span>, which measures total expenditure on final consumer goods and capital goods by households, firms, government and the rest of the world.
]

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# GDP Definition

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<div style="text-align:center;"> <strong>Gross domestic product (GDP)</strong> is the market value of all final goods and services produced within a country in a given period of time. </div>
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<div style="text-align:center;"> <strong>GDP</strong> Is the Market Value of All Final Goods and Services Produced Within a Country in a Given Period of Time. </div>
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# 'GDP Is the Market Value...'
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GDP adds together many different kinds of products into a **single measure of the value of economic activity**. 
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It uses **market prices** because they measure the amount people are willing to pay for different
goods (and hence reflect the **value** of those goods to members of society). 
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If the price of a dental filling is ten times the price of a haircut, then a dental filing contributes ten times as much to GDP as does a haircut!
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# '... of All...'

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GDP tries to be comprehensive. It includes **all** items produced in the economy and **sold legally in markets**.
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GDP includes the market value of the housing services provided by the economy's stock of housing, regardless of whether the houses are **rented** in the housing market or are **owned** by households who live in them (in which case the rent is **imputed** from comparable market prices).
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GDP excludes most items that are produced and consumed **at home** and, therefore, never enter the marketplace.
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# '... Final...'

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When a farmer produces milk which is then used to make cheese, the milk is considered __intermediate good__ and the cheese (if it is bought by consumers) is considered **final good**. 
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In this case, the milk is NOT included in the GDP because the value of the **intermediate good** (milk) is included in the value of the **final good** (cheese) and if both milk and cheese were counted towards GDP that would result in double counting of the **intermediate good** (milk).
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However, if the cheese is bought by a restaurant (to be used for preparation of meals), it would also be considered **intermediate good** and will NOT be used in the calculation of GDP since its value will become part of the value of the meals serviced to the restaurant's consumers (which are considered the **final good** in this case and are used for the GDP calculation). 
]

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# '... Final...'
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An important exception to this principle arises when an intermediate good is produced and, rather than being used, is added to a firm’s **inventory** of goods for use or sale at a **later period**.
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In this case, the intermediate good is taken to be 'final' for the **given period**, and its value is included in GDP as as **inventory investment**.
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Thus, **additions to inventory add to GDP**, and when the goods in inventory are later used or sold, the **reductions in inventory subtract from GDP**.
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# '... Goods and Services...'
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GDP includes both **tangible goods** (food, clothing, cars) and **intangible services** (haircuts, housecleaning, doctor visits). 
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When you buy a DVD with the _Lord of the Rings_ movie you are **buying a good**, and the purchase price is part of GDP.
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When you pay to watch the _Lord of the Rings_ in cinema, you are **buying a service**, and the ticket price is also part of GDP.
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# '... Produced...'
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When Tesla produces and sells a new Model 3 car, the value of the car is included in GDP. 
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But when one person sells a used Tesla to another person, the value of the used car is NOT included in GDP (to avoid double counting).
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# Analysis

`$$\begin{aligned}
\text{Total profit}  & = TR(Q) - TC(Q)  \\ \\
 & = P(Q) \times Q - ATC(Q) \times Q \\ \\
 & = [P(Q) - ATC(Q)]\times Q \\ \\
 & = [AR(Q) - ATC(Q)] \times Q \\ \\
 & = \text{Profit margin}(Q)\times Q \\ \\
  \end{aligned}$$`
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# Interactive Diagram

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# Questions?

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# Thank You!

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