Handbook for Final PE

INTERNATIONAL SCHOOL OF BUSINESS
Revision on Principle of
Macroeconomics
BY ISB ACADEMIC TEAM
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Chapter 23: Measuring a Nation’s Income
2
Chapter 23:
Measuring a Nation’s Income
I- The Economy’s Income and Expenditure:
- GDP measures two things at once: total income and total expenditure
- Total income = total expenditure (Because money flow from buyer to
seller.)

Chapter 23: Measuring a Nation’s Income
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II- The Measurement of GDP:
● Definition: Gross Domestic Product (GDP) is the market value of all
final goods and services produced within a country in a given period of
time.
1. “GDP is the Market Value…” : using market prices, because market
prices measure the amount people are willing to pay for different goods,
they reflect the value of those goods.
2. “... of All…” :
+ including all legal product
+ excluding illegal drugs, items produced and consumed at home, never get
into market. (E.g.: Karen cleans her own house instead of hiring people to
clean her house => The value Karen spent cleaning her house is not
included in GDP)
* NOTE: Housing Services.
+ For people who rent their houses, the rent is included in GDP.
+ For people who own their houses, estimated rental value is included in
GDP. (assume that if the owners use their house for rent)
3. “... Final…” :

Chapter 23: Measuring a Nation’s Income
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+ Final goods are goods purchased to consume.
+ Intermediate goods are goods purchased to produce other goods for sale.
For example:
- A purchases $5 of strawberries to eat. → Then strawberries are
considered as Final goods and $5 will be added into GDP.
- B purchases $5 of strawberries to make a 10-dollar-worth fruit salad to
eat. → In this case, even though strawberries is used to make another
good, B didn’t sale the salad but instead ate it. Therefore, strawberries
are still considered as Final good and $5 is included in GDP.
- C purchases $5 of strawberries to decorate a cake sold in his bakery for
$15. → In this case, strawberries is used to make a cake for sale.
Therefore, strawberries are considered as Intermediate goods and a cake
is a Final good → $15 will be added to GDP.
4. “... Goods and Services…”: tangible goods (food, clothing, car) and
intangible services (haircuts, housecleaning, doctor visits).
5. “... Produced…” : GDP includes goods and services currently produced
and does not includes transactions involving items produced in the past.
For example: Ford produced a $500 car in 2018 but did not sale it until 2019.
➔ $500 is included in GDP of 2018 not GDP of 2019.
6. “... Within a Country…” : within the geographic confines of a country,
regardless of the nationality of the producer.

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For example:
- If a Vietnamese owns a Pho restaurant in the USA, the Vietnamese
owner’s income will be included in the GDP of the USA.
- In contrast, if Ford builds a car factory in Ho Chi Minh city, the
production of the factory will be included in the GDP of Vietnam.
7. “... In a Given Period of Time.” : Usually a year or a quarter (3 months)
The Government reports the GDP for a quarter “at an annual rate” (the amount
of income and expenditure during the quarter multiplied by 4) with seasonal
adjustment.
* NOTE: Another Measures of Income.
GNP = GDP + income nationals earn abroad - income foreigner earn here
= GDP + net transfer (net transfer = cash inflow - cash outflow)
For example:
- If a Vietnamese owns a Pho restaurant in the USA, the Vietnamese
owner’s income will be included in the GNP of Vietnam.
- In contrast, if Ford (a US company) builds a car factory in Ho Chi Minh
city, the production of the factory will be included in the GNP of the
USA.
III- The Components of GDP: