Measuring a Nation's Income

Economics

Gross Domestic Product

measures 1) total income of everyone in the economy 2) total expenditure on economy’s output of goods and services

GDP: expenditure definition

The market value of all final goods and services produced within a country in a given period

Consumption (C)

spending by households on goods and services, except for purchases of new housing

Investment (I)

Spending on business capital, residential capital, and inventories; purchase of captial goods that will be used to produce other goods and services in the future

Government purchases (G)

Spending on goods and services by local, state and federal governments; excludes transfer payments (social security or unemployment insurance benefits)

Net exports (NX)

Spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports); = Exports- Imports

Exports

foreign spending on the economy’s good and services

Imports

Portions of C,I, and G that are spent on G&S produced abroad

Nominal GDP

The production of G&S valued at current prices

Real GDP

The production of G&S valued at constant prices; constant base-year prices to value the economy’s production

Is GDP a good measure of economic well-being?

Does not include leisure, value of activity outside markets, environment quality, distribution of income

The GDP deflator

a measure of the price level calculated as the ratio of nominal GDP to the real GDP times 100; measure current level of prices relative to the level of prices in the base year (“deflate” nominal GDP)

Income and expenditure

income=expenditure for the economy as a whole because every $ spent is income for the seller

Are transfer payments included in government purchases?

No; they are not purchases of goods and services

When economists talk about the economy’s GDP, which type of GDP are they referring to?

Real GDP