Chapter 15: Measuring a Nation's Income

Microeconomics

The study of how households and firms make decisions and how they interact in markets

Macroeconomics

The study of the economy as a whole

• Studying the economy, inflation, unemployment, and economic growth

What does GDP measure?

GDP measures the total income of everyone in the economy and the total expenditure on the economy’s output of good and services

What does GDP both measure?

GDP both measures total income and total expenditure

• For the economy as a whole, income must equal expenditure

Circular Flow Diagram Explained

The diagram describes all the transcations between households and firms in a simple economy

• Assumes that foods and services are bought by hosueholds and the hosueholds spend all of their income

• When households buy goods and services from firms, these expenditures flow through the markets to payu for goods and services

• Firrms uses this money to pay for wages, rent, which flows through the markets for the factor of production

• Money flows from households to firms, then back to households

How can we compute GDP for the economy?

We can compute GDP for the economy by:

• Adding up the total expenditure by households

• Adding up the total income (wages, rent, and profit) paid by firms

What is the same in an economy (simplified)?

In an economy as a whole, expenditure and income are the same

• Each dollar of spending by a buyer is a dollar of income for a seller

The Circular Flow Diagram

Diagram that shows how:

• Households buy goods and services from firms and firms use their revenue from sales to pay wages to workers, rent to landowners, and profit to firm owender. 

• GDP= the total amount spent by hosueholds in the market for goods and sercices

• Equals the total wages, rent, and profit paid by firms in the market for the factors of production

Gross Domestic Product (GDP)

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

What price does GDP use?

GDP uses the market price

• Since the market price measures the amount that peopleare willing to pay for different goods, they reflect the value of those goods

What items does GDP include?

GDP includes all items produced in the economy and sold legally in markets