Chapter 10 - Measuring a Nation's Income

10.1 The Economy’s Income and Expenditure

• A person’s income determines whether they can afford higher standards of living

  • Better housing
  • Better healthcare
  • Fancier cars
  • More opulent vacations

• Gross domestic product (GDP)- the market value of all final goods and services produced within a country in a given period of time

  • Money continuously flows from households to firms and back to households
  • GDP measures thesis low of money
  • We compute it for the economy by either adding up the total expenditure by households or adding up the total income paid by firms

  

10.2 The Measure of Gross Domestic Product

• GDP adds together different kinds of products into a single measure of the value of the economic activity
• GDP includes everything
• A few examples can be books, movies, haircuts, healthcare, and housing

10.3 The Components of GDP

• Consumption- spending by households on goods and services, with the exception of purchases of new housing
• Investment- the purchase of goods that will be used in the future to produce more goods and services.
• Government purchases- spending on goods and services by local, state, and federal governments
• Net exports- spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports)

10.4 Real Versus Nominal GDP

Numerical Example:

• Nominal GDP- the production of goods and services valued at current prices
• Real GDP- the production of goods and services valued at constant prices

The GDP Deflator:

• GDP deflator- a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100

10.5 Is  GDP a Good Measure of Economic Well-Being?

• Most people prefer to receive higher income and enjoy higher expenditure
  • GDP per person seems a natural measure of the economic well-being of the average individual
  • A large GDP helps us lead a good life