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