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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

Circular-Flow Diagram

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

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

Circular-Flow Diagram

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