Chapter 23 - 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 economy-wide phenomena including inflation, unemployment, and economic growth
Gross domestic product (GDP): total income of a nation
GDP is the total income of everyone in the economy and the total expenditure on the economy’s output of goods and services
Income must equal expenditure
Households do not spend all of their income.
Households are not always the intended customers of goods/services
Gross domestic product (GDP): the market value of all final goods and services produced within a country in a given period of time
GDP adds market prices to compute the value of the economic activity
Market prices measure the amount consumers are willing to spend on a product
GDP measures all the items produced and spent (legally) in the marketed
It includes the market value of housing services provided by the stock of housing in the economy
Rental housing value = tenants expenditure + landlord’s income
Owned houses values are estimated
GDP does not include illegally produced and sold products. It also does not include products made at home for home use
Intermediate good: an item used to manufacture another item
Ex: paper to make gift cards
Final good: an item that is not used to manufacture another item (consumed directly)
Ex: gift cards
GDP uses values of final goods because the intermediate good value is included within it
One exception is when an intermediate good is saved (for use or later date)
GDP includes tangible goods and intangible services.
GDP includes goods and services currently produced, not products made in the past.
When used products are sold to each other, the value is not included in the GDP.
GDP measures only domestically produced products, without regard to the nationality of the producer
Quarterly GDP presents GDP at an annual rate. This also means the figure reported for quarterly GDP is the amount of income and expenditure during the quarter divided by four.
Seasonal adjustment: a process that modifies the reported amount of quarterly GDP
Y = C + I + G + NX
Y = GDP
C = Consumption
I = Investment
G = Government purchases
NX = net exports
Identity: an equation that must be true because of how the variables in the equation are defined
Consumption: spending by the household on goods and services with the exception of purchases of new housing
This includes both goods (durable & non-durable) and services.
Investment: spending on business capital, residential capital, and inventories
Capital goods: goods used to produce more goods and services
Investment = business capital + residential capital + inventories
Business capital includes business structures
Ex: factories, buildings, equipment, software
Residential capital includes landlords’ apartment building and household spendings
Government Purchases: spending on goods and services by local, state, and federal governments
A longer-term for this is government consumption expenditure and gross investment
Salaries that are paid by the government are classified as government purchases.
Transfer payments alter household income but aren’t made in exchange for a currently produced good or service. Therefore, they aren’t considered to be part of the GDP
Net exports = domestically produced goods (exports) - domestic purchases of foreign goods (imports)
Imports are subtracted from exports
Nominal GDP: the production of goods and services valued at different prices
Real GDP: the production of goods and services valued at constant prices
GDP deflator = Nominal GDP/RealGDP * 100
GDP deflator: a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100
Nominal GDP and real GDP are in the same base year
The GDP deflator for the base year always equals 100
Inflation: when the overall price level rises in an economy
Inflation rate: percentage change in some measure of the price level from one period to the next
Inflation rate in year 2 = [(GDP deflator in year 2 - GDP deflator in year 1)/GDP deflator in year 1] * 100
Macroeconomics aims to explain the long and short fluctuations in real GDP
GDP is can describe the income and expenditure of the average person in the economy
GDP per person can tell us the economic well-being of every person
A larger GDP is correlated with a standard of living.
GDP is not perfect, because it does not depict leisure activities. It also excludes activities unrelated to the market. Nor does it take the environmental quality into consideration, or the distribution of income.
Microeconomics: the study of how households and firms make decisions and how they interact in markets
Macroeconomics: the study of economy-wide phenomena including inflation, unemployment, and economic growth
Gross domestic product (GDP): total income of a nation
GDP is the total income of everyone in the economy and the total expenditure on the economy’s output of goods and services
Income must equal expenditure
Households do not spend all of their income.
Households are not always the intended customers of goods/services
Gross domestic product (GDP): the market value of all final goods and services produced within a country in a given period of time
GDP adds market prices to compute the value of the economic activity
Market prices measure the amount consumers are willing to spend on a product
GDP measures all the items produced and spent (legally) in the marketed
It includes the market value of housing services provided by the stock of housing in the economy
Rental housing value = tenants expenditure + landlord’s income
Owned houses values are estimated
GDP does not include illegally produced and sold products. It also does not include products made at home for home use
Intermediate good: an item used to manufacture another item
Ex: paper to make gift cards
Final good: an item that is not used to manufacture another item (consumed directly)
Ex: gift cards
GDP uses values of final goods because the intermediate good value is included within it
One exception is when an intermediate good is saved (for use or later date)
GDP includes tangible goods and intangible services.
GDP includes goods and services currently produced, not products made in the past.
When used products are sold to each other, the value is not included in the GDP.
GDP measures only domestically produced products, without regard to the nationality of the producer
Quarterly GDP presents GDP at an annual rate. This also means the figure reported for quarterly GDP is the amount of income and expenditure during the quarter divided by four.
Seasonal adjustment: a process that modifies the reported amount of quarterly GDP
Y = C + I + G + NX
Y = GDP
C = Consumption
I = Investment
G = Government purchases
NX = net exports
Identity: an equation that must be true because of how the variables in the equation are defined
Consumption: spending by the household on goods and services with the exception of purchases of new housing
This includes both goods (durable & non-durable) and services.
Investment: spending on business capital, residential capital, and inventories
Capital goods: goods used to produce more goods and services
Investment = business capital + residential capital + inventories
Business capital includes business structures
Ex: factories, buildings, equipment, software
Residential capital includes landlords’ apartment building and household spendings
Government Purchases: spending on goods and services by local, state, and federal governments
A longer-term for this is government consumption expenditure and gross investment
Salaries that are paid by the government are classified as government purchases.
Transfer payments alter household income but aren’t made in exchange for a currently produced good or service. Therefore, they aren’t considered to be part of the GDP
Net exports = domestically produced goods (exports) - domestic purchases of foreign goods (imports)
Imports are subtracted from exports
Nominal GDP: the production of goods and services valued at different prices
Real GDP: the production of goods and services valued at constant prices
GDP deflator = Nominal GDP/RealGDP * 100
GDP deflator: a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100
Nominal GDP and real GDP are in the same base year
The GDP deflator for the base year always equals 100
Inflation: when the overall price level rises in an economy
Inflation rate: percentage change in some measure of the price level from one period to the next
Inflation rate in year 2 = [(GDP deflator in year 2 - GDP deflator in year 1)/GDP deflator in year 1] * 100
Macroeconomics aims to explain the long and short fluctuations in real GDP
GDP is can describe the income and expenditure of the average person in the economy
GDP per person can tell us the economic well-being of every person
A larger GDP is correlated with a standard of living.
GDP is not perfect, because it does not depict leisure activities. It also excludes activities unrelated to the market. Nor does it take the environmental quality into consideration, or the distribution of income.
