11: measuring nation's income Flashcards
Microeconomics
Study of how households and firms
* make decisions
* interact in markets
Macroeconomics
Study of economy-wide phenomena
* Including inflation, unemployment, and economic growth
Gross Domestic Product (GDP)
- Measures total income of everyone in the economy.
- Also measures total expenditure on the economy’s output of
goods and services.
Income equals expenditure
- For the economy as a whole
- Because every dollar a buyer spends is a dollar of income for the
seller.
The Circular-Flow Diagram
- Simple depiction of the macroeconomy
- Illustrates GDP as spending, revenue, factor payments, and
income
Households:
own the factors of production,
sell/rent them to firms for income
buy and consume goods & services
Firms
buy/hire factors of production,
use them to produce goods
and services
sell goods & services
The government
- Collects taxes, buys goods and services
The financial system
- Matches savers’ supply of funds with borrowers’ demand for loans
The foreign sector
- Trades goods and services, financial assets, and currencies with
the country’s residents
Four components of GDP
- Consumption (C)
- Investment (I)
- Government Purchases (G)
- Net Exports (NX)
- These components add up to GDP (denoted Y):
Y = C + I + G + NX
CONSUMPTION (C)
Total spending by households on goods and services
* For renters, C includes rent payments.
* Not included in C: purchases of new housing
Investment, I
Total spending on goods that will be used in the future to produce more goods
* Business capital: business structures, equipment, and
intellectual property products
* Residential capital: landlord’s apartment building; a
homeowner’s personal residence
* Inventory accumulations: goods produced but not yet sold
Government purchases (G)
All spending on the goods and services purchased by the
government
* At the federal, state, and local levels.
NET EXPORTS (NX)
- Net exports, NX = exports – imports
- Exports: foreign spending on the economy’s goods and services
- Imports: are the portions of C, I, and G that are spent on goods and services produced abroad
- Adding up all the components of GDP gives:
Y = C + I + G + NX