Chap_22 Measuring a Nation’s Income.ppt

Measuring a Nation’s Income Chapter 22 Microeconomics Microeconomics is the study of how individual households and firms make decisions and how they interact with one another in markets. Macroeconomics Macroeconomics is the study of the economy as a whole. Its goal is to explain the economic changes that affect many households, firms, and markets at once. Macroeconomics Macroeconomics answers questions like the following: Why is average income high in some countries and low in others? Why do prices rise rapidly in some time periods while they are more stable in others? Why do production and employment expand in some years and contract in others? The Economy’s Income and Expenditure When judging whether the economy is doing well or poorly, it is natural to look at the total income that everyone in the economy is earning. The Economy’s Income and Expenditure For an economy as a whole, income must equal expenditure because: Every transaction has a buyer and a seller. Every dollar of spending by some buyer is a dollar of income for some seller. Gross Domestic Product Gross domestic product (GDP) is a measure of the income and expenditures of an economy. It is the total market value of all final goods and services produced within a country in a given period of time. The Circular-Flow Diagram The equality of income and expenditure can be illustrated with the circular-flow diagram. The Circular-Flow Diagram The Measurement of GDP GDP is the market value of all final goods and services produced within a country in a given period of time. The Measurement of GDP Output is valued at market prices. It records only the value of final goods, not intermediate goods (the value is counted only once). It includes both tangible goods (food, clothing, cars) and intangible services (haircuts, housecleaning, doctor visits). The Measurement of GDP It includes goods and services currently produced, not transactions involving goods produced in the past. It measures the value of produ