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N. GREGORY MANKIW BRIEF PRINCIPLES OF MACROECONOMICS Eight Edition Measuring a Nation’s Income 1 CHAPTE R 5
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Look for the answers to these questions: What is Gross Domestic Product (GDP)? How is GDP related to a nation’s total income and spending? What are the components of GDP? How is GDP corrected for inflation? Does GDP measure society’s well-being? 2
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Gross Domestic Product (GDP) How to measure a person’s economic status? Income How to measure a nation’s economic status? Total income of everyone in the country Gross domestic product Measures two things at once: total income and total expenditure on all goods and services 3
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Income and Expenditure Income equals expenditure For the economy as a whole Because every dollar a buyer spends is a dollar of income for the seller. 4
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Income and Expenditure Another way to study why income = expenditure: the Circular-Flow Diagram GDP measures the flow of money (the outer loop) Total expenditure by households (the upper half loop), and total income paid by firms (the lower half loop) Since expenditure = income, GDP is the same regardless of how we compute it 5
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The Circular-Flow Diagram Households : own the factors of production, sell/rent them to firms for income buy and consume goods & services Households Firms Firms : buy/hire factors of production, use them to produce goods and services sell goods & services 6
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The Circular-Flow Diagram Markets for Factors of Production Households Firms Income (=GDP) Wages, rent, profit (=GDP) Factors of production Labor, land, capital Spending (=GDP) G & S bought G & S sold Revenue (=GDP) Markets for Goods & Services 7
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What This Diagram Omits 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 8
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…the market value of all final goods & services produced within a country in a given period of time. Gross Domestic Product (GDP) Is… 9 Goods are valued at their market prices, so: All goods measured in the same units (e.g., dollars in the U.S.)
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…the market value of all final goods & services produced within a country in a given period of time. Gross Domestic Product (GDP) Is… 10 GDP includes all items produced in the economy and sold legally in markets GDP excludes most items produced and sold illicitly. It also excludes most items that are produced and consumed at home. e.g., housework you do for yourself.
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…the market value of all final goods & services produced within a country in a given period of time.
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