Measurement of Gross Domestic Product•Gross Domestic Product (GDP)–The market value of all final goods and services produced within a country in a given period of time
Measurement of Gross Domestic Product•“GDP is the market value…”–It uses market prices to reflect the value of the goods•“… of all…”–All items legally produced and sold in the economy•Excludes most items that are produced and consumed at home.•Excludes items that are sold illicitly
Measurement of Gross Domestic Product•“… final…”–The value of intermediate goods are already included in the prices of the final goods•“… goods and services…”–Tangible goods & intangible services•“… produced…”–Goods and services currently produced
Measurement of Gross Domestic Product•“… within a country…”–Goods and services produced domestically, regardless of the nationality of the producer•“… in a given period of time”–Such as a year or a quarter
The Economy’s Income and Expenditure•Gross Domestic Product (GDP)–Measures the total income of everyone in the economy–Measures the total expenditure on the economy’s output of goods and services•For an economy as a whole–Income must equal expenditure•Circular-flow diagram – assumptions:•All goods and services – bought by households•Households - -spend all of their income
The Circular-Flow DiagramHouseholds buy goods and services from firms, and firms use their revenue from sales to pay wages to workers, rent to landowners, and profit to firm owners.