note_ch23 - Chapter 23 This chapter is about measuring...

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Chapter 23 This chapter is about measuring economic well- being. This requires that we measure economic output and income. To do this, we measure GDP, which is gross domestic product . This is the market value of all final goods and services produced in an economy in a specific time period. The first principle we note in understanding national income and expenditure accounting is that income always equals expenditure. Figure 1 in chapter 23 shows this in detail by showing the flow of income between firms and households, as well as the flows of productive inputs and production. The basic idea is that in every transaction, there is a buyer and a seller. The buyer makes an expenditure, which results in an equal amount of income for the seller. There are several details in measuring GDP. The first is that to measure the market value, we use market prices that are recorded in market transactions. The second is that we measure final goods and services. A final good is sold to the ultimate user of that good. For example, when Ralphs supermarket purchases
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potatoes, from a potato distributor, that is an intermediate good, because Ralph’s is not the final consumer of the good. Rather, Ralph’s sells it to a consumer. Thus, Ralphs’ purchase of the potatoes is not counted in GDP. Another way of thinking about GDP is using the concept of value added. Value added by any producer is the difference between the income earned by a producer, and the value of the intermediate goods purchased by that producer. For example, if Ralphs purchases potatoes for $2 and sells them for $3, the value added by Ralphs is $1, GDP can also be calculated as the sum of all the value added in the economy. To see this, consider a simple economy, in which there is a single load of bread produced for $5 at a bakery.
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