ch20 - Measuring GDP and Economic Growth Gross Domestic...

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Chapter 20 Measuring GDP and Economic Growth Gross Domestic Product GDP or Gross domestic product is the market value of all the final goods and services produced within a country in a given time period. A final good (or service) is an item that is bought by its final user during a specified time period. An intermediate good (or service) is an item that is produced by one firm, bought by another firm, and used as a component of a final good or service. The figure below illustrates the circular flow of expenditure and income. The economy consists of: o Firms o Households o Governments o Rest of world Aggregate economic markets are: o Goods markets (goods and services) o Factor markets (productive resources) o Financial markets (stocks, bonds, loans, and money) Define the following:
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o Y Income o C Consumption expenditure o S Saving o I Investment o G Government expenditures , NT Net taxes o X Exports , M Imports o NX Net exports = X - M Let’s summarize what the circular flow diagram tells us. Households: o Sell factor services to firms and receive incomes = o Spend on goods and services o Save S o Pay governments taxes, NT o Y = C + S + NT Governments: o Collect taxes, NT o Spend on goods and services o Borrow (or lend) an amount equal to their deficit (surplus) o Government borrowing = G - NT o Government saving = NT - G The Rest of the World: o Spend on goods and services o Borrow (or lend) an amount equal to their deficit (surplus) o Foreign borrowing = NX Firms: o Buy the services of factors of production from households and pay incomes o Produce goods and services, which they sell to households, C, governments, , other firms (and themselves), , and the rest of the world, . o Y = C + I + G + NX How investment is financed: o Y = C + S + NT o Y = C + I + G + NX o So, S + NT = I + G + NX o And, I = S + NT - G - NX o is household (private) saving o NT - G is government saving (or dissaving) o -NX is foreign saving o The sum of private saving ( ) and government saving ( ) is called national saving .
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Study and learn the numerous definitions of macroeconomic terms on pp. 469-
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ch20 - Measuring GDP and Economic Growth Gross Domestic...

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