5 Measuring a Nation

5 Measuring a Nation - Measuring a Nation's Income...

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Measuring a Nation’s Income Microeconomics is the study of how individual households and firms make decisions and how they interact with one another in markets. 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 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. 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. The Circular-Flow Diagram 1 Spending Goods and services bought Revenue Goods and services sold Labor, land, and capital Income = Flow of inputs and outputs = Flow of dollars Factors of production Wages, rent, and profit FIRMS •Produce and sell goods and services •Hire and use factors of production •Buy and consume goods and services •Own and sell factors of production HOUSEHOLDS •Households sell •Firms buy MARKETS FOR FACTORS OF PRODUCTION •Firms sell •Households buy MARKETS FOR GOODS AND SERVICES
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THE MEASUREMENT OF GROSS DOMESTIC PRODUCT Gross domestic product (GDP) is a measure of the income and expenditures of an economy. GDP is the total market value of all final goods and services produced within a country in a given period of time. The equality of income and expenditure can be illustrated with the circular-flow diagram. 1.For an economy as a whole, a. income is greater than expenditure b. expenditure is greater than income. c. income is equal to expenditure. d. GDP measures income more precisely than it measures expenditure. 2. Gross domestic product serves as a measure of two things: a. the total spending of everyone in the economy and the total saving of everyone in the economy. b. the total income of everyone in the economy and the total expenditure on the nation's output of goods and services. c. the value of the nation's output of goods and services for domestic citizens and the value of the nation's output of goods and services for the rest of the world. d. the nation's saving and the nation's investment. 3. Because every transaction has a buyer and a seller, a. GDP is more closely associated with a nation’s income than it is with a nation’s expenditure. b. every transaction contributes equally to an economy’s income and to its expenditure.
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5 Measuring a Nation - Measuring a Nation's Income...

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