Principles of Economics- Mankiw (5th) 479

Principles of Economics- Mankiw (5th) 479 - CHAPTER 22 M E...

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CHAPTER 22 MEASURING A NATION’S INCOME 495 the transaction contributes equally to the economy’s income and to its expenditure. GDP, whether measured as total income or total expenditure, rises by $100. Another way to see the equality of income and expenditure is with the circular- flow diagram in Figure 22-1. (You may recall this circular-flow diagram from Chapter 2.) This diagram describes all the transactions between households and firms in a simple economy. In this economy, households buy goods and services from firms; these expenditures flow through the markets for goods and services. The firms in turn use the money they receive from sales to pay workers’ wages, landowners’ rent, and firm owners’ profit; this income flows through the markets for the factors of production. In this economy, money continuously flows from households to firms and then back to households. We can compute GDP for this economy in one of two ways: by adding up the total expenditure by households or by adding up the total income (wages, rent,
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