CHAPTER 22MEASURING A NATION’S INCOME509calculated from the ratio of nominal to real GDP—measures the level of prices in the economy.◆GDP is a good measure of economic well-being becausepeople prefer higher to lower incomes. But it is not aperfect measure of well-being. For example, GDPexcludes the value of leisure and the value of a cleanenvironment.Key Conceptsmicroeconomics, p. 494macroeconomics, p. 494gross domestic product (GDP), p. 496consumption, p. 499investment, p. 499government purchases, p. 499net exports, p. 499nominal GDP, p. 502real GDP, p. 502GDP deflator, p. 503Questions for Review1.Explain why an economy’s income must equal itsexpenditure.2.Which contributes more to GDP—the production of aneconomy car or the production of a luxury car? Why?3.A farmer sells wheat to a baker for $2. The baker usesthe wheat to make bread, which is sold for $3. What isthe total contribution of these transactions to GDP?
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