‘ECN Chapter 5
• Microeconomics: The study of how households and firms make decisions and
how they interact in markets.
• Macroeconomics: The study of economy wide phenomena, including
inflation, unemployment and economic growth.
The economy’s income and expenditure
• GDP: The market value of all goods and services produced within a
country in a given period of time.
• GDP measures two things at once: total income of everyone in the
economy and total expenditure on the economy’s output of goods and
• GDP can measure both total income and total expenditure because
these two things are really the same.
• For economy as a whole, income must equal expenditure.
The measurement of gross domestic product (GDP)
• GDP adds together many different kinds of products into a single
measure of the value of economic activity.
• There are some products that GDP excludes because measuring them
is so difficult. Like produced and sold illegal drugs. It also excludes
most items that are produced and consumed at home, and therefor
never enter the market place.
• GDP includes only the value of the final good because the value of
intermediate goods is already included in the price of the final good.
• If a product is used as inventory then GDP goes up.
• GDP includes both tangible goods (food, clothing, cars) and
intangible services (haircuts, housecleaning, dentist visits).
• GDP includes goods and services currently being produced. It does
not involve transactions involving items produced in the past. When
General Motors produces and sells a new car, its included in the GDP.
When a person sells a used car to another person, the value of the
used car is not included in GDP
• GDP measures the value of production that takes place within a
specific interval of time. Usually that interval is a year or a quarter
The Components of GDP • To understand how the economy is using scares resources,