Chapter 5 Measuring a Nations Income
Gross Domestic Product (GDP): measures the total income of a nation.
GDP measures two things at once: the total income of everyone in the economy and the total
expenditure on the economy’s outputs of goods and services. For economy as a whole, income =
expenditure; this is because every transaction has a buyer and a seller, every dollar of spending by some
buyer is a dollar income for some seller.
GDP Text Definition: is the market value of all final goods and services produced within a country in a
given period of time
Compute GDP 2 Ways: by adding up the total expenditure by households or by adding up the total
income (wage, rent, and profit) paid by firms.
Factors of production: are inputs like labor, land, capital, and natural resources
Factor Payments: are payments to the factors of production (wages, rent, etc)
Households: own the factors of production; sell/rent them to firms for income, buy and consume g&s
Firms: buy/hire factors of production, use them to produce goods and services, sell g&s
-GDP adds together many different kinds of products in a single measure of the value of
economic activity. It uses market prices because it measures the amount people are willing to
pay for different goods; they reflect the value of those goods.
-GDP includes all items produced in the economy and sold legally in markets. It also includes the
market value of the housing services provided by the economy’s stock of housing. GDP excludes
items produced and sold illicitly such as illegal drugs and items that are produced and consumed
at home therefore never enter the market place (growing your own food in your garden).
-GDP includes both tangible goods (foods, clothing, and cars) and intangible services (haircuts,
-GDP includes goods and services currently produced; it does not include used things or goods
produced in the past
-GDP measures the value of production within the geographic confines of a country. Items are
included in a nation’s GDP if they are produced domestically, regardless of the nationality of the
-GDP measures the value of production that takes place within a specific interval of time (a year
or a quarter [3 months]). When government reports for the quarter, it usually presents a GDP
“at an annual rate” which is the amount of income and expenditure during the quarter
multiplied by 4. When the government reports quarterly GDP, it presents the data after they
have been modified by statistical procedure called seasonal adjustment (taking out the seasonal
cycle).Intermediate good: used as components of ingredients in the production of other goods
Final good: the final product
-GDP includes only the value of final goods because the intermediate good is already included in the
price of the final good. An exception is when an intermediate good is produced and rather than being
used, is added to a firm’s inventory of foods to be used or sold at a later date. When it is later used or
sold, the firm’s inventory investment is negative, and GDP is reduced accordingly.
The Components of GDP
GDP (Y) = Consumption (C) + Investment (I) + Government Purchases (G) + Net Exports (NX)
Consumption: spending by households on goods and services, with the exception of purchases of new
housing. For renters, consumption includes rent payments. For homeowners, consumption includes the
imputed rental value of the house, but not the purchas