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Chapter 5

Principles of Macro [Mankiw, Kneebone, McKenzie] - Chapter 5 Notes

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ECON 2020U
Peter Cheung

ECON2020Chapter 5 Notes MEASURING A NATIONS INCOME Measuring a Nations IncomeThe Economys Income and ExpenditureTo judge a persons quality of life one might generally look at that persons incomeGenerally a high income individual can afford lifes luxuries and thus lives a more fulfilling lifeThis same logic applies to nations the greater the GDP of a nation the more active valuable production the higher the quality of life in that countryFor an economy as a whole income must equal expenditureSince every transaction in an economy has a purchaser and a seller any measurement of a transaction at any point in the transaction must be equivalent from the point of view of the seller or the purchaserWhen a transaction is made the seller benefits from the money made selling a product and the purchaser benefits from the value they receive in purchasing the product thus the economy grows by the amount of money in the transactionThe Measurement of Gross Domestic ProductGross Domestic Productthe market value of all final goods and services produced within a country in a given period of timeGDP is the market valueGDP compares all goods produced in an economy at the price which they are soldThus if product X is sold for twice the price of product Y product X contributes twice as much to the countrys GDPof allGDP only seeks to measure the value of all of the goods and services sold in the marketplaceTherefor any good or service produced at home that is to say it isnt bought or sold in the marketplace isnt counted in the GDPBecause GDP cannot measure what isnt sold in the marketplace some measurements made are paradoxicalFor example if person A pays person B to do a service but person A later marries person B the service is no longer paid for in the marketplace so it is excluded from the GDP But the service still holds the same valueSince some GDP measurements omit valuable transactions GDP often underestimates the productivity value of a nationFinalIntermediate goods and final goods must be distinguished in a GDP
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