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Chapter 5

Chapter 5 Econ 1010 Notes.docx

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ECON 1010
Xueda Song

Chapter 5 Econ 1010 Notes Measuring a Nation’s Income Economics is divided into two brands: 1) Microeconomics: Study of how individual households and firm makes decisions and how they interact with one another in the market 2) Macroeconomics: Study of the economy as a whole, global and national economy (households, firms and market simultaneously) Economy’s Income and Expenditure To judge a person economically you look at their income (higher income = higher standard of living) To judge nation’s overall economy (whether good or poor), you look at the total income that everyone in the economy is earning Total income economy earns is determined by GDP GDP (Gross Domestic Product) - Total income of everyone in the economy - Total expenditure on the economy’s output of goods and services Reason GDP can perform trick of measuring income and expenditure is? Income = Expenditure (true because every transaction has 2 parties, a buyer and a seller) Another way to see the equality of income and expenditure is... Circular Flow Diagram - Describes all the transactions between households and firms in a simple economy In this economy: - Households buy goods and services from firms - Expenditures flow through the markets for goods and services - Firms in turn use the money they receive from sales to pay workers wages, landlord rent and firms owner profit - Income flows through the markets for the factors of production In this economy, money flows from households to firms and back to households Compute GDP for this economy in one of two ways: 1) Adding up the total expenditure by households 2) Adding up total income (wages, rent, and profit) paid by the firms Because all expenditure in economy ends up as someone’s income, GDP is same. Explanation of Circular Flow Diagram Firms: - Buy/hire factors of production, use them to produce goods and services - Sells goods and services Households -
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