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Chapter 23

Chapter 23 - Measuring a Nation's Income

Course Code
Economics 10b
Gregory Mankiw

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Chapter 23: Measuring a Nation’s Income
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 measures total income of everyone in the economy and the total expenditure
on the economy’s output of goods and services  the two are equal
- Each transaction has a buyer and a seller so it contributes equally to the
economy’s income and expenditure
- GDP measures flow of money in circular-flow diagram
- Total expenditure by households or total income (wages, rent, profit) paid by
- Realistically households do not spend all their income or buy all the goods
- For the economy as a whole, expenditure = income
The Measurement of Gross Domestic Product
-Gross domestic product (GDP): market value of all final goods and services
produced within a country in a given period of time
- Uses market prices
- Tries to be comprehensive  estimates rental value for owner-occupied houses,
excludes illicit products, items produced and consumed at home
- Only counts value of final goods, intermediate good counts if it goes into
inventory for use/sale at a later date
- Additions to inventory add to GDP, reductions in inventory subtract from GDP
- Include tangible goods and intangible services
- Does not include transactions involving items produced in the past
- Items have to be produced domestically, regardless of nationality of producer
- Measures income and expenditure during specific interval of time, usually a year
or a quarter
- Statisticians apply seasonal adjustment
-Statistical discrepancy: difference between two calculations of GDP (income
and expenditure)
Components of GDP
-GDP (Y) = consumption (C) + investment (I) + government purchases (G) +
net exports (NX)
- Equation must be true because it is an identity  variables in the equation are
defined that way
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