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Chapter 10

ECON 201 Chapter Notes - Chapter 10: Gross Domestic Product, Seasonal Adjustment, Intermediate Good


Department
Economics
Course Code
ECON 201
Professor
Sarna
Chapter
10

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Chapter 10: Measuring a Nation's Income
10.1 The Economy’s Income and Expenditure
Gross domestic product (GDP)
Measures two things at once:
Total income of everyone in the economy
Total expenditure on the economy’s output of goods and services
For an economy as a whole, income must equal expenditure
Economy’s income is the same as its expenditure because every
transaction has two parties: buyer and seller
The Circular-Flow Diagram
GDP equals:
Total amount spent by households in the market for goods and
services
Total wages, rent, and profit paid by firms in the markets for the
factors of production
10.2 The Measurement of Gross domestic product (GDP)- the market value of all final
goods and services produced within a country in a given period of time
Adds together many different kinds of products into a single measure of the value
of economic activity
Uses market prices
Market prices measure the amount people are willing to pay for
different goods, so they reflect the value of those goods
Tries to be comprehensive
Includes all items produced in the economy and sold legally in markets
Includes market value of the house services provided by the economy’s
stock of housing
Excludes most items produced and sold illicitly
Ex. Illegal drugs
Excludes most items that are produced and consumed at home (never
enters the market)
Ex. Vegetables that you grow in your garden
Includes only the value of final goods
Value of intermediate goods is already included in the prices of the final
goods
Exception arises when an intermediate good is produced and added to a
firm’s inventory of goods for use or sale at a later date
Intermediate good is taken to be a “final” good for the moment and
its value as inventory investment is included as part of GDP
Additions to inventory add to GDP, when goods in inventory are later
used or sold, the reductions in inventory subtract from GDP
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