Apa Style

C h a p t e r

5

MEASURING GDP AND ECONOMIC GROWTH*

Key Concepts

Gross Domestic Product Gross domestic product, GDP, is the market value of all the final goods and services produced within in a country in a given time period. ♦ A final good or service is an item that is bought by its final user during a specified time period. In contrast, an intermediate good is an item produced by one firm, bought by another and used as a component of a final good or service. Intermediate goods are not directly included in real GDP. The circular flow of income and expenditure shows real and monetary flows in the economy. The circular flow involves: ♦ Four economic sectors — households, firms, governments, and the rest of the world. ♦ Three major markets — factor markets, goods markets, and financial markets. In these markets people make their economic decisions by choosing the amounts of key economic variables: ♦ Consumption expenditures (C ) — total household spending on consumption goods and services. ♦ Investment (I ) — firms’ purchase of new plants, equipment, buildings, and additions to inventories. ♦ Government purchases (G ) — government spending on goods and services. Net taxes (T ) are taxes paid to the government minus transfer payments received from governments and minus interest payments on the government’s debt.

♦ Net exports (NX ) — exports (X, sales of U.S. goods and services abroad) minus imports (M, purchases of foreign good and services). Aggregate expenditure, C + I + G + NX, equals aggregate production, GDP, and also equals aggregate income, Y. This equality is the basis for measuring GDP. ♦ National saving equals saving by households and businesses plus government saving: S + (T − G ). ♦ Borrowing from the rest of the world equals M − X. Investment is financed by national saving plus borrowing from the rest of world, I = S + (T − G ) + M − X. A flow is a quantity over a unit of time. A stock is a quantity that exists at a moment in time. Wealth and...