Chapter 4

Measuring a Nations Production and Income

The Circular Flow of Production and Income

The circular flow shows how the production of goods and services generates income for households and how households purchase goods and services produced by firms

THE PRODUCTION APPROACH: MEASURING A NATIONS MACROECONOMIC ACTIVITY USING GROSS DOMESTIC PRODUCT

Gross Domestic Product (GDP) -

The total market value of final goods and services produced within an economy in a given year.

Intermediate Goods -

Goods used in the production process that are not final goods and services.

The Components of GDP

1. Consumption expenditures spending by households on goods and services. 2. Private investment expenditures spending by firms on goods and services. 3. Government purchases spending on goods and services by local, state and federal governments. 4. Net exports spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports)

Private investment expenditures in GDP consist of three components:

1. First, there is spending on new plants and equipment during the year. 2. Second, newly produced housing is included in investment spending. 3. Finally, if firms add to their stock of inventories, the increase in inventories during the current year is included in GDP.

Gross Investment - total new investment expenditures. Depreciation - reduction in the value of capital goods over a one-year period due to physical wear and tear and also to obsolescence; also called capital consumption allowance.

Net Investment - Gross investment minus

depreciation.

Net Exports Import - a good or service produced in a foreign country and purchased by residents of the home country (for example, the UAE). Export - a good or service produced in the home country (for example, the UAE) and sold in another country. Net Exports - exports minus imports.

Trade Deficit exports. Trade Surplus imports.

the excess of imports over

the excess of exports over

THE INCOME APPROACH: MEASURING A NATIONS MACROECONOMIC ACTIVITY USING NATIONAL INCOME

Measuring a National Income 1. National Income - the total income earned by a nation s residents both domestically and abroad in the production of goods and services.

2. Gross National Product - GDP plus net income earned abroad.

3. Personal Income - it is the sum of all kinds of incomes received by the individuals from all sources of incomes (both legal and illegal earnings. 4. Personal Disposable Income refers to the personal income of the earners against which they do not have any legally enforceable payment obligations. It includes personal income tax, fines, and fees.