Chapter 10 Measuring a Nation s Income The Economy s Income and Expenditure GDP measures total income of everyone in economy and total expenditure on the economy s output of goods and services For an economy as a whole income must equal expenditure intermediate good raw supply made to be used in production final good final product of made out of raw supplies included in GDP GDP market value of all final goods services produced within a country in a given period of time GDP excludes items produced sold illicitly most items produced and consumed at home and never enter the marketplace GDP includes both tangible goods and intangible services GDP includes goods and services currently produced GDP measures the value of production within the geographic confines of a country GDP measures the value of production that takes place within a specific interval of time The difference between the two calculations of GDP is called the statistical discrepancy GDP Y is divided into four components consumption C investment I government purchases G and net exports NX Y C I G NX identity an equation that must be true because of how the variables in the equation are defined consumption spending by households on goods services with the exception of purchases of new housing investment spending on capital equipment inventories structures including purchases of new housing o purchase of goods such as capital equipment structures and inventories used to produce other goods government purchases spending on goods services by local state federal governments net exports spending on exports by foreigners spending on imports If total spending rises from one year to the next at least one of two things must be true 1 the economy is producing a larger output of goods and services 2 goods and services are being sold at higher prices o o nominal GDP production of goods services valued at current prices real BDP production of goods services valued at constant prices Nominal GDP uses current prices to place a value on the economy s production of goods and services Real GDP uses constant base year prices to place a value on the economy s production of goods and services GDP deflator measure of the price level calculated as the ratio of nominal GDP to real GDP times 100 The Components of GDP Real vs Nominal GDP GDP Deflator measures t he current level of prices relative to the level of prices in the base year inflation situation in which the economy s overall price level is rising inflation rate percentage change in measure of the price level from one period to the next
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