Microeconomics The study of how individual households and firms make decisions and how they interact with one another in Chapter 10 Measuring a Nation s Income markets Macroeconomics The study of the economy as a whole Some major statistics of the economy include Inflation deflation The rate at which the average prices are rising or falling Gross domestic product GDP The total income of everyone in the economy Unemployment The percent of the workforce that is out of work Retail sales The total spending at stores Trade deficit The imbalance of trade between the United States and the rest of the world GDP measures two main things the total income of everyone in the economy and the total expenditure on the economy s output of goods and services For an economy as a whole income must equal expenditure Money is always flowing from households to firms and then back to households firms We can compute the GDP for a simple economy in one of two ways By adding up the total expenditure by households By adding up the total income wages rent and profit paid by Gross domestic product GDP The market value of all final goods and services produced within a country in a given period of time GDP measures different types of products using their market prices because it depicts the products actual value GDP includes owner occupied property by calculating its rental value GDP includes only the value of the final products because the value of the intermediate goods is already included in the prices of Additions to inventory add to the GDP and when the goods in inventory are used or sold the reductions in inventory are GDP includes both tangible goods food clothing furniture and intangible services haircuts housecleaning and tours GDP includes goods and services currently produced not produced in the past That means that all used products even if they are Goods or services are included in a nation s GDP if they are produced domestically regardless of the nationality of the producer Seasonal adjustment When government statisticians adjust the quarterly data to take out the seasonal cycle so that the quarterly the final goods subtracted from GDP still in the market are not a part of the GDP calculations can be compared more easily Statistical discrepancy The difference between the two calculations total expenditures and total income of GDP Total expenditure GDP is measured by Identity An equation that must be true because of how the variables in the equation are defined Y GDP C consumption I investment G government spending NX net exports Consumption The spending by households on goods and services with the exception of purchases of new housing Consumption also includes household s expenditure on education Investment The purchase of goods that will be used in the future to produce more goods and services It is the sum of purchases of capital equipment inventories and structures In simpler terms investment means purchases of goods such as capital equipment structures and inventories used to produce other goods and services in the future Government purchases These include spending on goods and services by local state and federal governments Transfer payments These include payments like Social Security benefits payments that are not made in exchange for a currently produced good or service Net exports This equal the foreign purchases of domestically produced goods exports minus the domestic purchases of foreign goods imports That is Imports alone do not affect the GDP as they raise consumption investment or government spending Net exports Exports Imports Real GDP This evaluates current production using prices that are fixed at past levels to show how the economy s overall production of goods and services changes over time The change in real GDP is the amount that GDP would change if prices were constant Change in real GDP Real GDP 2 Real GDP 1 x 100 Real GDP 1 Nominal GDP The production of goods and services valued at current prices The change in nominal GDP reflects both prices and quantities Change in nominal GDP Nominal GDP 2 Nominal GDP 1 x 100 Nominal GDP 1 GDP deflator A measure of the price level calculated as the ratio of nominal GDP to real GDP times The GDP deflator measures Real GDP GDP deflator Nominal GDP x 100 the current level of prices relative to the level of prices in the base year Inflation When the overall price level of the economy rises The GDP deflator is one measure that economists use to monitor the average level of prices in the economy and thus the rate of inflation Inflation rate for year 2 GDP deflator in year 2 GDP deflator in year 1 x 100 GDP deflator in year 1 Recession A period of declining real incomes and rising unemployment GDP does not directly measure those things that make life worthwhile but it does measure our ability to obtain many of the inputs into a worthwhile life GDP per person tells us what happens to the average person but behind the average lies a large variety of personal experiences