Transcript Chapter 7: Measuring Domestic Output, National Income, and Price

Chapter 7:
Measuring Domestic Output,
National Income, and Price Level
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How can we know that the economy is
performing well?
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Can we use (measurements \ indicators) to
judge the state of the economy?
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What we see in the economy?
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The economy can be divided into several
sectors:
1.
The Households
The Businesses
The Government
The Foreign sector
2.
3.
4.
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Sector (1): The Household
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Consumers,
Own production factors,
Earn income by selling production factors to
other sectors,
Spend their income on goods and services =
Consumption Expenditure “C”
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Sector (2): The Business Sector
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Produce goods and services,
Use production factors (households)
Pay wages and salaries and rents,,,
Investment expenditure = I
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Sector (3): Government sector
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Basic Projects (Public Goods)
Social and welfare
Taxes (T) and Government expenditure (G)
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Sector (4): The Foreign sector
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Exports (X)
Imports (M)
Total Expenditure Function:
=C+I+G+X–M
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Circular flow diagram:
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The economy produce goods and services by
using the economy resources,
Income moves between resource owners and
producers of goods and services
This process can be shown in Circular flow
diagram:
Assume first we have 2 sectors, households
and business sector:
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Money income
Resource Market
(I)
Business:
Buy resources
Sell products
Resources
Households
Sell resources
Buy products
Goods, services
C
Product Market
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Households receive income from business
b/c they participate in the production process
since they offer the resources they own
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Businesses receive income from selling
goods and services they produced
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