Chapter%207:%20Measuring%20Domestic%20Output,%20National%20Income,%20and%20Price%20Level

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Chapter 7Measuring Domestic Output, National
Income, and Price Level
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• How can we know that the economy is performing
  well?
• Can we use (measurements \ indicators) to judge
  the state of the economy?
• What we see in the economy?

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• The economy can be divided into several sectors
• The Households
• The Businesses
• The Government
• The Foreign sector

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Sector (1) The Household

• 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

• 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

• Basic Projects (Public Goods)
• Social and welfare
• Taxes (T) and Government expenditure (G)

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Sector (4) The Foreign sector

• Exports (X)
• Imports (M)
• Total Expenditure Function
• C I G X M

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Circular flow diagram

• 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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• Resource Market
• Money income (I)
  Resources
• Goods, services
  C
• Product Market

Business Buy resources Sell products
Households Sell resources Buy products
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• Households receive income from business b/c they
  participate in the production process since they
  offer the resources they own
• Businesses receive income from selling goods and
  services they produced