Economics Today The Micro 17th Edition Roger LeRoy Miller Solutions Manual 1
Economics Today The Micro 17th Edition Roger LeRoy Miller Solutions Manual 1
Economics Today The Micro 17th Edition Roger LeRoy Miller Solutions Manual 1
Chapter 8
Measuring the Economy’s Performance
◼ Overview
This chapter introduces national income accounting (NIA). It is important because it provides the
foundation for the heart of macroeconomics—the national income determination models. The first
objective is to examine the concepts and methods of NIA. The various measures of income and output
such as gross domestic product, net domestic product, national income, personal income, and disposable
personal income are explained in this section. The second objective is to demonstrate that one person or
group’s expenditure is another’s income. National income is equal to the money value of national (final)
output. GDP or income is not a perfect measurement of economic well-being and was not designed to
provide one. The basis of NIA, the circular flow of income and product model, is introduced. Then the
concept of real versus nominal values is presented. Finally, inter-country comparisons of GDP are shown.
◼ Learning Objectives
After studying this chapter, students should be able to
• Describe the circular flow of income and output.
• Define gross domestic product (GDP).
• Understand the limitations of using GDP as a measure of national welfare.
• Explain the expenditure approach to tabulating GDP.
• Explain the income approach to computing GDP.
• Distinguish between nominal GDP and real GDP.
◼ Outline
I. The Simple Circular Flow: The concept of a circular flow of income involves two principles:
(1) in every economic exchange, the seller receives exactly the same amount that the buyer
spends and (2) goods and services flow in one direction and money payments flow in the other.
(See Figure 8-1.)
A. Profits Explained: Profits are a part of costs because entrepreneurs must be rewarded for
providing their services, or they will not provide them.
B. Total Income or Total Output: Total income is the total of all individuals’ income and is also
defined as the annual cost of producing the entire output of final goods and services. Total output
is the value of all of the final goods and services produced in the economy during the year.
1. Product Markets: Product Markets are where households are the buyers and businesses are
the sellers of consumer goods.
2. Factor Markets: In the Factor Markets, households are the sellers; they sell resources such
as labor, land, capital, and entrepreneurial ability.
C. Why the Dollar Value of Total Output Must Equal Total Income: Total income is income
earned by households in payment for the production of these goods and services. The value of
total output is identical to total income because spending by one group is income to another.
II. National Income Accounting: A measurement system used to estimate national income and its
components.
A. Gross Domestic Product (GDP): The total market value of all final goods and services
produced by factors of production located within a nation’s borders in a year. GDP is a flow,
i.e., an activity that occurs over time. Contrast this with a stock measured at a point in time.
B. Stress on Final Output: GDP does not count intermediate goods (goods used up entirely in
the production of final goods) because to do so would be to double count. Value added is the
amount of dollar value contributed to a product at each state of production. (See Table 8-1.)
C. Exclusion of Financial Transactions, Transfer Payments, and Secondhand Goods: Many
transactions occur that have nothing to do with final goods and services produced.
1. Financial Transactions: There are three categories of purely financial transactions:
a. Securities: The value of brokers’ services is included in GDP when an investor buys or
sells securities because they perform a service. The actual value of the transaction is not
included because nothing new is produced. All that happens is an exchange of ownership
rights to the securities.
b. Government Transfer Payments: Transfer payments are payments for which no
productive services are concurrently provided in exchange.
c. Private Transfer Payments: This is a private transfer of funds from one person to
another and these are not included in GDP.
2. Transfer of Secondhand Goods: The value of secondhand goods is included in the GDP
in the year they were produced.
3. Other Excluded Transactions
a. Household Production: Tasks performed by homemakers within their households for
which they are not paid through the marketplace.
b. Otherwise Legal Underground Transactions: Legal transactions that are not reported
and not taxed.
c. Illegal Underground Activities: These activities include prostitution, illegal gambling,
sale of illegal drugs, etc. Illegal transactions are also not reported and thus not counted.
D. Recognizing the Limitations of GDP: GDP is a measure of production and an indicator of
economic activity. It is not a measure of a nation’s welfare. It excludes nonmarket activity and
says little about our environmental quality of life.
III. Two Main Methods of Measuring GDP: The expenditure approach is a way of adding up the dollar
value at current market prices of all final goods and services. The income approach could also be
used, by adding up the income received by everyone producing final goods and services.
A. Deriving GDP by the Expenditure Approach: The components of total expenditures are
added together. (See Figure 8-3.)
1. Consumption Expenditures (C): Consumption expenditures fall into three categories:
durable consumer goods, nondurable goods, and services.
2. Gross Private Domestic Investment (I): When economists refer to investment, they are
referring to expenditures that represent an addition to our future productive capacity.
When life has been well spent, age is a loss of what it can well spare,—
muscular strength, organic instincts, gross bulk, and works that belong to
these. But the central wisdom, which was old in infancy, is young in
fourscore years, and, dropping off obstructions, leaves in happy subjects
the mind purified and wise. I have heard that whoever loves is in no
condition old. I have heard, that, whenever the name of man is spoken,
the doctrine of immortality is announced; it cleaves to his constitution.
The mode of it baffles our wit, and no whisper comes to us from the
other side. But the inference from the working of intellect, hiving
knowledge, hiving skill,—at the end of life just ready to be born,—
affirms the inspirations of affection and of the moral sentiment.
THE END.
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