Chapter 23: Measuring a Nation's Income

Chapter 23 gives an introduction to macroeconomics, stating that some components of macroeconomics are GDP (gross domestic product), inflation, unemployment, retail sales, and the trade deficit. Macroeconomics is the study of the economy as a whole, and GDP is the best measure of a society’s economic well being.

GDP is extremely useful for measuring income and spending, since both are always equal. For each buyer, a seller receives the amount paid. It is the market value of all final goods and services produced within a country in a given period of time. This means that the market value of all final version of goods and services sold legally (and some illegally) in a certain time period contributes to the GDP of a country.

GDP is composed of four parts: consumption, investment, government purchases, and net exports. Consumption is the spending by households on goods and services, investment is spending on capital, inventories, and structures (including purchasing housing), government purchases are spending on goods and services by federal, local, and state governments, and net exports are the spending on domestically produced goods minus spending on foreign goods.

There are two kinds of GDPs: nominal and real. The nominal GDP is the production of goods and services valued at current prices. This means that the economist would multiply the price of a good for each year and the quantity produced for the same year to get the nominal GDP. The real GDP is the production of goods and services valued at constant prices, meaning that the economist would multiply a constant price with a varying quantity for the year to get the real GDP. These two values can be used to calculate the GDP deflator, which helps measure inflation. The GDP deflator is computed by dividing nominal GDP by the real GDP and multiplying the quotient by 100. An increase in the value represents the inflation rate between the years.