1. Market for Resources HouseholdsFirms Market for Goods and Services Wages, profits Land, Labor, Capitol Spending Goods And Services

2.  Most resources are owned by Households and Firms  The chart shows the flow of resources in an economy and how institutions in a capitolistic economies are tied together

3.  National Income Accounting is the measurement of the economy’s overall performance ◦ The Bureau of Economic Analysis, which is a part of the Commerce Department, compiles the National Income and Product Accounts ◦ This allows policy-makers to:  Asses the health of the economy with levels of production  Track the long-run economy as to see growing, sustaining, or shrinking numbers  Formulate policies to protect and improve the economy

4.  The Gross Domestic Product of a country measures the total market value of all final goods and services produced in a given year within a country’s borders. ◦ Think of this as a measurement of the health and performance of a country’s economy. ◦ This annual total output is known as the aggregate output of a country

5.  GDP is truly about comparison. In order to receive the most accurate account of effectiveness of policy and the health of a country economists: ◦ Compare GDP to previous years ◦ Compare the policy changes of the years ◦ Compare GDP growth to other countries  Through these steps an accurate picture of a country’s economic health can be compiled.

6. The most direct of the three is the product approach, which sums the outputs of every class of enterprise to arrive at the total. The expenditure approach works on the principle that all of the product must be bought by somebody, therefore the value of the total product must be equal to people's total expenditures in buying things. The income approach works on the principle that the incomes of the productive factors ("producers," colloquially) must be equal to the value of their product, and determines GDP by finding the sum of all producers' incomes. Example: the expenditure method: GDP = private consumption + gross investment + government spending + (exports − imports), or Note: "Gross" means that GDP measures production regardless of the various uses to which that production can be put. Production can be used for immediate consumption, for investment in new fixed assets or inventories, or for replacing depreciated fixed assets. "Domestic" means that GDP measures production that takes place within the country's borders. In the expenditure-method equation given above, the exports- minus-imports term is necessary in order to null out expenditures on things not produced in the country (imports) and add in things produced but not sold in the country (exports). Economists (since Keynes) have preferred to split the general consumption term into two parts; private consumption, and public sector (or government) spending. Two advantages of dividing total consumption this way in theoretical macroeconomics are: Private consumption is a central concern of welfare economics. The private investment and trade portions of the economy are ultimately directed (in mainstream economic models) to increases in long-term private consumption. If separated from endogenous private consumption, government consumption can be treated as exogenous, so that different government spending levels can be considered within a meaningful macroeconomic framework. Expenditure Method of GDP

7. In economics, most things produced are produced for sale, and sold. Therefore, measuring the total expenditure of money used to buy things is a way of measuring production. This is known as the expenditure method of calculating GDP. Note that if you knit yourself a sweater, it is production but does not get counted as GDP because it is never sold. Sweater-knitting is a small part of the economy, but if one counts some major activities such as child-rearing (generally unpaid) as production, GDP ceases to be an accurate indicator of production. Similarly, if there is a long term shift from non-market provision of services (for example cooking, cleaning, child rearing, do-it yourself repairs) to market provision of services, then this trend toward increased market provision of services may mask a dramatic decrease in actual domestic production, resulting in overly optimistic and inflated reported GDP. This is particularly a problem for economies which have shifted from production economies to service economies. This highlights the problems of the expenditure method of calculating gdp. Only things that are produced that year count, things not produced and sold that year will not. Money gained through stock exchange will not count either, along with benefits such as social security. Issues with the Expenditure Method What is and is not counted

8.  Nominal GDP is measured in current market prices. That means that there is no account for year to year inflation.  Nominal GDP will include all of the changes in market prices that have occurred during the current year due to inflation or deflation.

9. Real GDP is expressed in constant or unchanging dollars ◦ This means real GDP has been adjusted to NOT include the inflation or deflation that has occurred between the years being compared.  in order to figure out changes in the overall price level real GDP is used.

10.  To calculate real GDP, you must start with a base year to compare and use for calculations. This is called a standard indicator or a consumer price index.  Ex/ if a car cost $5,000 in 1984 and currently costs $10,000, you would divide $10,000 by $5,000 to arrive at 2.00 as a CPI figure. If you wanted to see the percentage of the price increase, you would just subtract 1 from your CPI result and convert to the CPI number to percentage form. ◦ The calculated CPI is your GDP deflator, which is a number that when divided into nominal GDP and multiplied by 100, yields the real GDP for that year.  Divide nominal GDP by the GDP deflator to calculate real GDP. Real GDP represents inflation-adjusted output.

11.  handy thing to note, to figure out if inflation or deflation occurred… If… real < nominal = deflation If…real > nominal = inflation