Economics summary Chapter 20 ‘Measuring a nation’s income’
Macroeconomics – the study of the economy as whole.
Microeconomics – the study of how individual households and firms make decisions and how they
interact with one another in markets.
Gross domestic product (GDP) – a measure of the income and expenditures of an economy.
-> ‘It is the total market value of all final goods and services produced within a country in a given
period of time.’
- it includes all items produced in the economy and sold legally in markets
GDP per capita – measures the national income per head.
GDP (Y) is divided into 4 components:
- Consumption (C)
- Investment (I)
- Government Purchases (G)
- Net Exports (NX) (-> export – import (X – M) )
Y = C + I + G + NX
Consumption - spending by households on goods and services, with the exception of purchases of
new housing.
Investment - spending on capital equipment, inventories, and structures, including new housing.
Government Purchases - spending on goods and services by local and central governments.
Net Exports – spending on domestically produced goods and services by foreigners (export) minus
spending on foreign goods by domestic residents (imports).
Transfer Payments – a payment for which no good or service is exchanged. (not part of GDP)
Nominal GDP - values the production of goods and services at current prices.
Real GDP - values the production of goods and services at constant prices.
GDP at constant prices – gross domestic product calculated using prices that existed at a particular
base year which takes into account changes in inflation over time.
GDP at current or market prices – gross domestic product calculated by multiplying the output of the
goods and services by the price of those goods and services in the reporting year.
GDP deflator - a measure of the price level calculated as the ratio of nominal GDP to real GDP x 100
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
X 100
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃
- It tells us the rise in nominal GDP that is attributable to a rise in prices rather than a rise
in the quantities produced.
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
Converting Nominal GDP to Real GDP: Real GDP = 𝐺𝐷𝑃 𝑑𝑒𝑓𝑙𝑎𝑡𝑜𝑟 X 100
Macroeconomics – the study of the economy as whole.
Microeconomics – the study of how individual households and firms make decisions and how they
interact with one another in markets.
Gross domestic product (GDP) – a measure of the income and expenditures of an economy.
-> ‘It is the total market value of all final goods and services produced within a country in a given
period of time.’
- it includes all items produced in the economy and sold legally in markets
GDP per capita – measures the national income per head.
GDP (Y) is divided into 4 components:
- Consumption (C)
- Investment (I)
- Government Purchases (G)
- Net Exports (NX) (-> export – import (X – M) )
Y = C + I + G + NX
Consumption - spending by households on goods and services, with the exception of purchases of
new housing.
Investment - spending on capital equipment, inventories, and structures, including new housing.
Government Purchases - spending on goods and services by local and central governments.
Net Exports – spending on domestically produced goods and services by foreigners (export) minus
spending on foreign goods by domestic residents (imports).
Transfer Payments – a payment for which no good or service is exchanged. (not part of GDP)
Nominal GDP - values the production of goods and services at current prices.
Real GDP - values the production of goods and services at constant prices.
GDP at constant prices – gross domestic product calculated using prices that existed at a particular
base year which takes into account changes in inflation over time.
GDP at current or market prices – gross domestic product calculated by multiplying the output of the
goods and services by the price of those goods and services in the reporting year.
GDP deflator - a measure of the price level calculated as the ratio of nominal GDP to real GDP x 100
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
X 100
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃
- It tells us the rise in nominal GDP that is attributable to a rise in prices rather than a rise
in the quantities produced.
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
Converting Nominal GDP to Real GDP: Real GDP = 𝐺𝐷𝑃 𝑑𝑒𝑓𝑙𝑎𝑡𝑜𝑟 X 100
