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GDP—The Measure of National Output (cont.) • Gross domestic product (GDP)— measures the dollar value of all final goods, services, and structures produced within a country’s borders during a oneyear period. • The most important measure of a nation’s economic performance and economic health. Estimating Total Annual Output GDP—The Measure of National Output (cont.) • Items excluded from GDP & Examples – Intermediate products – Secondhand sales – Nonmarket transactions – Underground economy Estimating Total Annual Output GDP—The Measure of National Output (cont.) • GDP has limitations. – GDP tells us nothing about composition of output. – GDP tells little about the impact of production on quality of life. – Some GDP is produced to control activities with little utility. Economic Sectors and Circular Flows (cont.) • The largest sector in the economy is the household or consumer. Economic Sectors and Circular Flows (cont.) • Business or investment sector – Proprietorships, partnerships, and corporations Economic Sectors and Circular Flows (cont.) • Government or public sector • Foreign sector The Output—Expenditure Model (cont.) • The circular flow can be represented by the output-expenditure model. – GDP = C + I + G + (X – M) The Output—Expenditure Model (cont.) • Consumers spend income on goods and services used by households. • Income that is not spent appears as personal saving and borrowed by the business and government sectors. The Output—Expenditure Model (cont.) • Investment sector spends income on labor, factories, equipment, inventories, and other investment goods. • Government sector spends income on national defense, income security, roads, etc. • Foreign sector buys U.S. goods that make up our GDP. • Foreign sector purchases are called net exports of goods and services. Economic Sectors and Circular Flows (cont.) • Income generated by production flows to businesses, government, and consumer sectors. Circular Flow of Economic Activity GNP—The Measure of National Income Gross national product (GNP) (cont.) – The dollar value of all final goods, services, and structures produced in a one-year period with labor and property owned by a country’s residents. =GDP + payments received from outside the country – payments made to all foreign owned businesses within the country