2-03-National Income- Where It Comes From and Where It Goes.pdf

User JOEWA:Job EFF01419:6264_ch03:Pg 40:23909#/eps at 100% *23909* Wed, Feb 13, 2002 8:55 AM
part II
Classical Theory:
The Economy in
the Long Run
User JOEWA:Job EFF01419:6264_ch03:Pg 41:24836#/eps at 100% *24836* Wed, Feb 13, 2002 8:55 AM
CHAPTER THREE
National e: Where es
From and3 Where It Goes
A large e is the best recipe for happiness I ever heard of.
— Jane Austen
The most important macroeconomic variable is gross domestic product (GDP).
As we have seen, GDP measures both a nation’s total output of goods and ser-
vices and its total appreciate the significance of GDP,one need only
take a quick look at international data: compared with their poorer counterparts,
nations with a high level of GDP per person have everything from better child-
hood nutrition to more televisions per large GDP does not ensure
that all of a nation’s citizens are happy,but it may be the best recipe for happiness
that macroeconomists have to offer.
This chapter addresses four groups of questions about the sources and uses of
a nation’s GDP:
➤ How much do the firms in the economy produce? What determines a na-
tion’s total e?
➤ Who gets the e from production? How much goes pensate
workers, and how much goes pensate owners of capital?
➤ Who buys the output of the economy? How much do households pur-
chase for consumption, how much do households and firms purchase
for investment, and how much does the government buy for public
purposes?
➤ What equilibrates the demand for and supply of goods and services? What
ensures that desired spending on consumption, investment, and govern-
ment purchases equals the level of production?
To answer these questions, we must examine how the various parts of the econ-
omy interact.
A good place to start is the circular flow diagram. In Chapter 2 we traced the
circular flow of dollars in a hypothetical economy that produced one product,
bread, from labor services. Figure 3-1