Alomar_1111 Chapter 7: Measuring Domestic Output, National Income, and Price Level

Alomar_111 2 How can we know that the economy is performing well? Can we use (measurements \ indicators) to judge the state of the economy? What we see in the economy?

Alomar_111 3 The economy can be divided into several sectors: 1. The Households 2. The Businesses 3. The Government 4. The Foreign sector

Alomar_111 4 Sector (1): The Household Consumers, Own production factors, Earn income by selling production factors to other sectors, Spend their income on goods and services = Consumption Expenditure “C”

Alomar_111 5 Sector (2): The Business Sector Produce goods and services, Use production factors (households) Pay wages and salaries and rents,,, Investment expenditure = I

Alomar_111 6 Sector (3): Government sector Basic Projects (Public Goods) Social and welfare Taxes (T) and Government expenditure (G)

Alomar_111 7 Sector (4): The Foreign sector Exports (X) Imports (M) Total Expenditure Function: = C + I + G + X – M

Alomar_111 8 Circular flow diagram: The economy produce goods and services by using the economy resources, Income moves between resource owners and producers of goods and services This process can be shown in Circular flow diagram: Assume first we have 2 sectors, households and business sector:

Alomar_111 9 Resource Market Money income ( I ) Resources Goods, services C Product Market Business: Buy resources Sell products Households Sell resources Buy products

Alomar_ Households receive income from business b/c they participate in the production process since they offer the resources they own Businesses receive income from selling goods and services they produced