Worth: Mankiw Economics 5e and the total expenditure on its output of goods and services. The consumer price index, or CPl, measures the level of prices. The unemployment rate tells us the fraction of workers who are unemployed. In the following pages, we see how these statistics are computed and what they tell us about the econom 2-1 Measuring the Value of Economic Activity: Gross domestic product Gross domestic product is often considered the best measure of how well the economy is performing. This statistic is computed every three months by the bu- reau of Economic Analysis(a part of the U.S. Department of Commerce) from a large number of primary data sources. The goal of GDP is to summarize in a sin- gle number the dollar value of economic activity in a given period of time. There are two ways to view this statistic. One way to view gDp is as the total income of everyone in the economy. Another way to view GDP is as the total expendi ture on the econommy's output of goods and services. From either viewpoint, it is clear why GDP is a gauge of economic performance. GDP measures something peo- ple care about--their incomes Similarly, an economy with a large output of pods and services can better satisfy the demands of households, firms, and the government. How can GDP measure both the economy's income and the expenditure on its output? The reason is that these two quantities are really the same: for the economy as a whole, income must equal expenditure. That fact, in turn, follows from an even more fundamental one: because every transaction has both a buyer and a seller, every dollar of expenditure by a buyer must become a dollar of in come to a seller. When Joe paints Jane's house for $1, 000, that $1,000 is income to Joe and expenditure by Jane. The transaction contributes $1,000 to GDP, re- gardless of whether we are adding up all income or adding up all expenditure To understand the meaning of GDP more fully, we turn to national income accounting, the accounting system used to measure GDP and many related statistics Income, Expenditure, and the Circular Flow Imagine an economy that produces a single good, bread, from a single input, labor. Figure 2-1 illustrates all the economic transactions that occur between households and firms in this economy. The inner loop in Figure 2-1 represents the flows of bread and labor. The households sell their labor to the firms The firms use the labor of their workers to produce bread, which the firms in turn sell to the households. Hence, labor flows from households to firms and bread fows from firms to households. The outer loop in Figure 2-1 represents the corresponding flow of dollars The households buy bread from the firms. The firms use some of the revenue User JoENA: Job EFFo1418: 6264_ch02: Pg 16: 24934#/eps at 1004 mI Tue,Feb12,20028:404MUser JOEWA:Job EFF01418:6264_ch02:Pg 16:24934#/eps at 100% *24934* Tue, Feb 12, 2002 8:40 AM and the total expenditure on its output of goods and services. The consumer price index, or CPI, measures the level of prices.The unemployment rate tells us the fraction of workers who are unemployed. In the following pages, we see how these statistics are computed and what they tell us about the economy. 2-1 Measuring the Value of Economic Activity: Gross Domestic Product Gross domestic product is often considered the best measure of how well the economy is performing.This statistic is computed every three months by the Bu￾reau of Economic Analysis (a part of the U.S. Department of Commerce) from a large number of primary data sources.The goal of GDP is to summarize in a sin￾gle number the dollar value of economic activity in a given period of time. There are two ways to view this statistic. One way to view GDP is as the total income of everyone in the economy.Another way to view GDP is as the total expendi￾ture on the economy’s output of goods and services. From either viewpoint, it is clear why GDP is a gauge of economic performance. GDP measures something peo￾ple care about—their incomes. Similarly, an economy with a large output of goods and services can better satisfy the demands of households, firms, and the government. How can GDP measure both the economy’s income and the expenditure on its output? The reason is that these two quantities are really the same: for the economy as a whole, income must equal expenditure.That fact, in turn, follows from an even more fundamental one: because every transaction has both a buyer and a seller, every dollar of expenditure by a buyer must become a dollar of in￾come to a seller.When Joe paints Jane’s house for $1,000, that $1,000 is income to Joe and expenditure by Jane.The transaction contributes $1,000 to GDP, re￾gardless of whether we are adding up all income or adding up all expenditure. To understand the meaning of GDP more fully, we turn to national income accounting, the accounting system used to measure GDP and many related statistics. Income, Expenditure, and the Circular Flow Imagine an economy that produces a single good, bread, from a single input, labor. Figure 2-1 illustrates all the economic transactions that occur between households and firms in this economy. The inner loop in Figure 2-1 represents the flows of bread and labor. The households sell their labor to the firms.The firms use the labor of their workers to produce bread, which the firms in turn sell to the households. Hence, labor flows from households to firms, and bread flows from firms to households. The outer loop in Figure 2-1 represents the corresponding flow of dollars. The households buy bread from the firms.The firms use some of the revenue 16 | PART I Introduction