MacroeconomicsI_working_version (1)

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Chapter 6
The goal of this chapter is to explain the ways the overall production performance of the
economy is measured. Measuring of the main overall economic indicators is a function of
national income accounting, which is as important for the entire national economy as
private accounting is for individual enterprises or, for that matter, for households.
Costs
Resources
RESOURCE
MARKET
Money income (wages,
rents,interest, profits)
Labor, land, capital,
enterpreneurial ability
BUSINESSES
HOUSEHOLDS
Revenue
Goods and
services
PRODUCT
MARKET
Goods and
services
Consumption
expenditures
Real flows
Financial flows
Figure 6.1 The circular flow of output and income. There are two groups of decision makers depicted in
the figure: households and firms. (We are omitting the government for now in the figure.) Product and
resource markets work as a co-ordinating mechanisms, which adjust the decision processes of households
and firms.
The upper part of the figure shows the resource market. Firms demand labour and other
resources there whereas households act as suppliers of the resources. The prices paid for
the use of capital, land, labour (and entrepreneurial ability) are determined in the resource
market. The prices of final goods and services are determined by households on the
demand side and by firms on the supply side in the product market. This is shown in the
lower part of the figure.
The resource market depicted in the upper part of the diagram represents the place where
resources (factors of production) supplied by households are bought and sold. The firms
demand and purchase these resources, in order to produce final products and services. The