MacroeconomicsI_working_version (1)

Measuring Domestic Output, National Income 45
interaction of the households’ supply and firms’ demand for the vast variety of resources
(human and property) determine the prices paid for use of each individual kind of resource.
The lower part of the diagram portrays the product market, where final goods and services
supplied by firms are bought and sold. Households demand these goods and services there
in order to satisfy their needs and wishes. The money income they have received from the
sale of the resources in the resource market is used for purchasing the final goods and
services in the product market. Firms use various types of resources they have obtained in
the resource market to produce and supply the immense variety of final goods and services.
Thus, the product prices are established due to interaction of consumers’ demand and
firms’ supply decisions in the product market.
6.1. National Income Accounting
There are three main functions of national income accounting:
a) A national accounting allows us to keep the economy of the nation under permanent
control. It permits to measure the overall level of production in the economy in a
particular time frame.
b) System of a national accounting allows us to compare the national accounts in a chosen
period of years. By comparing these numbers we can examine the long run course of
the economy and explore the growing, declining or steady trend path.
c) National accounts provide us with information that serve as a basis for planning,
designing and pursuing macroeconomic policies. We can asses the health of the
economy due to national accounting and accordingly formulate policies to stabilise and
improve actual performance of the economy.
6.1.1. Gross Domestic Product
We can use quite broad variety of measures of an economy’s economic performance.
Aggregate output belongs among measures based on the economy’s annual output of goods
and services, which are considered the best available measures. Gross domestic product
(GDP), including goods and services produced by domestic and foreign resources operating
within geographical boundaries of a country, measures aggregate output. GDP is
measured as the total market value of all final goods and services produced within a
country in a particular year.
6.1.1.1. Avoiding Multiple Counting
Gross domestic product includes only the market value of final goods. It doesn’t
involve intermediate goods neither re-sold products. If we want to measure aggregate
output of some particular year accurately, we must avoid multiple counting. Some goods
(or their parts) could be bought and sold many times. Such goods must be counted only
once.