Summary

1. Economists keep track of the flows of money between sectors with the national income and product accounts, or national accounts.
2. Gross domestic product, or GDP, measures the value of all final goods and services produced in the economy. It does not include the value of intermediate goods and services. It can be calculated in three ways: add up the value added by all producers; add up all spending on domestically produced final goods and services; or add up all the income paid by domestic firms to factors of production. These three methods are equivalent because in the economy as a whole, total income paid by domestic firms to factors of production must equal total spending on domestically produced final goods and services.
3. Real GDP is the value of the final goods and services produced calculated using the prices of a selected base year. Except in the base year, real GDP is not the same as nominal GDP, the value of aggregate output calculated using current prices. Analysis of the growth rate of aggregate output must use real GDP because doing so eliminates any change in the value of aggregate output due solely to price changes. Real GDP per capita is a measure of average aggregate output per person but is not in itself an appropriate policy goFal. U.S. statistics on real GDP are always expressed in chained dollars.
4. To measure the aggregate price level, economists calculate the cost of purchasing a market basket. A price index is the ratio of the current cost of that market basket to the cost in a selected base year, multiplied by 100.
5. The inflation rate is the yearly percent change in a price index, typically based on the consumer price index, or CPI, the most common measure of the aggregate price level. A similar index for goods and services purchased by firms is the producer price index, or PPI. Finally, economists also use the GDP deflator, which measures the price level by calculating the ratio of nominal to real GDP times 100.