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Economic Theory
buys a good or service, the transaction has a buyer and seller. Thus, for the
economy as a whole, expenditure and income are always the same.
Figure 3.1 – Circular flow diagram
2. Gross Domestic Product and Gross National Product
Gross domestic product (GDP) is the total value of all final goods and
services produced within a country over a given year.
Several key points regarding the measurement of GDP are worth noting:
GDP measures the market values of goods (tangible) and services
(intangible), which are calculated by using market prices;
GDP includes all items produced and sold legally in the economy. It
does not include illegal activities and household production (e.g. cleaning
and cooking);
GDP includes only final goods. Final goods are goods that are
consumed and used as is (e.g. loaf of bread), as opposed to intermediate
goods which are sold and used for some further stage of production (e.g.
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