Introduction

This chapter builds up, from first principles, how the income of an entire economy is measured. It opens by laying out a few foundational ideas about how production, income and expenditure fit together (section 2.1), then traces the circular flow of income -- the way money moves between the different sectors of the economy -- and shows how the same national income figure can be arrived at through three different routes: the product (or value added) method, the expenditure method, and the income method (section 2.2). The chapter closes by breaking down national income into its various sub-categories, introducing price indices such as the GDP deflator, the Consumer Price Index and the Wholesale Price Index, and examining why GDP, despite being the headline number, is an imperfect measure of a country's overall welfare (section 2.3).