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Define GDP
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the market value of all final goods and services produced within a country in a given period of time
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Microeconomics
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the study of how households and firms make decisions and how they interact in markets
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Macroeconomics
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the study of economy-wide phenomena, including inflation, unemployment, and economic growth
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Use or Importance of Macroeconomics
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-design public policy
-understand economic fluctuations
-understand general unemployment
-measurement of national income
-understand international trade
-making business decisions
-understand economic fluctuations
-understand general unemployment
-measurement of national income
-understand international trade
-making business decisions
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For an economy as a whole, income must equal...
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total expenditure
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circular flow diagram
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a visual model of the economy that shows how dollars flow through markets among households and firms
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Breaking down GDP
"GDP is the market value..."
"GDP is the market value..."
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1. To add different items, market values are used.
2. Market values are calculated by using market prices.
(Things such as being paid under the table or acting as a housewife to support a family are not included.)
2. Market values are calculated by using market prices.
(Things such as being paid under the table or acting as a housewife to support a family are not included.)
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Breaking down GDP
"...of all..."
"...of all..."
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1. GDP includes all items produced in the economy and sold legally in markets
2. GDP excludes all items that are produced and consumed at home and never enter the marketplace.
2. GDP excludes all items that are produced and consumed at home and never enter the marketplace.
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Breaking down GDP
"...final..."
"...final..."
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1. Intermediate goods are not included in GDP
2.The value of intermediate goods is already included in the value of the final good.
3. Goods that are placed into inventory are considered to be final and are included in GDP as a firms inventory investment.
a. goods that are sold out of inventory are considered as a decrease in inventory investment.
b. the goal is to count the product when the good is finished, which is not necessarily the same time that the product is sold.
2.The value of intermediate goods is already included in the value of the final good.
3. Goods that are placed into inventory are considered to be final and are included in GDP as a firms inventory investment.
a. goods that are sold out of inventory are considered as a decrease in inventory investment.
b. the goal is to count the product when the good is finished, which is not necessarily the same time that the product is sold.
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Breaking down GDP
"...goods and services..."
"...goods and services..."
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1. GDP includes both tangible goods and intangible services.
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Breaking down GDP
"...produced..."
"...produced..."
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1. Only current production is counted
2. Used goods that are sold do not count as part of GDP
2. Used goods that are sold do not count as part of GDP
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Breaking down GDP
"...within a country..."
"...within a country..."
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1. GDP measures the production that takes place within the geographical boundaries of a particular country.
2. If a Canadian citizen temporarily works in the United States, the value of their output is included in the united states GDP. If an American owns a factory in Haiti, the value fo the production of that factory is not included in the United States GDP.
2. If a Canadian citizen temporarily works in the United States, the value of their output is included in the united states GDP. If an American owns a factory in Haiti, the value fo the production of that factory is not included in the United States GDP.
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Breaking down GDP
"...in a given period of time."
"...in a given period of time."
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1. The usual interval of time used to measure GDP is a year or quarter (three months).
2. When the government reports GDP, the data are generally reported on an annual basis.
2. When the government reports GDP, the data are generally reported on an annual basis.
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There are four components of GDP
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1. Consumption (C)
2. Investment (I)
3. Government spending (G)
4. Net Exports (NX) (where, X=Exports and M=Imports)
2. Investment (I)
3. Government spending (G)
4. Net Exports (NX) (where, X=Exports and M=Imports)
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The equation for calculating GDP is
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Y=C+I+G+NX
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Consumption
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is spending by households on goods and services, with the exception of purchases of new housing.
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What type of purchase is a house?
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A capital purchase. Meaning.... it isn't something that get used up, therefore it is not included in the consumption component.
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Investment
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is the purchase of goods that will be used to produce further goods and services in the future. It involves spending on business capital, residential capital, and inventories.
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Government Expenditure
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Includes spending on goods and services by local, state, and federal governments.
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Salaries of government workers ____ counted as part of the government purchases component of GDP.
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ARE
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Transfer payments ____ included as part of the government purchases component of GDP.
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ARE NOT
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Net Exports
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spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports).
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GDP equals..
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price x quantity
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If total spending rises from one year to the next, at least one of two things must be true:
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1. The economy is producing a larger output of goods and services.
2. Goods and services are being sold at higher prices. We want to separate thesetwo effects.
2. Goods and services are being sold at higher prices. We want to separate thesetwo effects.
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Nominal GDP
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the production of goods and services valued at current prices
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Real GDP
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the production of goods and services valued at constant prices
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Definition of GDP deflator
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A measure of the price level calculated as theratio of nominal GDP to real GDP times 100.
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GDP deflator formula
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Nominal GDP/Real GDP x 100
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Economy's inflation rate
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Computes the percentage increase in the GDPdeflator from one year to the next
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Inflation Rate Formula
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CPI Year 2 - CPI Year 1/ CPI Year 1 x 100
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What does GDP not value?
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1. The quality of the environment.
2. Leisure time
3. Non-market activity:-Such as the child care a parent provides at home-Volunteer work
4. An equitable distribution of income
2. Leisure time
3. Non-market activity:-Such as the child care a parent provides at home-Volunteer work
4. An equitable distribution of income
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Why do we care about GDP?
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1. GDP does not measure the health of our children, but nations with larger GDPcan afford better health care for their children.
2. GDP does not measure the environmental quality, but higher GDP can affordbetter environmental sound approaches.
3. GDP does not take account of our intelligence, integrity, courage, wisdom, ordevotion to country, but all of these laudable attributes are easier to foster whenpeople are less concerned about being able to afford the material necessities oflife.
2. GDP does not measure the environmental quality, but higher GDP can affordbetter environmental sound approaches.
3. GDP does not take account of our intelligence, integrity, courage, wisdom, ordevotion to country, but all of these laudable attributes are easier to foster whenpeople are less concerned about being able to afford the material necessities oflife.
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Why is there a need for a measure of Aggregate Price Level?
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-There are various goods and services bought in the economy.
-We need a measure to capture the increase or decrease of the Aggregate Price Level in the economy.
-It helps us in understanding the economy such as the standard of living.
-We need a measure to capture the increase or decrease of the Aggregate Price Level in the economy.
-It helps us in understanding the economy such as the standard of living.
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Consumer price index (CPI):
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a measure of the overall cost of the goods and services bought by a typical consumer
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Core CPI:
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a measure of the overall cost of consumer goods and services excluding food and energy.
-Because the prices of food and energy are unstable, the core CPI betterreflects ongoing inflation trends.
-Because the prices of food and energy are unstable, the core CPI betterreflects ongoing inflation trends.
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Producer Price Index (PPI):
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a measure of the cost of a basket of goods and services bought by firms.
-Because firms eventually pass on higher costs to consumers in the form of higher prices on products, the producer price index is believed to be useful in predicting changes in the CPI.
-Because firms eventually pass on higher costs to consumers in the form of higher prices on products, the producer price index is believed to be useful in predicting changes in the CPI.
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Steps to calculate CPI:
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1. Fix the basket
2. Find the prices
3. Compute the basket's cost
4. Choose a base year and compute the index
5. Compute the inflation rate
2. Find the prices
3. Compute the basket's cost
4. Choose a base year and compute the index
5. Compute the inflation rate
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Standard of living: Among Countries
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Average income in a rich/developed country is about tentimes the average income in a poor/underdeveloped country.Differences arereflected in large differences in the quality of life: nutrition, housing,healthcare, life expectancy, and so on
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Standard of living: Within a country
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Over time,the U.S. Real GDP per person growth: 2% peryear (for the past 100 years)
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Productivity formula
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Productivity = Y/L (output per worker),where, Y = real GDP = Quantity of output produced and L = Quantity of labor5mm
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Definition of Productivity:
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The quantity of goods and services produced from each unit of labor input.
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Physical capital (K):
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Stock of equipment and structures used to producegoods and services.
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Physical capital per worker (K/L):
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Productivity is higher when the averageworker has more capital (machines, equipment, etc.).An increase in K/L causes an increase in Y/L.
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Human capital (H):
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the knowledge and skills workers acquire through education, training, and experience
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Human capital per worker (H/L)
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Productivity is higher when the averageworker has more human capital (education, skills, etc.).An increase in H/L causes an increase in Y/L.
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Natural resources (N):I
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Inputs into production that nature provides (land,rivers, and mineral deposits).
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Natural resources per worker(N/L):
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Other things equal, more N allows acountry to produce more Y .An increase in N/L causes an increase in Y/L.
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Technological knowledge (A):
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society's understanding of the best ways to produce goods and services
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Common knowledge:
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after one person uses it, everyone becomes aware of it
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Proprietary:
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It is known by the company that discovers it
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Technological knowledge vs. Human capital
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Both are important for productivity
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Human capital
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Results from the effort people expend to acquire thisknowledge.
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A production function:
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A production function describes the relationship between the quantity ofinputs used in production and the quantity of output from production.The production function generally is written like this:Y = A × F(L, K, H, N)
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