Chapter 2 covers - Chapter 2 covers the meaning and...

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1/29/2014 1 Chapter 2 covers: …the meaning and measurement of the most important macroeconomic statistics: Gross Domestic Product (GDP) The Consumer Price Index (CPI) The unemployment rate Gross Domestic Product: Expenditure and Income Two definitions: Total expenditure on domestically-produced final goods and services. Total income earned by domestically-located factors of production. Expenditure equals income because every dollar spent by a buyer becomes income to the seller. The Circular Flow Households Firms Goods Labor Expenditure ($) Income ($)
1/29/2014 2 Value added Value added: The value of output minus the value of the intermediate goods used to produce that output Stages of Production Example: Production of Notebook Paper NOW YOU TRY: A farmer grows a bushel of wheat and sells it to a miller for $1.00. The miller turns the wheat into flour and sells it to a baker for $3.00. The baker uses the flour to make a loaf of bread and sells it to an engineer for $6.00. The engineer eats the bread. Compute value added at each stage of production and GDP
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1/29/2014 4 U.S. consumption, 2008 42.6 20.8 7.2 70.5% 6,069.6 2,965.1 1,023.2 $ 10,057.9 Services Nondurables Durables Consumption % of GDP $ billions Investment (I) Spending on goods bought for future use (i.e., capital goods) Includes: Business fixed investmentSpending on plant and equipment Residential fixed investmentSpending by consumers and landlords on housing units Inventory investmentThe change in the value of all firms’ inventoriesU.S. Investment, 2008 0.3 3.4 10.9 14.0% 47.0 487.7 1,552.8 $1,993.5 Inventory Residential Business fixed Investment % of GDP $ billions
1/29/2014 5 Investment vs. Capital Note: Investment is spending on new capital. Example (assuming no depreciation): 1/1/2009: economy has $500b worth of capital during 2009: investment = $60b 1/1/2010: economy will have $560b worth of capital Stocks vs. Flows A flowis a quantity measured per unit of time.

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