Chapter 2 Student Notes - 2 IN THIS CHAPTER YOU WILL LEARN...

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4/26/20151MACROECONOMICSN. Gregory MankiwThe Data of Macroeconomics2IN THIS CHAPTER, YOU WILL LEARN:…the meaning and measurement of the most important macroeconomic statistics:gross domestic product (GDP)the consumer price index (CPI)the unemployment rate12Gross Domestic Product: Expenditure and IncomeTwo 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 a buyer spendsbecomes income to the seller. 3The Circular FlowHouseholdsFirmsGoodsLaborExpenditure ($)Income ($)4Value addedValue added: The value of output minus the value of the intermediate goods used to produce that output NOW YOU TRYIdentifying value addedA 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 $6.00. The engineer eats the bread. Compute value added at each stage of production and GDP5
4/26/201526Final goods, value added, and GDPGDP = value of final goods produced = sum of value added at all stages of production.The value of the final goods already includes the value of the intermediate goods, so including intermediate andfinal goods in GDP would be double counting. 7The expenditure components of GDPconsumption, Cinvestment, Igovernment spending, Gnet exports, NXAn important identity:Y = C + I + G + NXaggregate expenditurevalue of total output8Consumption (C)durable goodslast a long time e.g., cars, home appliancesnondurable goodslast a short time e.g., food, clothingservicesintangible items purchased by consumers e.g., dry cleaning, air traveldefinition: The value of all goods and services bought by households. Includes:9U.S. consumption, 201445.715.47.568.67,8992,6681,30111,868ServicesNondurablesDurablesConsumption% of GDP$ billions10Investment (I)Spending on capital, a physical asset used in future production Includes:Business fixed investmentSpending on plant and equipmentResidential fixed investmentSpending by consumers and landlords on housing units Inventory investmentThe change in the value of all firms’ inventories11U.S. Investment, 20140.63.212.516.41105502,1702,829InventoryResidentialBusiness fixedInvestment% of GDP$ billions
4/26/2015312Investment vs. CapitalNote: Investment is spending on new capital.Example (assumes no depreciation): 1/1/2014: Economy has $10 trillion worth of capitalduring 2014:Investment = $2 trillion1/1/2015: Economy will have $12 trillion worth of capital13Stocks vs. FlowsA flowis a quantity measured per unit of time. E.g., “U.S. investment was $2 trillion during 2014.”FlowStockA stockis a quantity measured at a point in time.

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