Econ Notes - (Chapter 7 GDP and the CPI Tracking the...

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(Chapter 7)-- GDP and the CPI: Tracking the Macroeconomy The National Accounts Indicator of nation’s developments National income and product accounts: (national accounts) calculated number that keeps track of the spending of consumers, sales of producers, business investment spending, government purchases, and a variety of other money flows The Circular-Flow Diagram, Revisited and Expanded o o Total sum of flows of money out of a given box = total sum of flows of money into that box What go in, must come out o Consumer spending: buying goods and services from producers (domestic and international) o Factors of production: land, labor, physical capital, human capital, financial capital o Stocks: shares in the ownership of a company o Bonds: borrowing money in the form of “IOU”s that pay interest o Income that households receive from the factor markets dividends o Don’t get to keep all the income they receive from the markets (taxes) o Government transfers: payments by the government to individual were nothing is received in return (Social Security)
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o Disposable income: total income households have left after taxes and receiving government transfers o Income usually set aside for private savings, which goes into financial markets (buy/sell stocks, bonds, etc.) o Rest of world participates in US economy: 1. Exports 2. Imports 3. Transactions o Investment spending: spending on productive physical capital, such as machinery and construction of buildings, and on changes to inventories Includes changes Gross Domestic Product o Final goods and services: good and services sold to the final, or end, user o Intermediate goods and services: goods and services that are inputs for production of final goods and services Not the final user Ex: steel foundry (steel then bought by car manufactures) o Gross Domestic Product: the total value of all final goods and services produced in an economy during a given period, usually a year Ex: US’ 2010, individual about $46,844/person o Aggregate Spending: the total flow of funds into the markets for goods and services Calculating GDP o Expenditure Approach: Sum the amount spend on all final goods and services during a year GDP = C + I + G + X – M C: Personal Consumption Expenditure I: Investment G: Government Consumption and Gross Investment X: Export M: Import o Income Approach: Add up all the income received by all factors of production in producing final goods GDP = National Income + Depreciation + (Indirect Taxes – Subsidies) + Net Factor Payment to the Rest of the World + Other What GDP Measures o The size of the economy o Economic performance in comparison to other countries o Have to be careful because part of the increase in the value of GDP over time represents increase in the prices of goods and services rather than an increase in output Real GDP: A Measure of Aggregate Output Aggregate output: the total quality of final goods and services the economy produces
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