Exam #1 Notes - Chapter 5 Measuring a Nations Income...

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Chapter 5: Measuring a Nation’s Income macroeconomic : the study of economy-wide phenomena including inflation, unemployment, economic growth Gross Domestic Product (GDP): the market value of all final goods and services produced within a country in a given period of time o The economy’s income and expenditure GDP is the most closely watched economic statistic because it is thought to be the best single measure of a society’s economic well-being measures two things at once: the total income of everyone in the economy and the total expenditure on the economy’s output of goods and services for an economy as a whole, income must equal expenditure because all expenditure in the economy ends up as someone’s income, GDP is the same regardless of how we compute it o The measurement of GDP includes all items produced in the economy and sold legally in markets includes only the value of final goods does not include intermediate goods does not include goods that have “switched hand” ex. used cars includes only goods and services currently produced measures the value of production within the geographic confines of a country measures the value of production that takes place within a specific interval o Gross National Product (GNP): total income earned by a nation’s permanent residents ex. if a person earns money outside the US, it counts in GNP no GDP o The Components of GDP Y = C + I + G + NX
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y = income, c=consumption, i=investment, nx = (x-m) = net imports (x=exports, m=imports) consumption: spending by household on goods and services with exception of new housing housing is considered an investment investment: spending on capital equipment, inventories, and structures including new housing government purchases: spending on goods and services by government does not include transfer payments net exports: spending on domestically produced goods by foreigners minus spending on foreign goods by domestic residents NX=X-M o Real vs. Nominal GDP GDP : the production of goods and services valued at current prices real GDP : the production of goods and services valued at constant prices they want a measure of the total quantity of goods and services the economy is producing that is not affected by changes in the prices of those goods and services uses prices from a base year better gauge of economic well-being than is nominal GDP if GDP increases, at least one of two things must be true economy is producing more goods and services goods and services are more expensive recession : a decline in a country’s GDP or negative economic growth for two consecutive quarters GDP shortfalls doesn’t account for: o leisure o non-market transactions
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o quality of environment o distribution of income Counterpoint: Real GDP per capita is correlated with literacy, life expectancy, and other measures of well-being GDP deflator
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