Chapter 2

Chapter 2 - Core Ideas More Precisely (Blanchard ch. 2)...

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Core Ideas More Precisely (Blanchard ch. 2) Prof. Irina A. Telyukova UCSD Econ 110A Spring 2008
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2 Outline: Main Macroeconomic Variables I. Measuring a country’s output: Gross Domestic Product. Three definitions. Nominal versus real GDP. Measuring output growth. II. Unemployment rate: definition, measurement, and policy implications. III. Inflation: two ways of measuring (GDP deflator and the Consumer Price Index) and policy implication. IV. Why we distinguish between the short, medium and long run.
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3 I. Aggregate Output: the GDP There are three definitions of the GDP: 1. GDP is the total value of the final goods and services produced in the economy during a given period. (Supply side) 2. GDP is the value added in the economy during a given period. (Supply side) 3. GDP is the sum of incomes in the economy during a given period. (Income side) GDP: Total Production = Total Value Added = Total Income
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4 Nominal vs. Real GDP s Nominal GDP ($Y t ) is the sum of quantities of final goods produced times their current prices. s Production of most goods increases over time. s BUT, prices of most goods increases over time too. h Thus, growth of nominal GDP may be due to the growth of either. S Real GDP (Y t ) takes out price growth: the sum of quantities of final goods produced times their constant prices . S Growth of real GDP is thus entirely due to growth of production, so better measures economic growth. S Chained-dollar GDP computes real GDP by taking into account the fact that relative prices of goods also change over time.
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5 Nominal vs. Real GDP 0 2,000 4,000 6,000 8,000 10,000 12,000 1965 1970 1975 1980 1985 1990 1995 2000 (billions of U.S. dollars) NGDP (billions of $) RGDP (billions of 1996 $)
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6 Real GDP Measures Economic Size of a Country
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Chapter 2 - Core Ideas More Precisely (Blanchard ch. 2)...

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