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Chapter 7 Notes

Chapter 7 Notes - Macroeconomic Foundations and Long-Run...

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Macroeconomic Foundations  and Long-Run Growth 15:20 Microeconomics The study of how households and businesses make choices, how they interact in markets, and how the government attempts to influence their choices. Macroeconomics The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth. Economists study factors that affect many markets at the same time Analyzes what determines the total level of employment in an economy o Its significantly affected by the business cycle Business cycle Alternating periods of economic expansion and economic recession. Expansion The period of a business cycle during which total production and total employment are increasing. Recession The period of a business cycle during which total production and total employment are decreasing. Economic growth The ability of an economy to produce increasing quantities of goods and services. An economy that grows too slowly fails to raise living standards Inflation rate The percentage increase in the price level from one year to the next. Gross Domestic Product Measures Total Production Gross domestic product (GDP) The market value of all final goods and services produced in a country during a period of time. Measuring Total Production: Gross Domestic Product GDP IS MEASURED USING MARKET VALUES, NOT QUANTITIES We measure production by taking the value, in dollar terms, of all the goods and services produced In micro: we measure production in quantity terms o The number of ipods Apple produces o The tons of wheat’s US farmers grow
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GDP INCLUDES ONLY THE MARKET VALUE OF FINAL GOODS Final good or service A good or service purchased by a final user. o Its not included in the production of any other good or service o A hamburger purchased by a consumer o A computer purchased my a business Intermediate good or service A good or service that is an input into another good or service, such as a tire on a truck. o Are used in the production of other goods and services GM doesn’t produce tires for its cars, it buys them from tire companies Tires are an intermediate good The truck is the final good In calculating GDP, the GM truck is the value of the final good but not the tire If we included the tire, we would be double counting PRODUCTION, INCOME, AND THE CIRCULAR FLOW DIAGRAM
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