ECON
Chapter 7 notes

# Chapter 7 notes - Chapter Seven GDP Measuring Total...

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Chapter Seven GDP: Measuring Total Production and Income Microeconomics : the study of how households and firms make choices, how they interact in markets, and how they government attempts to influence their choices. Macroeconomics : The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth. 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 Measuring Total Production: Gross Domestic Product GDP : the market value of all final goods and services produced in a country during a period of time. o Bureau of Economic Analysis (BEA) in Department of Commerce compiles data to calculate GDP. GDP is measured using market values, not quantities. o We measure production by taking the value in dollar terms of all the goods and services produced. GDP includes only the market value of all final goods. o In measuring GDP we include only the value of final goods and services. Final goods and services : a good or service purchased by a final user. When a hamburger is purchased by a customer. Intermediate Good : a good or service that is an input into another good or service, such as a tire on a truck. If we included the value of the tire, we would be double counting: once when it was sold to the company and once when the company sold the truck. GDP includes only current production. o GDP includes only production that takes place during the indicated time period. o GDP does not include the value the used goods. Production, Income, and the Circular Flow Diagram When we measure the total production in an economy using GDP, we measure the value of total income. o If we add up the value of every good and service sold in the economy, we must get a total that is exactly equal to the value of all of the income in the economy. Circular Flow:

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o Firms sell goods and services to three groups: domestic households, foreign firms and households, and the government. o Expenditures by foreign firms and households on domestically produced goods and services are exports. o Firms use factors of production (labor, capital, entrepreneurship, natural resources) to produce goods and services.
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