Week 3-4 measuring the economy - Chapter 5 The Wealth of...

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Chapter 5 The Wealth of Nations: Defining and Measuring Macroeconomic Aggregates This week: 5.1, 5.2 1
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5 The Wealth of Nations: Defining and Measuring Macroeconomic Aggregates Chapter Outline 5.1 Macroeconomic Questions 5.2 National Income Accounts: Production = Expenditure = Income 5.3 What Isn’t Measured by GDP? 5.4 Real vs. Nominal 2
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Key Ideas 1. Macroeconomics is the study of aggregate economic activity. 2. National income accounting is a framework for calculating gross domestic product (GDP), which is a measure of aggregate economic output. 3. GDP can be measured in three different ways, and in principle these three methods should all yield the same answer: Production = Expenditure = Income. 4. GDP has limitations as a measure of economic activity and as a measure of economic well-being. 5. Economists use price indexes to measure the rate of inflation and to distinguish nominal GDP from real GDP (which holds prices fixed). 5 The Wealth of Nations: Defining and Measuring Macroeconomic Aggregates 3
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5.1 Macroeconomic Questions Macroeconomics is the study of economic aggregates and economy-wide phenomena like the annual growth rate of a country’s total economic output or the annual percentage increase in the total cost of living. 4
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Income per capita The average income per person. Calculated by dividing a nation’s aggregate (or total) income by the number of people in that country. Income per capita in the United States is more than 2 times the level in Portugal, 7 times the level in China, and 100 times the level in Zimbabwe! 5.1 Macroeconomic Questions 5
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gross domestic product (GDP) The total market value of all final goods and services produced within a given period by factors of production located within a country. Gross Domestic Product http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1
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5.2 National Income Accounts: Production = Expenditure = Income Exhibit 5.1 Circular Flow Diagram 9
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final goods and services Goods and services produced for final use. intermediate goods Goods that are produced by one firm for use in further processing by another firm. value added The difference between the value of goods as they leave a stage of production and the cost of the goods as they entered that stage. Gross Domestic Product Final Goods and Services gross domestic product (GDP) The total market value of all final goods and services produced within a given period by factors of production located within a country. In calculating GDP, we can sum up the value added at each stage of production or we can take the value of final sales. Using total sales would be double counting.
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Aggregate economic activity in a country can be measured in three different ways: The production approach The expenditure approach The income approach 5.2 National Income Accounts: Production = Expenditure = Income 11
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5.2 National Income Accounts: Production = Expenditure = Income Exhibit 5.1 Circular Flow Diagram 12
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Production Approach Production-based accounting sums up each firm’s value added, which
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