MACROECONOMICS.docx - MACROECONOMICS Gross domestic product measures the production a country is able to produce Measures total income of everyone in

MACROECONOMICS.docx - MACROECONOMICS Gross domestic product...

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MACROECONOMICS Gross domestic product: measures the production a country is able to produce. Measures total income of everyone in the country. GDP also measures total expenditure on the economy’s output of goods and services. For the economy as a whole, income equals expenditure because every dollar a buyer spends is a dollar of income for the seller. If saving exists, how can we say that total income will be equal to total production? Because total income whereas we use it to consume or to save, the saving will be used to invest and produce. The circular-flow diagram Households: own the factors of production, sell/rent to firms for income. Buy and consume goods and services. Firms: buy/hire households and produce goods and services. Production = Total spending in consumption = Total income Goods and services Consumption of households Wages investment Profits Government spending rentals GDP is the market value of all final goods and services produced within a country in a given period of time. Goods are valued at their market priced, so: All goods measured in the same units Things that don’t have a market value are excluded like housework you do for yourself GDP is the market value of all final goods and services produced within a country in a given period of time. Final product: intended for the end user Intermediate goods: used as components or ingredients in the production of other goods GDP only includes final goods and currently produced goods, not goods produced in the past. GDP measures the value of production that occurs within a county’s borders, whether done by its own citizens or by foreigners located here. GDP is total spending and is composed by consumption (C), investment (I), government purchases (G) and net exports (NX). These components add up to GDP denoted Y: Y= C+I+G+NX
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Investment is total spending on goods that will be used in the future to produce more goods. Includes spending on capital equipment, structures and inventories. Investment does not mean the purchase of financial assets like stocks and bonds Government purchase is all spending on the goods and services by govt at the federal, state, and local levels. G excludes transfer payments, such as social security or unemployment insurance benefits. They are not purchases of g&s Real vs nominal GDP Inflation can distort economic variables like GDP, so we have two versions of GDP: Nominal GDP: values output using current prices. Not corrected for inflation. Real GDP: values output using the prices of a base year. Is corrected for inflation. Example PIZZA LATTE Year P Q P Q 2011 $10 400 $2 1000 2012 $11 500 $2.5 1100 2013 $12 600 $3 1200 Compute nominal GPD in each year: 2011: 10x400+2x1000= $6000 2012: 11x500+2.5x1100= $8250 2013: 12x600+3x1200= $10800 THE GDP DEFLACTOR Is a measure of the overall level of prices GDP deflator= 100x (nominal GDP/real GDP) One way to measure the economy’s inflation rate is to Example Year Nominal GDP Real GDP GDP deflator 2011 $6000 $6000 100 2012 $8250 $7200 114.6 2013 $10800 $8400 128.6 Compute de GDP deflator in each year: 2011: 100x (6000/6000) = 100 2012: 100x (8250/7200) = 114.6 2013: 100x (10800/8400) = 128.6
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Exercise 2011 2012 2013 P Q P Q P Q Good A $30 900
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