Lecture 3 - Economics 102 Lecture 3: Measuring Income...

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1 Economics 102 Lecture 3 : Measuring Income LECTURE 3 MEASURING INCOME 1 Measuring Income Measuring Income § How will the economy be doing when you graduate? § How do we take the “blood pressure ” or “pulse” of the economy? § How does the present state of the economy compare to the state of the economy last year? the economies of other countries? LECTURE 3 MEASURING INCOME 2 In this lecture, look for answers to these questions: § What is Gross Domestic Product (GDP)? § How is GDP related to a nation’s total income and spending? § What are the components of GDP? § How is GDP corrected for inflation? § Does GDP measure society’s well-being?
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2 LECTURE 3 MEASURING INCOME 3 Micro vs. Macro Recall: § Microeconomics : The study of how individual households and firms make decisions, interact with one another in markets. § Macroeconomics : The study of the economy as a whole. § We begin our study of macroeconomics with the country’s total income and expenditure. LECTURE 3 MEASURING INCOME 4 Income and Expenditure § Gross Domestic Product (GDP) measures total income of everyone in the economy. § GDP also measures total expenditure on the economy’s output of G&S. For the economy as a whole, income equals expenditure , because every dollar of expenditure by a buyer is a dollar of income for the seller. LECTURE 3 MEASURING INCOME 5 The Circular-Flow Diagram § is a simple depiction of the macroeconomy. § illustrates GDP as spending, revenue, factor payments, and income. § First, recall: Factors of production are inputs like labor, land, and capital. Factor payments are payments to the factors of production. ( e.g ., wages, rent)
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3 LECTURE 3 MEASURING INCOME 6 FIGURE 1: The Circular-Flow Diagram Markets for Factors of Production Households Firms Income (=GDP) Wages, rent, profit (=GDP) Factors of production Labor, land, capital Spending (=GDP) G & S bought G & S sold Revenue (=GDP) Markets for Goods & Services LECTURE 3 MEASURING INCOME 7 What This Diagram Omits § The government collects taxes purchases G&S § The financial system matches savers ’ supply of funds with borrowers ’ demand for loans § The foreign sector trades G&S, financial assets, and currencies with the country’s residents LECTURE 3 MEASURING INCOME 8 …the market value of all final goods & services produced within a country in a given period of time. Gross Domestic Product (GDP) Is… Goods are valued at their market prices, so: GDP measures all goods using the same units (e.g., dollars in the U.S.), rather than “adding apples and oranges.” Things that don’t have a market value are excluded, e.g., housework you do for yourself.
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4 LECTURE 3 MEASURING INCOME 9 …the market value of all final goods & services produced within a country in a given period of time.
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Lecture 3 - Economics 102 Lecture 3: Measuring Income...

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