Chapter 8 Macro Notes.docx - Chapter 8 Measuring the...

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Chapter 8: Measuring the Economy’s Performance 8.1 The Simple Circular Flow Profits explained: o Question: Why is a profit a cost of production?
Figure 8-1 The Circular Flow of Income and Product Product markets Transactions in which households buy goods Factor markets Transactions in which businesses buy resources Total income The yearly amount earned by the nation’s resources (factors of production) Includes wages, rent, interest payments, and profits received by workers, landowners, capital owners, and entrepreneurs, respectively Final goods and services Goods and services that are at their final stage of production and will not be transformed into yet other goods or services Question: Why must the dollar value of total output equal total income?
GDP measures the dollar value of final goods and services produced per year by factors of production located within a nation’s borders. Stress on final output: What is a final good? Wheat? Steel? Crude oil? Bread? Automobile? Gasoline? Intermediate goods Goods used up entirely in the production of final goods Value added The dollar value of an industry’s sales minus the value of intermediate goods (for example, raw materials and parts) used in production Table 8-1 Sales Value and Value Added at Each Stage of Donut Production (1 of 2) (1) Stage of Production (2) Dollars Value of Sales (3) Value Added Stage 1: Fertilizer and seed $.03] $.03 Stage 2: Growing .07] .04 Stage 3: Milling .12] .05 Stage 4: Baking .30] .18 Stage 5: Retailing .45] .15 Total dollar value of all sales $.97 Total value added $.45 Table 8-1 Sales Value and Value Added at Each Stage of Donut Production (2 of 2) Stage 1: A framer purchases 3 cents’ worth of fertilizer and seed, which are used as factors of production in growing wheat. Stage 2: The farmer grows the wheat, harvests it, and sells it to a miller for 7 cents. Thus, we see that the farmer has added 4 cents’ worth of value. Those 4 cents represent income over, and above expenses incurred by the farmer. Stage 3: The miller purchases the wheat for 7 cents and adds 5 cents as the value added. That is, there is 5 cents for the miller as income. The miller sells the ground wheat flour to a donut-baking company.

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