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econ 1 - Dr Mohammed Alwosabi Econ 141 Ch.1 Chapter 1...

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Dr. Mohammed Alwosabi Econ 141- Ch.1 1 Chapter 1 MEASURING GDP AND PRICE LEVEL MEASURING EONOMIC ACTIVITY Macroeconomics focuses on the economic activity of a country. Overall, economic activity is the pattern of transactions in which things of real useful value--resources, goods and services--are created, transformed, and exchanged. Macroeconomics focus is on the aggregate (or total) concept. We always discuss the aggregate output, the aggregate income, the general price level of goods and services, the total jobs in the entire economy, etc. Economic activity is measured by calculating gross domestic product (GDP). This measurement is sometimes called national Income accounts. There are three ways to measure economic activity or GDP: o Product (or Value Added) Approach : output produced by all firms to be sold o Expenditure Approach : amount spent by ultimate buyers o Income Approach : income received by producers from the sale of the total output The three approaches are equivalent. Any output produced (product approach) is purchased by someone (expenditure approach) which results in income to someone (income approach) total production = total expenditure = total income. GDP provides a measure of total production, total expenditures, and total income, and can be used to make comparisons over time and across countries. So, what’s GDP?
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Dr. Mohammed Alwosabi Econ 141- Ch.1 2 GDP DEFINED (THE PRODUCT APPROACH) GDP is the market value of all final goods and services produced within the border of a country in a given time period. This definition contains four parts: 1. Market value 2. Final goods and services produced 3. Within the border of a country 4. In a given period of time 1. Market value: To measure total production we must add together the production of all final goods and services produced in a country. Since we cannot add tons to units to meters to gallons, it is necessary to convert all output to the same unit of measurement. Conversion is to calculate the market value (market price) of each good and service and then add them together. Thus, market value means valuing production according to market price. Market value of a good = (Price of the good) (Quantity of the good) = P*Q Example: Suppose a country produces only three final goods. Quantities and prices of these goods for two different years are given in the table below: Good 1 Good 2 Good 3 Year Q $P/unit Q $P/unit Q $P/unit GDP 2003 2000 1 3500 3 500 10 $ 17500 2004 3000 2 4000 2.5 700 11 $ 23700 GDP in 2003 = P1 Q1 + P2 Q2 + P3 Q3 = ($1) (2000) + ($3) (3500) + ($10) (500) = $17500 GDP in 2004 = P1 Q1 + P2 Q2 + P3 Q3 = ($2) (3000) + ($2.5) (4000) + ($11) (700) = $23700
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