Chapter_7_Notes

Chapter_7_Notes - Chapter 7 Notes Chapter 7 GDP Measuring...

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Chapter 7 Notes Chapter 7 GDP: Measuring Total Production and Income After reviewing basic microeconomic concepts in chapters 3 and 4, it is now to move on to Macroeconomics and its topics. Macroeconomics is the study of the economy as a whole (not just individual consumers, firms, and markets), including topics such as inflation, unemployment, and economic growth. The first “macro” chapter we look at explains production and income for a whole economy. It does this by looking mainly through the scope of the measure of gross domestic product (GDP). Gross Domestic Product Measures Total Production Gross domestic product (GDP) is the most popular measure of total production in the economy. It is the market value of all final goods and services produced in a country during a period of time. It is compiled by the Bureau of Economic Analysis (www.bea.gov) and the Department of Commerce and reports on GDP are released every three months (quarterly). Since it is such an important measurement in macroeconomics, the definition must be understood very carefully. 1. GDP is measured using market values, not quantities 2. GDP includes only the market value of final goods 3. GDP only includes the market value of final goods and services Final good or service – a good or service purchased by a final user Intermediate good or service – a good or service that is an input into another good or service 1
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Chapter 7 Notes Avoid double counting. 4. GDP only includes current production 2009 4 th quarter GDP only includes what is produced for that quarter -Does not include value of used goods Production, Income and the Circular-Flow Diagram Just as it is important to have an idea of the total production of an economy, we also want to know about the total income of the economy. GDP helps take care of this because when GDP is calculated, a measure of the value of total income is calculated at the same time. When you buy a good the money you spend must end up as someone’s income. The circular-flow diagram helps illustrate the flow of spending and money in the economy. a. Firms sell goods and services to domestic households, foreign firms and households, and the government. Exports - expenditure by “rest of the world” on domestically produced goods 2
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Chapter 7 Notes b. Firms use the factors of production (L, N, K, and E) to produce goods and services. Households supple the factors of production to firms in exchange for income. Income is split into four categories 1. Wage - to labor services 2. Interest - for use of capital 3. Rent - for natural resources 4. Profit - return to entrepreneur c. Federal, state, and local governments make payments of wages and interest to households in exchange for hiring workers and other factors of production. Governments also make transfer payments which are payments by the government to individuals for which the government does not receive a new good or service in return.
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