2 - Chapter 2 Measuring the Macroeconomy 2.1 Introduction...

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1 Chapter 2 Measuring the Macroeconomy 2.1 Introduction In this chapter, we learn: the importance of gross domestic product (GDP), and how it is measured. the composition of GDP, and how it has changed over time. how to use GDP to measure the evolution of living standards over time. how to use GDP to measure differences in living standards across countries National Income & Product Accounts National income accounting provides a systematic method of aggregating the production of diverse goods into a single measure of overall economic activity. National accounting allows us to analyze the state of an economy at a given time, the changes over time, and differences across countries.
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2 The Great Depression What happened on October 29 th , 1929? BLACK TUESDAY- Stock Market Crashed Problem: Severity of the Great Depression? No broad-based measure of economic activity Policymakers couldn’t determine effectiveness of decisions Solution:___________________________ ____________________________________ Fundamental contribution of economics!!!! Analogy from Medicine How can you tell whether a human being is healthy? Doctors have settled on a few key variables Body Temperature, Blood Pressure, Heart Rate, Breathing rate (aka ―Vital Signs‖) How can we tell whether the economy is healthy? Economists have settled on a few key variables __________________________________________ ___________________________________ 2.2 Measuring the State of the Economy National Income Accounting Origins of national income accounting? What is Gross Domestic Product (or GDP)? Gross Domestic Product (GDP) is the market value of the final goods and services produced in an economy during the year. In 2008, U.S. GDP = $14.3 trillion, or $48,000 per person.
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3 National Income Accounting Three Approaches: Production, Expenditure, and Income The production measure of GDP counts the number of goods produced in the economy. The expenditure measure of GDP counts the total purchases in the economy. The income measure of GDP counts all the income earned in the economy. All three approaches give identical measures of GDP. Production=Expenditure=Income The Expenditure Approach to GDP The national income accounting identity states Y = GDP in dollars C = consumption I = investment G = government purchases NX = net exports = exports – imports The ―G‖ of Expenditure ―G‖ = Government Purchases Measured in GDP and include expenditure on:
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2 - Chapter 2 Measuring the Macroeconomy 2.1 Introduction...

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