Lecture 3 Measurement -...

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!"# %&'() *+,, &'-') ./012330/ 42+5/67 .++, 89%'9&'-' (2:5;/2 %< =2+3;/2>2?5 -98 !"#$%&" ( "#$%&'#(#)* Last time ± syllabus: a few more points to emphasize ( Syllabu s (Tim e tabl e ) ) ± working with growth rates ( Exampl e 1 . 1 ) ± current issues ( R e ading s 1 . 1 , 1 . 2 , Chapt e r 1 . 1 , WSJ vid e o ) Today ± preview of the model ± the circular flow and national income accounting ( e r 2 . 1 , 2 . 2 ) ± real vs. nominal interest rates ( e r 2 . 5 ) ± read on your own: ± real vs. nominal GDP, measurement of the price level ( e r 2 . 4 ) Next time ± savings identities ( e r 2 . 3 ) ± stocks and flows ± the current account ( e r 2 . 3 ) +,# -.'-&/$' 0/123 *,# 4$%.% 10 *,# )$*.1)$/ .)-1(# $--1&)*.)5 .6#)*.*.#% The purpose of GDP accounting ± PHDVXUH WKH WRWDO YDOXH RI D FRXQWU\¶V HFRQRPLF RXWSXW (see an exact definition of GDP later) The three approaches to measuring GDP in the simplest possible economy firms households factors of production goods and services factor payments, profits expenditures on goods income approach ask households what they earn product approach ask firms what they produce expenditure approach ask households what they buy &
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!"# %&'() *+,, &'-') ./012330/ 42+5/67 .++, 89%'9&'-' (2:5;/2 %< =2+3;/2>2?5 &98 +,# *,'## $77'1$-,#% *1 -$/-&/$*.)5 89: The three approaches are equivalent by construction. ± In the simple example above, the equivalence comes from the following observations: ± value of goods and services sold = value of expenditures on goods and services Æ product approach gives same answer as expenditure approach ± ILUPV¶ UHYHQXHV IDFWRU SD\PHQWV Æ product approach gives same answer as income approach ± In a more complicated real world situation with intermediate goods, imports, exports, government expenditures, taxes etc. the accounting system is c on st ru t e d in s u h a way so that this basic equivalence still holds. ± adjustments are made so that the equivalence works out % +,# *,'## $77'1$-,#% $'# &%#0&/ 4#-$&%# *,#; help us understand the economy from different perspectives ± for example, a recession might occur because of a fall in demand for exports or a fall in demand for consumption (expenditure approach) ± in the current recovery, manufacturing is a leading sector: helps understand why jobs are not easily created (product approach) help us in building our general equilibrium model ± Y = C + I + G + NX will turn into an equilibrium condition of the goods market (GDP from product approach = GDP from expenditure approach) ± WKH IDFW WKDW WKH YDOXH RI RXWSXW EHFRPHV VRPHRQH¶V LQFRPH is used in budget constraints (GDP from income approach = GDP from expenditure approach) @
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!"# %&'() *+,, &'-') ./012330/ 42+5/67 .++, 89%'9&'-' (2:5;/2 %< =2+3;/2>2?5 %98 <%#0&/ 6#0.).*.1)% =>?
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Lecture 3 Measurement -...

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