Chapter 6 Notes - Vandan Desai ECON 102Principles of...

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Vandan Desai ECON 102—Principles of Macroeconomics 1 Chapter 6 —Measuring the Production, Income, and Spending of &ations (Lecture &otes) I. Measuring GDP A. A Precise Definition of GDP i. GDP —measure of the value of all goods and services newly produced in a country during some period of time 1. What? —only newly produced goods and services are included 2. Where? —only goods and services produced within the borders of a country are included in GDP 3. When? —only goods and services produced during some specified period of time are included in GDP ii. Prices Determine the Importance of Goods and Services in GDP 1. Each good is given a weight when we compute GDP, which is price If price of DVD > price of CD, DVD will count more in GDP 2. In a market system, prices (weight given to each item) tend to reflect the cost and value of the goods and services produced iii. Intermediate Goods versus Final Goods 1. It is important not to count the same item more than once in GDP 2. Intermediate good —a good that undergoes further processing before it is sold to consumers 3. Final good —a new good that undergoes no further processing before it is sold to consumers 4. To avoid double counting , we never count intermediate goods ; only final goods are part of the GDP iv. Three Ways to Measure GDP 1. All three ways give the same answer ; just conceptually different activities in economy and provide different ways to think about GDP 2. Spending approach —measures the total amount that people spend on goods and services made in America 3. Income approach —measures the total income that is earned by all the workers and businesses that produce American goods and services 4. Production approach —measures the total of all the goods and services as they are produced (shipped out of the factory) B. Spending Approach i. Total spending in economy divided into— consumption , investment , government purchases , and net exports —(exports – imports) ii. Consumption —purchases of final goods and services by individuals 1. Does not include spending by business or government 2. Big-ticket items: convertible, operation, vacation, tuition, etc. 3. Small-ticket items: oil change, medical checkup, bus ride, etc. iii. Investments —purchases of final goods by firms plus purchases of newly produced residences by households 1. Business fixed investment —includes all new machines , new factories , and other tools used to produce goods and services 2. Inventory investment —change in inventories , which are goods on store shelves, on showroom floors, or in warehouses that have not yet been sold or assembled into final form for sale When inventories rising , get positive inventory investment
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This note was uploaded on 10/31/2010 for the course ECON 201 taught by Professor Coomber during the Spring '08 term at Community College of Baltimore County.

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Chapter 6 Notes - Vandan Desai ECON 102Principles of...

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