Sections+I+and+II-Summary

# Sections+I+and+II-Summary - Sections I and IISUMMARY 1...

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Sections I and II—SUMMARY 1. Macroeconomics studies the behavior of the economy as a whole. The central objective is to understand what variables determine production per person (output per capita) or production per worker (worker productivity). These concepts of production adjust for the economy’s population and tell us the goods and service available per person, a key component of individual welfare. In addition, other things that make people better off tend to be closely correlated with worker productivity: such as leisure time, health, environmental quality, democratic institutions, and civil liberties. 2. In contrast to measuring the output of an individual good, measuring total output of all good is difficult because each good is measured in its own particular physical units and thus cannot be added directly to other goods. To measure total output all goods must be converted into a common physical unit. The natural choice is to use dollars. Nominal GDP is the government’s measure of the market value of domestic production—the average price of a good times the quantity of the good produced in a given year, summed over all goods. 3. Using Nominal GDP creates a problem because changes in its value over time reflect both price changes and output changes. The problem is solved by using the concept of Real GDP , which uses prices to convert different goods into their dollar value, but keeps the prices used over consecutive years unchanged. The simplest way to do this is to arbitrarily choose a year (the “base year”) and use the prices of that year to calculate the value of output in every year. A

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Sections+I+and+II-Summary - Sections I and IISUMMARY 1...

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