Ch3.1 - Ch.3 The Goods Market 1 1. Measuring Economic...

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1 Ch.3 The Goods Market
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2 1. Measuring Economic Activity: Gross Domestic Product (GDP)
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3 1. National Income Accounting ± GDP is to measure the dollar value of economic activity in a given period of time. ± To understand the meaning of GDP, we turn to national income accounting, which is an accounting framework used in measuring current economic activity. ± The national income accounts are based on the idea that the amount of economic activity that occurs during a period of time can be measured by three approaches.
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4 National Income Accounting ± The expenditure approach is to add up the value of final goods and services produced in the domestic economy. [Final goods are products that are not used as inputs by other firms, at least not in the period of time under consideration.] ± The valued-added approach is to add up the total value added from domestic production. [Value added = revenue – cost of intermediate goods, where intermediate goods are outputs of some firms that are used as inputs by other firms. ± The income approach is to add all incomes received by the producers of output, including wages received by workers and profits received by owners of firms.
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5 ± The national income accounts can be decomposed into four broad categories of spending. ± Consumption expenditure. The purchase of goods and services by households for consumption purposes. 1.1. Expenditure Approach
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6 ± Investment. It is the sum of nonresidential investment (or business fixed investment) and residential investment, and the net change in businesses’ inventories of goods ² Nonresidential investment is the purchase of new plant and equipment by firms. ² Residential investment is the purchase of new housing by households. ² Fixed investment=Nonresidential investment + Residential Investment. Expenditure Approach
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7 ± The Treatment of Inventories. When a firm increases its inventory of goods, this investment in inventory is counted as an expenditure by the firm owners. Thus, production for inventory increases GDP just as much as production for final sale. ± Gross private domestic investment is equal to the sum of fixed investment and the change in business inventories. Expenditure Approach
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8 ± Government spending. It includes consumption outlays (such as salaries of military personnel and public school teachers), as well as public investment (such as purchases of new buildings). It excludes government transfers, such as payments to welfare recipients, and interest payments on the government debt. Expenditure Approach
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9 ± Exports and Imports. ² The exports of goods and services must be added to produce goods and services that are imported into the home country—for use by households, businesses, and government. ² The imports of goods and services must be subcontracted from domestic purchases to calculate the economy’s total production (GDP).
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Ch3.1 - Ch.3 The Goods Market 1 1. Measuring Economic...

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