MIT14_02F09_lec02

MIT14_02F09_lec02 - TOPIC 1 TOPIC Introduction to Macro...

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TOPIC 1 Introduction to Macro Data
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Goals and Outline of Topic 1 1. Gross Domestic Product (GDP) What is Gross Domestic Product and how we measure it? Why is this measure important? What are the definitions of the major expenditure components? What are the trends in these components over time? flation 2. Inflation What is the difference between ‘Real’ and ‘Nominal’ variables? How is inflation measured? 3. Interest Rate How is inflation measured? Why do we care about Inflation? 4. Unemployment How is Unemployment measured? Why do we care about Unemployment? 2
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PART I: GDP
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Gross Domestic Product (GDP) GDP is a measure of output! Why Do We Care? Because output is highly correlated (at certain times) with things we care about (standard of living, wages, unemployment, inflation, budget and trade deficits, value of currency, etc…) Formal Definition: GDP is the Market Value of all Final Goods and Services Newly Produced on Domestic Soil During a Given Time Period (different than GNP) 4
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Three ways of measuring GDP Production Method : Measure the Value Added summed across all rms (value added = sale price less cost of raw firms (value added sale price less cost of raw materials) come Method abor Income (wages/salary) + Income Method : Labor Income (wages/salary) + Capital Income (rent, interest, dividends, profits)+ Government Income (taxes) Expenditure Method : Spending by consumers (C) + Spending by businesses (I) + Spending by government (G) + Net Spending by foreign sector (NX) Fundamental identity of national income account : 5 total production = total income = total expenditure
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A simple example of how GDP is measured What is the total value (in dollars) of the economic activity generated by these 2 firms? Production Method (value added: sales – intermediate good): 35K + (40K– 25K) = 50K come Method (Wages + Profits + Taxes) = 15K + 10K + 15K + 3K + 5K + 2K = 50K 6 Income Method (Wages + Profits + Taxes) 15K + 10K + 15K + 3K + 5K + 2K 50K Expenditure approach (expenditure by final users): 10K + 40K = 50K Orange lnc Transactions Juice lnc Transactions Wagos paid to Orange lnc employees Wagos paid to Juice lnc employees Taxes paid to government Taxes paid to government Oranges purchased from Orange lnc Revenue received from sale of orange juice Revenue received from sale of oranges Oranges sold to public Oranges sold to Juice lnc $15,000 $10,000 5,000 2,000 25,000 40,000 35,000 10,000 25,000 Figure by MIT OpenCourseWare.
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“Production” Equals “Expenditure” GDP (for us Y) is a measure of Market Production! Market value = how much you have to spend to buy What is produced in the market has to show up as being purchased or held by some economic agent; Who are the economic agents we will consider on the expenditure side? Consumers (refer to expenditure of consumers as “consumption”) – Businesses (refer to expenditure of firms as “investment”) – Governments (refer to expenditures of governments as “government spending”) – Foreign Sector (refer to expenditures of foreign sector as “net exports”) For us, we will predominantly spend our time working with the Expenditure Approach : 7 ******* Y = C + I + G + NX *******
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MIT14_02F09_lec02 - TOPIC 1 TOPIC Introduction to Macro...

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