Chapter 25 Notes

Chapter 25 Notes - [ChapterTwentyFive]...

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[Chapter Twenty Five] Measuring the Aggregate Economy Learning Objectives After reading the material in this chapter, you will be able to do the following: 1. Define GDP and list the four expenditure components of aggregate output. 2. Calculate GDP in a simple example, avoiding double counting. 3. Distinguish between “net” and “gross” and between “national” and “domestic.” 4. List the four components of aggregate income. 5. Explain how profit is the key to the equality between aggregate income and aggregate production. 6. Distinguish between real GDP and nominal GDP. 7. Describe the shortcomings of using GDP. Chapter Outline Aggregate Accounting In the mid-1930s, a group of Keynesians set out to develop a terminology and to measure the concepts they defined. The aggregate accounting system they developed often goes by the name national income accounting. It provides a way of measuring aggregate production and aggregate income. Calculating GDP Gross Domestic Product (GDP): “The total market value of all final goods and services produced in an economy in a one-year period.” You can only add like things, so we multiply each good by its price, which weights the importance of each good by its price. The Components of GDP
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GDP is usually divided into four expenditure categories, depending on who buys the output. Consumption Consumption: “Spending by households on goods and services.” Investment Investment: “Spending for the purpose of additional production.” Investment includes business spending on equipment for production, the change in business inventories, and purchases by households of new houses. When economists say “investing” they are not referring to buying stocks; they call that activity saving . When savings is borrowed by businesses to buy things that will increase their output, they’re investing. Inventories represent goods to be sold in the future. Residential construction is part of investment because most of the housing services from a new house will be provided in the future. Government Spending Government Spending: “Goods and services that government buys.” When the government buys the services of an analyst or equipment for the space program, it is undertaking economic activity. Government expenditures only include expenditures that involve production. Transfer Payments: “Payments to individuals that do not involve production by those individuals.” Examples: Social Security payments and unemployment insurance. (Transfer payments are not included in government expenditures.) Net Exports Net Exports: “Spending on goods and services produced in the United States that foreigners buy (exports) minus goods and services produced abroad that U.S. citizens buy (imports).”
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GDP measures production within the geographic borders of a country. GDP
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This note was uploaded on 12/03/2011 for the course ECON 101 taught by Professor Smith during the Fall '11 term at North Shore.

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Chapter 25 Notes - [ChapterTwentyFive]...

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