Instructor5Commentary

Instructor5Commentary - 1 INSTRUCTOR COMMENTARY Text...

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INSTRUCTOR COMMENTARY Text Reference: Chapter 5 Measuring the Economy’s Output 1. Chapter 5 focuses on the following important concepts: A. The difference between actual production and potential production. The potential production of the economy is the maximum amount of output that could be produced if all resources were employed and each resource was used in is most efficient way. Points of potential production are located on the production possibilities schedule. Actual production is the amount of goods and services the economy produces during a given year. Actual production cannot exceed, but may be less than, potential production. That is, points of actual production may be on, or inside (but not outside of) the production possibilities schedule. (text, p. 36) B. Gross Domestic Product (GDP) as a measure of actual production. Gross domestic product is the market value of final goods and services produced by domestically-located factors of production in a given year. (text, p. 123) C. The difference between GDP and GNP. GDP (defined above) is based on the final output produced by domestically-located factors of production, no matter whether those resources are owned by those inside or outside of the United States. GNP measures the market value of final goods and services produced by domestically-owned factors of product, whether or not those resources are located within the United States. D. How GDP is measured in the “upper loop” of the circular flow graph. The “upper loop” of the circular flow depicts purchases of final goods and services by households, businesses, governmental units and the rest-of-the-world. This measure excludes expenditures on goods and services produced outside of the United States. Hence, GDP = C + I + G + X – M. (text, p. 127) E. How GDP is measured in the “lower loop” of the circular flow graph. 1
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The “lower loop” of the circular flow depicts the incomes earned by resource owners from the sale of resources used to produce the final products sold in the upper loop. Business firms set up separate “cost accounts” to set aside for funds for depreciation and indirect business taxes, so that these funds do not mistakenly get included in profits. Once these two additional accounts have been established, GDP = rents + interest + employee compensation + profits + depreciation + indirect business taxes. (text, p. 130) F. The difference between GDP and Disposable Income (DI). GDP is a measure of final output produced, while DI is a measure of the funds available for spending by households. To calculate DI from a given value of GDP, the following adjustments must be made: (1) subtract depreciation and indirect business taxes; (2) subtract from income earned by resource owners the funds that are not available for them to spend during the year in which the funds are earned; and (3) add government transfer payments. DI is an important determinant of household consumption expenditures, which constitute the largest share of GDP. You should note that the
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This note was uploaded on 01/12/2012 for the course ECN 211 taught by Professor Kingston during the Spring '08 term at ASU.

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Instructor5Commentary - 1 INSTRUCTOR COMMENTARY Text...

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