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Econ+102+lecture+6%2C+1-24-12+-+The+size+of+the+economy...

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Lecture 6: Ch. 7 –  The “size” of the economy Econ 102, Winter 2012 1/24/2012 1 Required reading : Ch 7: (all) pp. 173-193
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Outline 1. Measuring output a. Expanded Circular Flow b. The Aggregate Expenditure Identity 2. GDP and foreign countries 3. The distinction between nominal versus real variables 4. Measuring the aggregate price level 1/24/2012 2
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Measuring the Macroeconomy National income and product accounts : measurements of the flows of money within an economy. Why measure? Simply to know the size To compare one economy’s performance to another’s To compare an economy to itself over time: growth! National income / output are closely related to many other variables 1/24/2012 3
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1/24/2012 4
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Measuring the Macroeconomy Money Factors Goods and services Factors Households Firms Ma rke ts f or goo ds an d ser vice s Factor Markets Goods and services Money Money Money Recall our model of the flows of money, goods and services: the circular flow (this is the simple version) 5
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Measuring the Macroeconomy The Circular-Flow Diagram (complex) 6
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Measuring the Macroeconomy Three basic ways to calculate Gross Domestic Product (GDP) 1. The value of final goods produced within the country Or, “the value added of all production, final or not” This is the definition of GDP: the “size” of the black arrow flowing out of the market for G&S towards firms in the previous slide 2. Aggregate expenditure : all flows into the market for goods and services within the country 3. National Income: total payments to factors of 1/24/2012 7
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Measuring the Macroeconomy The Aggregate Expenditure Identity describes spending on domestically produced goods and services GDP = C = Consumption. HH expenditure on domestically- and foreign-produced goods and services (70% of GDP) I = Investment. Firm expenditure on domestically- and foreign-produced resources (15%) G = Government expenditure (20%) EX = Exports. Domestically-produced goods sold (-5%) C + I + G + ( EX – IM ) 1/24/2012 8 NX = net exports
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GDP = C + I + G + (EX - IM) = factor payments = Aggregate Expenditure = National Income 9
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The fact that one economy interacts with others makes
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Econ+102+lecture+6%2C+1-24-12+-+The+size+of+the+economy...

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