ECON 1110 Lecture Notes 01

ECON 1110 Lecture Notes 01 - ECON 1110 Intermediate...

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ECON 1110 Intermediate Macroeconomics James R. Maloy Spring 2011 Lecture Notes for Topic 1: Macroeconomic Accounting Readings: Froyen Ch. 1 and 2 I. Gross Domestic Product (GDP): (definition) Measure of all currently produced final goods and services evaluated at market prices. It is essentially a measure of output in an economy. Currently produced : Includes goods and services produced during the given time period (year, quarter, etc). Final goods and services : To prevent double counting, only final goods and services are included in GDP, not intermediate goods. Why? Recall that the price of the final good includes the price of the materials and labour used to produce them. For example, the price of a car includes the price of the steel used to produce it. Counting the intermediate good (steel) separately would be double-counting and would artificially inflate GDP. There are two types of goods used in the production process that are included in GDP —capital goods and inventory investment. Capital goods are plants and equipment used in the production process but are not completely used up in the process. The amount of a capital good that is used up (worn out) in the production process is called depreciation and is included in GDP as part of the price of the final good. The part not used up in production is included in GDP under the term investment. Inventory investment is the net change in inventories of final goods awaiting sale or intermediate goods that have not been used yet. These intermediate goods are counted because they were currently produced but have not been put into final goods yet. Failing to count them would underestimate GDP since they were currently produced but is not double-counting because their value has not been included in the price of any final good. Evaluated at Market Prices: Goods are evaluated at market prices because it is an effective method of measuring the contribution of goods of different values to the economy. EC2202 Lecture Notes 1 1
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Obviously, something that is highly valued such as a car makes a greater contribution to the economy than something of a lower value such as an orange. II. Gross Domestic Product (GDP) vs. Gross National Product (GNP) Another widely used (although not so much in recent years) measure of output is GNP. The difference between the two measures relates to ownership and location of production. GDP is the measure of final goods and services produced within a nation’s geographical boundaries, regardless of who owns it (hence the term gross DOMESTIC product). It therefore includes earnings that accrue to foreign workers or firms. GNP is the measure of output owned by the citizens (or corporations or government) of a nation regardless of where it is actually produced and therefore includes profits earned from overseas enterprises and wages earned by citizens working in foreign nations. For example, profit earned from a car produced in the UK by Ford, an American
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ECON 1110 Lecture Notes 01 - ECON 1110 Intermediate...

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