ECMA06_Supplementary_Readings

ECMA06_Supplementary_Readings - SUPPLEMENTARY READINGS...

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SUPPLEMENTARY READINGS SUPPLEMENT A: MEASURING THE TOTAL VALUE OF PRODUCTION IN A COUNTRY: MEASURING GROSS DOMESTIC PRODUCT SUPPLEMENT B: UNEMPLOYMENT AND INFLATION: HOW DO WE MEASURE THEM? SUPPLEMENT C: THE AGGREGATE DEMAND CURVE AND HOW IT SHIFTS: THE LINKED DIAGRAMS APPROACH SUPPLEMENT D: AN INTRODUCTION TO MONETARY POLICY SUPPLEMENT E: THE FOREIGN EXCHANGE MARKET
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SUPPLEMENT A MEASURING THE TOTAL VALUE OF PRODUCTION IN A COUNTRY: MEASURING GROSS DOMESTIC PRODUCT The key variable in macroeconomics is the total value of production in a country, measured by the Gross Domestic Product or GDP. GDP measures the value of production that occurs over a period of time, usually a year (but sometimes a quarter of a year). The rate of increase of real GDP is considered to be a marker of the health of an economy. GDP can be measured in two different ways: by adding up all the expenditures on final goods and services over the course of a year, or by adding up all the incomes earned in producing goods and services over the course of a year. The first of these is called the Expenditures Approach and the second is the Factor Incomes Approach, or simply, the Income Approach. It is useful to know something about these two different approaches. Because there are many different stages of production that any good goes through, avoiding doublecounting is an important objective when measuring GDP. In the expenditure approach, this is avoided by only counting the value of each good once - when it has reached its final destination. In other words, statisticians only add up expenditure on final goods and services, and not expenditures on intermediate goods. Expenditures by consumers, by investors buying capital goods, by governments, and by people in other countries on our exports are added together to get the total value of spending on final goods and services over a year. Doublecounting is avoided in a different way in the Income Approach. Information is collected from each and every stage of production, both those producing final goods and those producing intermediate goods. However, only the value-added at each and every stage of production is included in this way of measuring GDP. The value-added at each stage of production corresponds to the value of the incomes earned by all factors of production at that stage. Therefore, the statisticians collect information on the wages and benefits paid to employees, the interest payments, the rental payments and the amount paid in profits at each stage of production. There are two items which are part of value-added which are not exactly income items; these must be added too. These items are an allowance for depreciation of the firm = s productive assets, sometimes called the Capital Consumption Allowance, and the amount of indirect taxes paid by the firm minus the subsidies received.
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