Macroeconomics Notes midterm 2

Nfia receipts of factor income from rest of world

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NFIA= receipts of factor income from rest of world- payments of factor income from rest of world 4. Uses of Income : GDP= C + S + T + M (consumption, savings, taxes, imports)
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Measuring GDP as expenditures is equivalent to measuring GDP as income. For any firm, profit=sales-costs; for all firms producing final goods and services, gross profits= gross sales- gross costs => gross sales= gross profits + gross costs => gross sales= resource costs + other costs + profits C + I + G + (x-m) = W + i + R +NFIA+ CCA+ profits Is GDP a good measure of the quality of life? NO, 1) Defense Expenditures -health care costs, environment, safety 2) Ignores Value of Leisure 3) Population Differences 4) Distribution of Income 5) Cultural Differences -domestic production, divorce, illegal markets 6) Prices and Exchange Rates 7) Quality Changes 8) Wars & National Disasters Alternative Measures of Economic Welfare 1. Index of sustainable economic welfare (ISEW), developed by Daly & Cobb (1989, The Common Good ): measures of income inequality, output of domestic labor, included health and education, consumer durable services, commuting costs, and pollution costs; calculated and published by Friends of the Earth 2. Measure of Economic Welfare, developed by Nordaus & Tobin (1972): adds value of leisure, adds underground economy, and subtracts negative externalities 3. Global (Ecological) Footprint, developed by Mathis Wackernagel: measures the quantity of land used in economic activity International Markets : Quantity- measured by balance of payments accounts Price- affected by exchange rates Balance of Payments: A record of one country’s trade in goods, services, income and financial assets w/ the rest of the world 1) Current account- flow of goods, services, income, and unilateral transfers 2) Capital & Financial Account- flow of financial assets between one country and the rest of the world (stocks, bonds, FIDM assets, lank, bank loans) * B of P account uses double entry bookkeeping, each transaction entered as both a debit and a credit Exports bring revenue into the country= credit; payment for exports= debit Imports represent revenue leaving the country= debit; payment for imports= credit B/c of double entry bookkeeping, overall balance of payments must equal 0, credits balance out debits. Since overall balance of payments=0, any deficit in one account must be made up through a surplus in the other account. Currency (Foreign Exchange) Markets: large banks in major cities around the world where exchange of currency takes place Exchange Rate: value of one country’s currency in terms of another country’s currency; appreciation- increase in the value of currency, depreciation- decrease in the value of a currency Purchasing Power Parity Theory: Currencies should have the same purchasing power in different countries…if not international arbitrage will result which is buying in a low priced country and selling in a high priced country, prices will adjust until the price differential is just less than the shipping costs; long run movements of the economy while supply and demand analysis explains short-run fluctuations.
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Chapter 6 Business Cycles Real GDP tends to fluctuate around the trend of potential GDP.
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