Macro Chapter 6 Econ Notes

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lexi.chocoholic
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110370
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Macro Chapter 6 Econ Notes
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2011-10-19 19:20:25
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Macro Chapter 6 Econ Notes
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  1. � Gross Domestic Product (GDP)
    • o The total market value of all final goods and services produced in a given year
    • o Includes domestically supplied and foreign supplied resources employed within the country
    • o Ex. Market value of fords produced in Michigan or the Hondas produced by a Japanese-owned factory in OH
    • o What the goods/services sold for value
  2. � GDP as a Monetary Measure
    o Compares value of goods/services produced in a given country in different years
  3. � US GDP
    • o Current GDP is approximately $14.3 trillion
    • o Highest in the world
    • o China�s in second ($5.2 trillion) and expected to pass us eventually
  4. � Intermediate Goods
    • o Goods and services that are purchased for resale or for further processing or manufacturing
    • o Become part of the final good
    • o Ex. Sugar, steel, car engines
    • o Don�t count toward GDP (final good counts)
  5. � Final Goods
    • o Goods and services that are purchased for final use by the consumer (not for resale or for further processing or manufacturing)
    • o Ex. Cars, televisions
    • o Count toward GDP
  6. � Multiple Counting
    • o Counting the intermediate goods in the GDP
    • o They�ll be added twice (once as intermediate goods and once as part of the final good)
    • o Artificially raises GDP
  7. � Value Added
    • o Market value of a firms output excluding the value of the inputs the firm has bought from others
    • o Adding value at each production stage will equal the final price of that good
    • o Helps avoid multiple counting
  8. � GDP excludes�
    • o Public Transfer Payments: social security payments, welfare payments, and veterans� paysments
    • ? Recipients contribute nothing to current production
    • o Private Transfer Payments: money that parents give children, cash gifts, etc.
    • ? Produce no output (just transfer funds from one private individual to another)
    • o Stock Market Transactions: the buying and selling of stocks/bonds does not add to current production (the current wealth just changes hands)
    • ? But the fee you pay stockbrokers counts toward GDP (they�re producing a service)
    • o Secondhand Sales: the good/service was already added to the GDP when it was sold the first time
    • ? Don�t contribute to current production
    • ? Ex. Selling a used car
    • o Black Market Sales: any sale made by a business who doesn�t pay taxes to the government (ex. Fake DVDs in China, gambling, drugs, etc)
    • ? Should count toward GDP because they add to production (as long as the good/service is produced in the US) but aren�t reported so aren�t added
    • ? Cause underestimated GDP
  9. � Two Ways to Calculate GDP
    • o The Expenditures Approach: looks at all of the money spent buying a product
    • o The Income Approach: looks at the income derived from producing the product
  10. � The Expenditures Approach
    • o Add up all of the spending on final goods and services throughout the year
    • o GDP = (personal consumption expenditures)+(gross private domestic investment)+(government purchases)+(net exports)
    • o GDP = C + Ig + G + Xn
  11. � Personal Consumption Expenditures (C)
    o Includes expenditures BY HOUSEHOLDS on durable goods, nondurable goods, and services
  12. � Gross Private Domestic Investment (Ig)
    • o Final purchases of machinery, equipment, and tools BY BUSINESSES
    • o All construction
    • o Changes in inventory
    • ? Add goods produced in a given year that weren�t purchased in that year
    • ? Subtract goods that were produced in a previous year (and counted in that year) and not sold until this year
    • ? Count toward the year they were produced, not sold
  13. � Government Purchases
    • o Expenditures for goods and services the government consumes in providing public services
    • o Expenditures for social capital like schools and highways
  14. � Net Exports (Xn)
    o Exports (X) � imports (M)
  15. � National Domestic Product (NDP)
    • o NDP = GDP � depreciation (aka consumption of fixed capital)
    • o Consumption of fixed capital = how much capital is used up to add to GDP
  16. � Disposable Income
    • o Personal income minus taxes
    • o All the money you have � taxes
    • o Save or spend what�s left
  17. � Inflation
    • o A rise in the general level of prices in an economy
    • o Costs more for the same good
  18. � Deflation
    • o A decline in the economy�s price level
    • o Costs less for the same good
  19. � Nominal GDP
    • o The GDP measured using the price of the goods purchased
    • o NOMINAL GDP = NUMBERS OF GOODS SOLD * PRICE PER GOOD
    • o Not adjusted for inflation
  20. � Real GDP
    • o Adjusted for inflation
    • o Inflated (when prices fall) or deflated (when prices rise) to show changes in price level
    • o Ex: the same hamburger cost less in 1940 than it does now
    • o REAL GDP = (NOMINAL GDP)/(PRICE INDEX/100)
  21. � GDP Price Index
    • o A measure of the price of a specific collection of goods and services (called a market basket) in a given year as compared to the price of an identical or very similar basket in a reference year
    • o The reference year = the base year
    • o PRICE INDEX IN A GIVEN YEAR = (PRICE OF MARKET BASKET IN SPECIFIC YEAR/PRICE OF SAME BASKET IN BASE YEAR) * 100
  22. � Rate of change
    • o The price rose by this percent (since the base year price index is always 100)
    • o RATE OF CHANGE = (NEW PRICE INDEX � OLD PRICE INDEX)/OLD PRICE INDEX * 100
  23. � Shortcomings of GDP
    • o Nonmarket activities excluded
    • ? Work of a housewife and carpenter fixing his home doesn�t count
    • o Improved product quality
    • ? A cell phone now is much better quality than one from 10 years ago
    • o Underground economy
    • ? Illegal and off the books activities (gambling) don�t count
    • o No accounting for negative pollution caused by the production
    • o Raising GDP doesn�t necessarily improve a country
  24. � The GDP would be higher if nonmarket activities, improved product quality, and underground economy were accounted for

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