Ch. 10 - Econ 2202

Macroeconomics

Study of the economy as a whole; includes inflation, unemployment, and economic growth.

Microeconomics

Study of individual markets and actors within the economy.

Big Three in Macroeconomics

Economic growth, unemployment rate, inflation rate. 

Circular Flow Diagram

Represents the flow of goods/services and money in an economy. 

Total Income = Total Expenditure = Total Output

Fundamental identity in macroeconomics; they are equal in a closed economy. 

Factors of Production

Inputs used to produce goods/services (land, labor, capital, entrepreneurship). 

Gross Domestic Product (GDP) – formal definition and meaning

Total value of goods/services produced within a country; includes consumer spending, business investment, government spending, and net exports. 

What is included in GDP and what is excluded from it

Includes final goods/services; excludes intermediate products, used goods, and non-production transactions. 

Two approaches to calculating GDP

• Expenditure Approach: GDP is calculated as the total spending on consumption (C), investment (I), government spending (G), and net exports (X - M).

• Income Approach: GDP is calculated by summing all incomes earned in the economy, including wages (W), rent (R), interest (I), and profits (P).

Gross National Product (GNP) – formal definition and meaning

GDP plus the value of income earned by residents from overseas investments minus income earned by foreigners from domestic investments. 

Difference between GDP and GNP

GDP focuses on location (domestic production), while GNP focuses on ownership (national production).

Components of GDP

o What is included under each component and what is not

Components of GDP: Consumptionn (C)

Household spending on goods and services, including food, clothing, healthcare, and entertainment.

Components of GDP: Investment (I)

Business spending on equipment, machinery, new buildings, and inventory, plus household purchases of new homes.

Components of GDP: Government Spending (Purchases) (G)

Government expenditures on goods and services, including infrastructure, defense, education, and public services.

Components of GDP: Net Exports (X - M)

The value of a country's exports minus the value of its imports.

Components of GDP: GDP accounting identity (GDP = C+I+G+NX)

GDP is the sum of consumption (C), investment (I), government spending (G), and net exports (NX).

Exports

are goods sold abroad; contributing positively to a nation’s GDP.

Imports:

are goods purchased from abroad; which reduce a nation’s GDP as they are not produced domestically.

Transfer Payments

Payments made without any goods/services provided in return (e.g., social security payments). 

Real Variables

Nominal Variables

Real vs. Nominal Variables

Real variables are adjusted for inflation, whereas nominal variables are measured in current dollars. 

Real GDP

GDP adjusted for inflation, reflecting true value in constant dollars. 

We calculate real GDP for any year using the output of that year and prices from the base year

Base Year

A base year is the year used for comparison for the level of real GDP

Nominal GDP - meaning and how to calculate

is the market value of goods and services
valued at current year prices.

ex: 𝑃𝑎𝑝𝑝𝑙𝑒𝑠
2024 .𝑄𝑎𝑝𝑝𝑙𝑒𝑠
2024 +𝑃𝑓𝑖𝑠ℎ
2024.𝑄𝑓𝑖𝑠ℎ
2024=
$20+$14 = $34

Economic Growth

is the increase in output (real GDP) of
an economy; an expansion of production possibilities

GDP per capita

GDP divided by the population, measuring the average economic output per person. 

Real GDP per capita (Standard of living)

Real GDP per capita measures the average economic output per person, indicating the standard of living in a country.

2. A U.S.-owned automobile factory uses $50 million worth of materials produced in the U.S. and $10 million worth of material purchased from foreign countries to produce $100 million of automobiles. $70 million worth of these automobiles are purchased by U.S. consumers, $25 million are sold in foreign countries, and $5 million are added to inventory. How much of this production is included in U.S. GDP? By how much do these transactions alone affect U.S. net exports?

$100 million - $10 million = $70 million + $5 million +$25 million - $10 million = $90 million is included in U.S. GDP. These transactions raise net exports by $25 million - $10 million = $15 million.

3. Identify which of the following are included in the government purchases component of GDP. And Why?

The salary paid to a state court judge, unemployment insurance benefits, the payment made by the federal government for a jet fighter, social security payments, and construction costs of a jail building.

The following are included in government expenditures: the salary paid to a state court judge, the payment made by the federal government for a fighter jet, and construction costs of a jail building