macro ch 2 (measuring the nation's income)

microeconomics

• study of how households and firms

  • make decisions

  • interact in markets

macroeconomics

• study of eoconomy-wide phenomena

  • including inflation, unemployment and economic growth

Gross Domestic Product (GDP)

• measures total income of everyon in the economy

• also measures total expenditure on the economy’s output of goods and services

Income = ?

Expenditure

• for the economy as a whole

• because every dollar a buyer spends is a dollar of income for the seller

Circular Flow Diagram

wtf um..

What does the diagram omit?

• The government

• the financial system

• the foreign sector

GDP is… (def 1)

• The market value of all final goods & services produced within a country in a given period.

• Goods are valued at their market prices, so:

  • all goods measured in the same units

  • things that don’t have a market value are excluded

GDP is… (def 2)

• The market value of all final goods & services produced within a country in a given period.

• GDP includes all items produced in the economy and sold legally in markets

• GDP excludes most items produced and sold illicitly. It excludes most items that are produced and consumed at home.

GDP is… (def 3)

• The market value of all final goods & services produced within a country in a given period.

• GDP only includes final goods

  • They already embody the value of the intermediate goods used in their production.

Final goods

intended for the end user

Intermediate goods

used as components or ingredients in the production of other goods

GDP is… (def 4)

• The market value of all final goods &
  services produced within a country in a
  given period.

• GDP includes tangible goods and intangible services.

GDP is… (def 5)

• The market value of all final goods & services produced within a country in a given period.

• GDP includes currently produced goods, not goods produced in the past.

GDP is… (def 6)

• The market value of all final goods & services produced within a country in a given period.

• GDP measures the value of production that occurs within a country’s borders, whether done by its own citizens or by foreigners located there.

GDP is… (def 7)

• The market value of all final goods & services produced within a country in a given period.

• GDP measures the value of production that takes place within a specific interval of time

• usually a year or a quarter (3 months)

Components of GDP and what they add up to

• Consumption (C)

• Investment (I)

• Government Purchases (G)

• Net Exports (NX)

GDP (Y) → Y = C + I + G + NX

Consumption (C)

• Spending by households on goods and services

• Excludes - purchases of new housing

Note on housing costs

• for renters, C includes rent payments

• for homeowners, C includes the imputed rental value fo the house, but not the purchase price or mortgage payments

Investment (I)

• Spending on goods that ill be used in the future to produce more goods.

  • Business capital

  • Residential capital

  • Inventory accumulations

• Investment does NOT mean the purchase of financial assets like stocks and bonds.

Government Purchases (G)

• Spending on the goods and services purchased by the government

• Excludes transfer payments

Net Exports (NX)

• Exports: foreign spending on the economy’s goods and servies

• Imports: are the portions of C, I, and G that are spent on goods and services produced abroad