Macro Economics Midterm (CH 10-13)

Gross Domestic Product (GDP)

The market value of all final goods and serves produced within a country in a given period

Composition of GDP

Y=C+I+G+NX

Consumption

Spending by household on goods and serves. (excludes investments such as the purchase of a new house)

Investment

Spending on goods (capital goods) that will be used to produce more goods and services in the future. Can be used multiple times to produce more.

What component of GDP is Inventory in?

Inventory is part of Investment because it is counted like the company bought its own product. Unsold goods are counted the year they were produced.

Government

Spending on goods and services by local, state, and federal governments (this includes their wages, weapons, public schools, etc). Excludes transfer payments such as unemployment benefits, medicare, social security)

Do transfer payments affect GDP? Why or why not?

Transfer payments do not impact GDP because although they might alter household income they do not reflect the economy’s production. They are not made in exchange for a currently produced goods or service.

Net Export

Spending on domestically produced goods by foreigners(exports) minus spending on foreign goods by domestic residents (imports) NX=Exports-Imports

What accounts for most of GDP?

Consumption

Are Net Export positive or negative? Explain.

Net Exports can be negative or positive depending on whether the export amount is greater than imports or not. When it is negative it means that there is a trade deficit.

Nominal GDP

The production of goods and services values at current prices. It uses the current prices and does not correct for inflation.

What is nominal GDP used for?

is used to measure the country’s total economic output using current market processes without adjusting for inflation. it shows the dollar value of an economy’s production. It can be used to compare the size of different countries.

How to calculate nominal GDP

Price of final goods and services x quantity

Real GDP

measures the production of goods and services using a constant base-year price. It is corrected for inflation.

How to calculate real GDP?

base year price x quantity

GDP Deflator

measures changes in the prices (inflation or deflation) of goods and derives produced in a given country

How to calculate GDP Deflator?

(Nominal GDP/Real GDP) x 100