Macroeconomics Chapter 10- Measuring a Nation's Income

Microeconomics

study of how households/firms make decisions and interact in the market

Macroeconomics

study of economy wide phenomena (inflation, unemployment, and economic growth)

GDP

gross domestic product- measures total income and expenditure of everyone in the economy

Income =

Expenditure (because every $ a buyer spends is a $ of income for seller)

Firms vs households

Firms buy/hire factors of production and sell goods/services. Households own factors of production and sell/rent them to firms for income- they buy/consume goods and services.

Circular Flow diagram

green= income and payments

red= input/output

What does the circular flow diagram omit?

The government, the financial system, and the foreign sectorhW

What does the government do in the economy?

collects taxes and buys goods/services

What does the financial system do?

matches saver’s supply of funds with borrower’s demand for loanshatW

What does the foreign sector do?

trades goods/services, financial assets and currencies

Official definition for GDP

the market value of all final goods and services produced within a country in a given period

Characteristic of GDP- “market value”

all goods are valued at their market prices, all are measured in the same units and things that don’t have market value are excluded

Characteristic of GDP- “of all”

GDP includes only legal items sold, it excludes illicit items and those produced at home

Characteristic of GDP- “final”

GDP only counts final goods- those intended for the end user. Intermediate goods are not counted because they are included in the final value of the final good.

Characteristic of GDP- “goods/services”

counts tangible goods and intangible goods (services)

Characteristic of GDP- “produced”

GDP counts only currently produced goods, not past goods (that would be double counting)

Characteristic of GDP- “within a country”

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

Characteristic of GDP- “in a given period”

the value of production that takes place within a specific interval of time- usually a year or quarter)

4 Components of GDP

Consumption, Investment, Gov’t purchases, Net exports (export-import)

Formula for GDP

Y= C+I+G+Nx

Consumption

spending by households on goods and services

Consumption for renters vs homeowners

For renters, C is rent payments. For homeowners, C is the imputed rental value of the home, not the monthly mortgage payments.

Investment

spending on goods that will eventually be used to produce more goodsT

Three types of investments

Business capital, residential capital, inventory accumulations- NOT purchase of stocks and bonds

Government purchases

spending on goods/services purchased by government- could be federal, state, local

What do government purchases exclude?

Transfer payments (Social Security, unemployment insurance benefits, etc)

Net exports

are mostly negative (imports > exports)xE

Exports vs Imports

exports- the foreign spending on the economy’s goods and services

imports- the portions of C, I, and G that are spent on goods and services produced abroad

Nominal GDP

production of goods/services valued at current prices (not corrected for inflation)

Real GDP

the production of goods/services valued at constant prices (with a base year- is corrected for inflation)

For base year, nominal GDP =

real GDP

% change in GDP

(new GDP - old GDP)/old GDP x 100

Changes in nominal GDP reflect changes in ___

changes in price and quantity

Changes in real GDP reflect changes in ___

quantity

GDP deflator formula

nominal GDP/real GDP x 100

GDP deflator

measures current level of prices relative to the level of prices in the base year

Inflation rate formula

(new GDP deflator- old GDP deflator)/old GDP deflator x 100

real GDP per capita

main indicator of average person’s standard of livingw

What does the real GDP not measure? (4)

quality of environment, leisure time, non market activity, equitable distribution of income