ECO 304L: Sections 1 + 2

Introduction and GDP

Economics (AEA Definition)

The study of scarcity, how people use resources and respond to incentives, or the study of decision-making, as defined by the American Economic Association.

Functional Definition of Economics

A practical definition stating that economics is what economists do, specifically studying individual, business, and government decision-making using mathematics and statistical analysis to understand policy implications.

Microeconomics

The branch of economics that focuses on the study of individual decision-making.

Macroeconomics

The branch of economics primarily concerned with understanding economic activity (creation and exchange of goods and services) on the country- or multicountry-level.

Gross Domestic Product (GDP)

The market value of the final/finished goods and services produced in an economy over a certain period of time.

Market Value

The evaluation of goods and services based on the current prices at which they are offered and sold in the market.

Services

Intangible economic output such as haircuts, medical care, and transportation, which accounts for nearly $80\%$ of U.S. GDP.

Intermediate Good

A good that is transformed and/or combined with other goods to create a new, different good during the production process, or is consumed as part of a service.

Final Good

A finished good that is not an intermediate good and represents the endpoint of the production process.

Capital Goods

Goods used to produce other goods that are not directly transformed into a new good during production, such as machinery in manufacturing plants.

Simon Kuznets

The economist who developed the modern concept of GDP in the 1930s and advocated for measuring only finished goods to avoid double counting.

Double Counting

An error in national accounting that occurs if both intermediate inputs and final goods are counted in GDP, artificially overstating the total output value.

Expenditure Approach to GDP

A method measuring GDP by summing total purchases of final goods and services using the national income accounting identity $Y = C + I + G + NX$.

Consumption Expenditures ($C$)

Spending by domestic households on final goods and services (e.g., motor vehicles, food, housing services, medical care), accounting for roughly $68\%$ of U.S. GDP.

Investment ($I$)

Purchases of capital goods and housing by domestic residents plus inventory adjustments, defined as $I = \text{Purchases of Capital Goods} + \text{Inventory Adjustments}$.

Business Fixed Investment

Spending by firms on nonresidential plants, machinery, equipment, and intellectual property products (IPP).

Residential Investment

Expenditures on the construction of new houses and apartment buildings.

Inventory Adjustments

Changes in unsold final or intermediate goods, calculated as the monetary value of unsold goods in the current period minus the monetary value of unsold goods in the last period.

Government Purchases ($G$)

Expenditures by national, state, and local governments on final goods and services (e.g., public schools, highways, research, national defense), excluding transfer payments.

Transfer Payments

Government payments such as Social Security, Medicare, or interest on government debt, which are excluded from GDP because they do not reflect current production purchases.

Net Exports ($NX$)

The difference between total exports and total imports ($NX = EX - IM$).

Exports ($EX$)

All goods and services produced domestically in a given time period that are sold to non-residents, foreign businesses, and foreign governments.

Imports ($IM$)

All goods and services produced abroad in a given time period that are sold to domestic residents, businesses, and government.

U.S. GDP Components (2021 Breakdown)

In 2021, U.S. GDP consisted of Consumption ($68.0\%$ / \$15.9 trillion), Investment ($17.8\% / \4.1 trillion), Government Purchases ($17.6\%$ / \$4.2 trillion), and Net Exports ($-3.5\% / -\0.8 trillion).

Resell Service Value

The contribution of reselling a used final good to GDP, typically equal to the price the good is resold for minus the price at which it was purchased from the original owner.

Factor Income Approach to GDP

A method of measuring GDP by summing all income earned from domestic production: $\text{GDP} = \text{Employee compensation} + \text{Rent} + \text{Interest} + \text{Profit}$.

Nominal GDP

A measure of GDP evaluated using current-period prices, where changes reflect both changes in output quantities and changes in price levels.

Real GDP

A measure of the actual physical quantity of goods and services produced, evaluated using constant base-year prices ($\text{Real GDP} = \frac{\text{Nominal GDP}}{\text{Price Level}}$).

Growth Rate Formula

The percentage change in a variable over time, calculated as $\text{Growth Rate} = \left(\frac{\text{End Value} - \text{Start Value}}{\text{Start Value}}\right) \times 100$.

GDP Deflator

A price index measuring the average level of prices for domestically produced output, calculated as $\text{GDP Deflator} = 100 \times \left(\frac{\text{Nominal GDP}}{\text{Real GDP}}\right)$.

Informal Sector

Unrecorded, underground, or illegal economic activity omitted from official standard production figures, which can account for a substantial share of GDP (e.g., historically estimated at 41% in Latin America).

Recession (NBER Definition)

As defined by the National Bureau of Economic Research, a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

Business Fluctuations

Short-term movements or fluctuations in real GDP around its long-term growth trend, also known as business cycles.

U.S. Long-Term Real GDP Average Growth Rate

The average long-term growth rate of U.S. real GDP from 1948 to 2020, which stands at $3.2\%$ per year.