ECO3200 Chap 2 Notes

National Income Accounting

A formal structure for macroeconomic theory models that introduces statistics characterizing the economy.

Output

Measured in two ways: production side (payments to workers and capital) and demand side (purchases by different sectors of the economy).

GDP (Gross Domestic Product)

The value of all final goods and services produced within a country over a particular period of time.

Production Function

Describes the relationship between inputs (labor and capital) and output (GDP), typically expressed as Y = f(N, K).

Factor Payments

Payments made to factors of production, including employee compensation, taxes and depreciation.

Consumption

Purchases of goods and services by households, accounts for 70% of total demand in the U.S.

Investment

Additions to the physical stock of capital, including building, machinery, and construction of factories.

Net Exports (NX)

The difference between exports and imports; indicates domestic purchases of foreign goods.

Government Budget Deficit

Occurs when government expenditures exceed income, requiring borrowing to cover excess spending.

Nominal GDP (NGDP)

The value of output measured in current dollars, susceptible to changes in prices.

Real GDP (RGDP)

The value of output adjusted for inflation, measured in constant dollars.

GDP Deflator

A ratio measuring changes in price levels by comparing NGDP to RGDP.

Consumer Price Index (CPI)

Measures the cost of a fixed basket of goods and services for urban consumers; reflects cost of living.

Producer Price Index (PPI)

Measures the cost of a fixed basket of goods and services at the production stage.

Unemployment Rate

The fraction of the workforce that is out of work and actively looking for jobs.

Interest Rate

The annual percentage cost of borrowing money or the benefit of lending money.

Real Interest Rate

The nominal interest rate adjusted for inflation, reflecting true return on investment.

demand for output components

C+I+G+NX

NX formula

Exports-imports

total demand for domestic production

Subtract imports from GDP

Simple economy

closed economy with no public sector so output expressed as y=c+I; Assume national income equals GDP, use income and output interchangeably

2 things to do with income

consume and save --> national income is y=c+s where s is private savings; C+I=Y=C+S

• I=Y-C=S// investment= savings

Private sector can dispose of saving in 3 ways

• Make loans to the gov

• Private sector lend to foreigners

• Private sector lend to firms who use funds for investment

3 main criticisms of GDP measure

• Omits non market g and s

• No accounting for bads such as crime and pollution

• No correction for quality improvements

• GDP still considered one of the best econ indicators for estimating growth in an economy

NGDP changes bc

prices, if GDP is to be used as measure of output, need to control for prices

RGDP changes bc

production

Inflation

rate of change of prices

todays price equals last years price, adjusted for inflation

P_t=P_t-1+(P_t-1*II)

II>0

prices are increasing over time=inflation

II<0

prices are decreasing over time=deflation