Macroeconomics Ch. 7 GDP and CPI

Test 2 material

How can you compare the sizes of two economies when they produce different things?

By comparing the value of their production (GDP)

What is the most important and common way to estimate an economy’s size?

Comparing GDP

What does spending = ?

Income

It doesn’t matter HOW we measure the production, since…

one person’s spending is another’s income

National Income and Products Accounts (NIPA)

Measure our nation’s economic performance. Usually called national accounts. Compare American income and output to that of other nations. Track the economy’s condition throughout the business cycle

Who created the National Accounts

Simon Kuznets (Young Russian, Noble Peace Prize winner)

When and Why were the National Accounts created

1937 submitted to congress, the only data available were scattered statistics. Before the Great Depression and during WW2, comprehensive economic progress was needed to be tracked.

Stock

a share in the ownership of a company held by a shareholder. These stocks can pay dividends (shares of profit).

Bond

Borrowing in the form of an IOU that pays interest

Disposable income

Total household income minus consumer spending or disposable income that is not spend on consumption

Consumer Spending

household spending on goods and services

Private savings

disposable income minus consumer spending or disposable income that is not spent on consumption

Financial Markets

the banking, stock, and bond markets, which channel private savings and foreign lending into investment spending, government borrowing, and foreign borrowing.

Govt borrowing

the total amount of funds borrowed by federal, state, and local governments in the financial markets.

Government purchases of goods and services

Total expenditures on goods and services by federal, state, and local governments (Part of GDP)

Exports

Goods and services to other countries

Imports

goods and services purchased from other countries

Net Exports

exports minus imports

Inventories

stocks of goods and raw materials held to facilitate business operations

Investment spending

spending on productive physical capital, such as machinery and construction of structures (includes homes), and on changes to inventories

Gross Domestic Product (GDP)

the market value of all final goods and services produced within a country in a year.

Final goods and services

goods and services sold to the final, or end user.

Intermediate goods and services

goods and services (bought from firm by another firm) that are inputs for production of final goods and services

What does GPD measure?

Production

Name examples of things that are NOT included in GPD

Sale of used goods, sale of financial assets (stocks and bonds), Social Security and Welfare payments, Illegal markets, paying a babysitter in cash, realtor commission, free labor for a friend

Where does GDP take place?

Only production that takes place within the borders of a country is included in GPD. A Japanese car maker in America counts towards America’s GPD.

How long is GPD accounted for and what is it compared to?

1 year. Annual Income

What is included in GPD?

Domestically produced final goods and services, including capital goods (machines), new construction of structures (homes), and changes to inventories

What is excluded from GPD

Intermediate goods and services (inputs), used goods, financial assets, such as stocks and bonds, Goods and services produced outside of the country.

one way to calculate GPD is to add…

up the value added of all producers

What equation is used to calculated (easiest way)?

Add up all spending on domestically produced final goods and services.

GPD = C + I + G + X - IM

GPD = C + I + G + X - IM (name the variables)

C=consumer spending

I=investments

G=govt purchases goods/services

X=sales to foreigners

IM=imports

What is the third way to calculate GDP?

Add up all income paid to factors of production

Value added of a producer is the value…

of its sales minus the value of its purchases of intermediate goods and services

Give an example of Value added of a producer is the value

Sheep (wool) + value added = clothes

Using the image, identify the methods of calculating GDP

1. Sum of value added = $21,500

2. Total spending on domestically produced final goods and services = $21,500

3. Total payments to factors = $21,500

Components of GPD

Value added by section, spending on domestically produced final goods and services

GPD measures the size of the economy. What do you have to be careful about?

That’s because increases in GDP over time might represent increases in prices rather than increases in output.

To get the real GPD, what do you adjust for?

price changes and Inflation

Real GDP

Total value of all final goods and services produced in the economy during a given year, calculated using the prices of a selected base year

Nominal GPD

the value of all final goods and services produced in the economy during a given year, calculated using the prices current in the year in which the output is produced.

Real vs. Nominal GDP - how much would GPD have gone up if prices had not changed?

Find the value of output in year 2 expressed in year 1 prices.