Macro Unit 2

2.1 GDP

The Circular Flow and GDP

• Macroeconomics is the study of the large economy as a whole

  • Why study it? - Government during the Great Depression didn’t understand how to fix a depressed economy with 25% unemployment

• GDP - Gross Domestic Product

All countries have three economic goals

1. Promote economic growth

2. Limit unemployment

3. Keep prices stable (limit inflation)

   Natural income accounting

   • Economists collect stats on production, income, investment and savings.

GDP is the dollar value of all final goods and services produced within a country in one year.

• What does it tell us?

  • GDP measures how the U.S. is doing financially

• How do you use it?

  • Compare to previous years (Is there growth?)

  • Compare to policy changes (Did the new policy work?)

  • Compare to other countries (Are we better off?)

How to measure growth from year to year?

GDP does not accurately measure the standard of living

GDP Per Capita (one person)

• GDP divided by the population. It identifies on average how many products each person makes.

What is NOT included in GDP?

1. Intermediate Goods

   • Goods inside the final goods (Price of finished car, not the stock radio or tires)

2. Non Production Transactions

   • Financial transactions (stocks, bonds, real estate)

   • Used goods (old goods, used clothes, existing homes)

3. Non-market and Illegal Activities

   • Things made at home (Unpaid work, black markets, drugs)

Ways to Calculate GDP

1. Expenditure Approach - add up all the spending on final goods and services produced in a given year.

   • Consumer spending + investment + government spending + net exports (exports minus imports) provides a complete picture of the economy's total output.

   • GDP (Y) = C + I + G + (X-M)

• Consumer spending

  • Durable goods (cars)

  • Non-durable goods (food)

  • Services (dental work)

• Investment spending

  • Investment is NEVER when individuals buy assets like stocks and bonds.

  • Investments is ALWAYS when businesses by capital like machines, resources and tools.

• Government spending

  • Includes payments made by the gov. for goods and services

  • NOT stuff like social security

1. Income Approach - adds up all income earned from selling all final goods and services produced in a year.

2. Value-added Approach - add up the dollar value added at each stage of the production process.

Each method should generate the same number