EWOT - 14. The overall performance of economic systems
Macroeconomic analysis focuses on the performance of the overall economy.
Is the economy strong or is it weak?
Gross domestic product (GDP) is the market value of final goods and services produced within a country in a particular period of time.
It gives us some guide as to how well the economy is performing in total.
Its goal is to estimate the overall flow of current production and the income it generates.
The market is not a person or a place, it is a process of competing bids and offers.
GDP focuses on final goods.
Final good: something that is purchased by an ultimate user, without the good of reselling it.
GNP is the market value of final goods and services produced by permanent citizens of a country in a particular period of time.
There are three ways to interpret GDP:
Expenditures on final goods an services
Total income generated in the economy
Total value added in the economy
A purchase always involves a sale.
It creates an income for all those engaged in the production of a good or service.
Therefore, GDP is also considered to be a measure of national income created in the domestic economy.
The expenditure on final goods will flow back to the resource providers.
The value of the national output must necessarily equal the value of the national income.
National income accountants exclude expenditures on intermediate goods to avoid the double-counting problem.
Value added is the net income enjoyed by each of the producers.
It doesn't always have to be positive.
The retailer's unsold goods are classified as part of gross business inventory investment.
The reselling of used goods would affect GDP because it performs a service.
The aggregate output of nations display sizable fluctuations over time.
A decline in GDP means a decline in the production of goods and entails layoffs for some workers.
The numbers are deflated to calculate what GDP would have been if prices had not changed.
This is the real gross domestic product, as opposed to the nominal gross domestic product.
the process of calculating the real gross domestic product yields an implicit indicator of changes in the overall or average price level, called the GDP deflator.
Inflation is a fall in the value or purchasing power of money.
The problems that inflation creates are caused by uncertainty.
Inflation distorts the signals that are provided through market prices.
Deflation is a rise in the value or purchasing power of money. It also introduces uncertainty.
Disinflation is a slowing down in the inflation rate.
Stagflation is a stagnating economy with inflation.
Changes in the purchasing power of money make it more difficult to calculate the expected consequences of our financial activities.
Change and chance characterize the social universe.
It is stability, not fluctuations, that would require explanation.
The law of large numbers states that a lot of changes and chances ought to cancel each other out.
This doesn't work in economics.
Economic systems transmit viruses.
A setback or an unexpected bit of fortune in one sector of the economy generates setbacks or good fortune for other sectors with which it is linked.
A sustained rise in real GDP does not necessarily mean people are typically happier than before.
GDP is strictly meant to get some sense of economic performance.
But it is based on accounting profit, not economic profit.
The entrepreneurial search for economic profit is the driving force of the market process.
GDP accountants can't determine all the implicit or opportunity costs of all the entrepreneurs.
The most common measure of a nation's output or income is gross domestic product, which is the market value of all final goods and services produced within a country in the course of a year.
It is possible to measure gross domestic product in three ways, all of which would yield the same total if no errors were made in counting:
(1) the total purchases of final goods and services by households, business firms, and government, plus the purchases of foreigners in excess of what the foreigners sold in return;
(2) the total income received, in the form of wages and salaries, interest, rent, and profits, by those who contributed the resources used to produce the year's total output;
(3) the value added by each producer in the course of contributing to the year's total output of final goods. When unsold goods are counted as additions to inventory and added to the total purchases of business firms, the sum of household, business, government, and (net) foreign expenditures on final goods must add up exactly to the total value of the goods produced.
A question might arise about unsold goods.
They are part of the year's output, but because they aren't sold, they don't seem to generate income for anyone.
This is handled in the accounts by assuming that the business firm that produced the goods also bought them.
It surely had to pay to get them produced.
And while it may not have intended to buy them itself, goods produced and not sold are indeed added, however reluctantly, to the inventories of the firm that produced them.
Services in the economy are fresh.
They're part of the economy's current performance.
GDP therefore includes the market values of services, even from those who arbitrage used goods, such as used-auto sellers or antique dealers.
Inflation is a sustained fall in the purchasing power of money, which is the same thing as saying a rise in the money price of goods.
It is not a rise in the “cost of living”, particularly with the economist's notion of opportunity cost.
Deflation is a sustained rise in the purchasing power of money, or fall in the money price of goods.
Disinflation is a fall (slowing down) of the rate of inflation.
All three: inflation, deflation, and disinflation create serious distortions in market price signals and lead to problems for those engaged in monetary calculation, budgets, and long-term planning.
Real gross domestic product measures a nation's total output or income in dollars of constant purchasing power.
Nominal gross domestic product, or GDP in current dollars, divided by real gross domestic product yields what is called the GDP deflator, which functions as a measure of inflation or of the changing value of money.
Economic growth entails a sustained increase in real GDP.
A recession, on the other hand, is traditionally determined by an actual decrease in real GDP over two consecutive quarters or (more recently) a slowing down of the rate of economic growth.
In all commercial societies, the rate of increase in real gross domestic product (the rate of economic growth) fluctuates over time, generating “booms and busts” whose causes and cures are not well understood, or at least not sufficiently well understood at this time to enable government policymakers to bring them under complete control.
Finally, the measurement of GDP (called national income accounting) has a number of limitations, as does aggregate analysis as a whole.
GDP systematically ignores many activities that contribute to a nation's overall economic performance, including non-market production, illegal or black market production, and the pursuit of economic (as opposed to merely accounting) profit.
Macroeconomic analysis focuses on the performance of the overall economy.
Is the economy strong or is it weak?
Gross domestic product (GDP) is the market value of final goods and services produced within a country in a particular period of time.
It gives us some guide as to how well the economy is performing in total.
Its goal is to estimate the overall flow of current production and the income it generates.
The market is not a person or a place, it is a process of competing bids and offers.
GDP focuses on final goods.
Final good: something that is purchased by an ultimate user, without the good of reselling it.
GNP is the market value of final goods and services produced by permanent citizens of a country in a particular period of time.
There are three ways to interpret GDP:
Expenditures on final goods an services
Total income generated in the economy
Total value added in the economy
A purchase always involves a sale.
It creates an income for all those engaged in the production of a good or service.
Therefore, GDP is also considered to be a measure of national income created in the domestic economy.
The expenditure on final goods will flow back to the resource providers.
The value of the national output must necessarily equal the value of the national income.
National income accountants exclude expenditures on intermediate goods to avoid the double-counting problem.
Value added is the net income enjoyed by each of the producers.
It doesn't always have to be positive.
The retailer's unsold goods are classified as part of gross business inventory investment.
The reselling of used goods would affect GDP because it performs a service.
The aggregate output of nations display sizable fluctuations over time.
A decline in GDP means a decline in the production of goods and entails layoffs for some workers.
The numbers are deflated to calculate what GDP would have been if prices had not changed.
This is the real gross domestic product, as opposed to the nominal gross domestic product.
the process of calculating the real gross domestic product yields an implicit indicator of changes in the overall or average price level, called the GDP deflator.
Inflation is a fall in the value or purchasing power of money.
The problems that inflation creates are caused by uncertainty.
Inflation distorts the signals that are provided through market prices.
Deflation is a rise in the value or purchasing power of money. It also introduces uncertainty.
Disinflation is a slowing down in the inflation rate.
Stagflation is a stagnating economy with inflation.
Changes in the purchasing power of money make it more difficult to calculate the expected consequences of our financial activities.
Change and chance characterize the social universe.
It is stability, not fluctuations, that would require explanation.
The law of large numbers states that a lot of changes and chances ought to cancel each other out.
This doesn't work in economics.
Economic systems transmit viruses.
A setback or an unexpected bit of fortune in one sector of the economy generates setbacks or good fortune for other sectors with which it is linked.
A sustained rise in real GDP does not necessarily mean people are typically happier than before.
GDP is strictly meant to get some sense of economic performance.
But it is based on accounting profit, not economic profit.
The entrepreneurial search for economic profit is the driving force of the market process.
GDP accountants can't determine all the implicit or opportunity costs of all the entrepreneurs.
The most common measure of a nation's output or income is gross domestic product, which is the market value of all final goods and services produced within a country in the course of a year.
It is possible to measure gross domestic product in three ways, all of which would yield the same total if no errors were made in counting:
(1) the total purchases of final goods and services by households, business firms, and government, plus the purchases of foreigners in excess of what the foreigners sold in return;
(2) the total income received, in the form of wages and salaries, interest, rent, and profits, by those who contributed the resources used to produce the year's total output;
(3) the value added by each producer in the course of contributing to the year's total output of final goods. When unsold goods are counted as additions to inventory and added to the total purchases of business firms, the sum of household, business, government, and (net) foreign expenditures on final goods must add up exactly to the total value of the goods produced.
A question might arise about unsold goods.
They are part of the year's output, but because they aren't sold, they don't seem to generate income for anyone.
This is handled in the accounts by assuming that the business firm that produced the goods also bought them.
It surely had to pay to get them produced.
And while it may not have intended to buy them itself, goods produced and not sold are indeed added, however reluctantly, to the inventories of the firm that produced them.
Services in the economy are fresh.
They're part of the economy's current performance.
GDP therefore includes the market values of services, even from those who arbitrage used goods, such as used-auto sellers or antique dealers.
Inflation is a sustained fall in the purchasing power of money, which is the same thing as saying a rise in the money price of goods.
It is not a rise in the “cost of living”, particularly with the economist's notion of opportunity cost.
Deflation is a sustained rise in the purchasing power of money, or fall in the money price of goods.
Disinflation is a fall (slowing down) of the rate of inflation.
All three: inflation, deflation, and disinflation create serious distortions in market price signals and lead to problems for those engaged in monetary calculation, budgets, and long-term planning.
Real gross domestic product measures a nation's total output or income in dollars of constant purchasing power.
Nominal gross domestic product, or GDP in current dollars, divided by real gross domestic product yields what is called the GDP deflator, which functions as a measure of inflation or of the changing value of money.
Economic growth entails a sustained increase in real GDP.
A recession, on the other hand, is traditionally determined by an actual decrease in real GDP over two consecutive quarters or (more recently) a slowing down of the rate of economic growth.
In all commercial societies, the rate of increase in real gross domestic product (the rate of economic growth) fluctuates over time, generating “booms and busts” whose causes and cures are not well understood, or at least not sufficiently well understood at this time to enable government policymakers to bring them under complete control.
Finally, the measurement of GDP (called national income accounting) has a number of limitations, as does aggregate analysis as a whole.
GDP systematically ignores many activities that contribute to a nation's overall economic performance, including non-market production, illegal or black market production, and the pursuit of economic (as opposed to merely accounting) profit.
