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GDP and Introduction To Inflation

by: Jessica Hutchinson

GDP and Introduction To Inflation Econ 202

Marketplace > Towson University > Macro Economics > Econ 202 > GDP and Introduction To Inflation
Jessica Hutchinson
GPA 3.5

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This is the last of the notes for the first exam!
Dr. Rhoades
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This 4 page Bundle was uploaded by Jessica Hutchinson on Monday September 26, 2016. The Bundle belongs to Econ 202 at Towson University taught by Dr. Rhoades in Fall 2016. Since its upload, it has received 8 views. For similar materials see Macroeconomics in Macro Economics at Towson University.

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Date Created: 09/26/16
Chapter 5 GDP:  Gross Domestic product: the total market value of all final goods and services produced by resources in  a given country in a given time period. To determine how much output society procures, we must  somehow add many different items.   During great depression o Unemployment was approaching 25 percent o Business investments rate went from 18 percent to 4 percent from 1929 to 1933 o Stock market crashed  In 1946, Congress Passed Employment Act: goal of providing full employment to all Americans wh9o  are willing and able to work.  1978, congress passed the Humphrey­Hawkins Act to augment the original law: directs the government  to pursue policies designed to stimulate economic growth and reduce inflation. In addition to those  policies that promote full employment. Business cycles – Fluctuations   Common feature of industrialized economies  4 phases of the business cycle: o Peak o Recession o Trough o Expansion  Business cycles are officially dated by the national bureau of economic research. National Income Accounting and Product Accounts:  Measures our nation’s economic performance   Compares American income and output to that of other nations   Tracks the economy’s condition throughout the business cycle.  GDP: trying to measure product that takes place – can measure product intake and selling  Total market value: puts a $ in front of it. The expenditure approach to GDP:   Measures the value of GDP by adding the value of goods and services purchased by each type of final  users  The market value of output is determined only when it is purchased.  o As a result, the dollar value of the quantity supplied by producers must equal the dollar value of  the quantity demand by households, businesses, the government and foreign countries o Exhaustive and mutually exclusive.      GDP = C+I+G+NX Households ( C ) o Personal consumption expenditures refer to the purchased of good and services by  households for their own use  Durable goods (fridges)  Non­durable goods (newspaper)  Services (medical care, insurance or real estate)  Rental expenditures on housing. o Consumption accounts for more than 2/3 of all US expenditures      HOME SERVICE IS PERSONAL CONSUMPTION BUYING PHYSICAL HOME IS  AN INVESTMENT Private investment expenditures (I) o 1.) spending on capital goods such as tools, instruments and machines  Capital goods are manmade inputs used ­ but not used up – in the production of final  goods. o 2.) all private construction  Factories, rental property and new single family homes (note that this is not  consumption). Home because it provides housing services. o 3.) changes in business inventories  Inventory is the stock of goods that a firm produce but does not sell in the sell time  period  Firms add to inventory when they  Produce a product in one year and sell it another year  Want to protect themselves from an interruption in production  Overestimate demand for their goods Government purchases (G) o Refers to spending on goods and services by all 3 levels of government: federal, state and  local.  Transfer payments – such as social security payments and unemployment benefits –  are not counted as government expenditures  THEY DO NOT INVOLVE NEW PRODUCTION Net exports (NX) o Some of what households, businesses or the government purchase is not produced  domestically  o Since these goods are not produced domestically, spending on these imports are subtracted  from GDP o On the other hand, US firms sell some of what they produce to households, firms and  governments in foreign countries.  Because these goods and services are produced domestically, spending on thse  exports are added to GDP     Net Export = exports – imports = NX Income approach: the sum of the income that is earned in the economy.  Problems with measuring GDP: o Underground economy  o Production taking place that we don’t want to include in economy GDP (ex. Stay at home  moms) Chapter 7 ­ Inflation  Healthy level of an increase in prices is good.  2 percent is our current goal  Rapid inflation: hyperinflation – 50 percent a month increase in inflation rates  Deflation – falling prices  Price index – a number whose movement reflects movement in the average price level.   Inflation: change in the price level percentage from one year to the next  Stagflation – high unemployment and high inflation  Higher inflation means that currency isn’t valued at a certain rate (ex. $100 for a loaf of bread)  Consumer price index – measure of the average of prices paid urban consumers for a fixed marker  basket of consumption goods and services.  CPI – measures inflation  CPI = 100 * (current cost of fixed basket goods/ cost of the basket goods in the base period)  Market Basket – the combination of goods and services that the typical consumer purchases during the  period in question.   4 steps to calculating CPI: o Survey consumer o Survey retailers o Determine cost of market basket o Compare the cost of the market basket across time periods.   Base year serves as the basis for comparison with prices in another year.  Example of CPI calculation: o 2010 is the base year o Base year CPI is always 100 o Market basket case: we need 4lbs of oranges and 4 gallons of ice cream o Calculate the cost of 4 pounds of oranges and 4 gallons of ice cream in both years Given Table Calculated table Item 2016 Price 2010 Price Orange $3 /lb $1.50/lb 2016 price 2010 price I$12Cream $4/ gallon $63 / gallon $16 $12 CPI (16) = (28/18) * Total: $28 Total: $18 100 = 156 CPI (10) = (18/18)* 100 = 100 This means that prices went up by 56 percent from 2010 to 2016. Also, inflation rate was 56 percent from 2010  to 2016. Example 2 : Assuming that the CPI rate in 2015 was 150, Find the CPI rate from 2015 to 2016 (hint: it is NOT 6 percent) Remember that ….  Inflation rate = ((CPI currently – CPI previously)/ CPI previously) * 100 Infaltion rate = ((156­150)/150) * 100 Inflation rate = 0.04


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