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NU - ECON 201 - Class Notes - Week 5

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NU - ECON 201 - Class Notes - Week 5

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background image Highlight = Important principle   Highlight = Important Concept   Highlight = Key Term    NATIONAL INCOME ACCOUNTING 
Circular flow of income 
-  Visual display of flow of money through economy, recognizing that there are two sides to every  exchange  o  If shoes ‘flow’ from the shoe store owner to me, money ‘flows’ from me to the shoe store owner  (income equals expenditure)  -  Not just exchange of goods/services: factors of production as well  o  The inputs that firms need to produce ‘output’; labor, land, capital 
o  What is the value of production? 
§   Income = expenditure = production (or ‘output’)    Gross domestic product 
GDP is the total market value of all final goods and services produced within a country in a given period of 
time 
(it is a flow variable) 
-  The value of output and the value of expenditure and the value of income  
-  “GDP is the total market value…” = Output is valued at market prices 
-  “…of all…” = Includes all items produced in the economy and legally sold in markets 
-  “…final…” It records only the value of final goods, not intermediate goods (the value is counted only 
once)  o  Ex. the final good is the cookie, the intermediate good is the cookie dough  -  “…goods and services…” = both tangible goods (food, clothing, cars) and intangible services (haircuts,  housecleaning, doctor visits)  -  “…produced…” = includes goods and services currently produced, not transaction involving goods  produced in the past  -  “…within a country…” = it measures the value of production within geographic confines of a country  o  Different from GNP (gross national product) which only counts gross product of nationality)  -  “…within a given period of time…” = it measures the value of production that takes place within a  specific interval of time, usually a year or a quarter (three months)   
 
 
 
 
 
background image How do we calculate GDP?  -  Calculated by adding the value of expenditure on final goods and services produced (generally easiest to  calculate with spending), There are four types of expenditure   o  Consumption: expenditure by domestic residents (includes any products or services except for  new houses)  o  Investment: expenditure by firms on plants & equipment (includes purchases of new houses)  §   Spending on newly produced capital goods (a house produces future accommodation the  same way a cookie machine produces future cookies); durable goods  o  Government purchases: expenditures by governments (federal, state, local) on newly produced  goods and services  §   Does not include ‘transfer payments’ such as taxes and benefits, as these are not made in  return for currently produced goods or services   o  Current account balance (NX = X-M): net expenditures by foreigners on domestic goods and  services  -  Algebraically: income = expenditure   o  Y = C d  + I d  + G d  + X  (we’ll consider this equation for US GDP)  §   Y is income flowing to domestic factors of production (GDP), and the RHS is  expenditure on the foods those factors produce  §   C d  is spending by US residents on American-produced consumption goods   §   I d  is spending on investment expenditures by American  §   G d  is government purchases on American-produced goods  §   X is exports; spending by foreigners on goods produced by US factors  o  From this, we can derive   §   C = C d  + C f   •  C d  is consumption spending on American-made goods  •  C f  is consumption spending on foreign-made goods  §   I = I d  + I f   §   G = G d  + G f   §   M is imports, NX = X – M is net exports (i.e. NX = the current US account balance)  §   Then we get: Y= (C – C i ) + (I – I f ) + (G – G f ) + X  •  = C + I + G + X – (C i  + I + G f •  = C + I + G + X – M  •  Y = C + I + G + NX  §   Note that total domestic spending (C + I + G) can exceed domestic income/production Y  •  US residents can spend more than they produce if (on net) it important imports  from abroad, i.e. NX < 0  o  (C + I + G) – Y = -NX  o  What does this mean?  §   Even though we make a lot, we consume even more   

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School: Northwestern University
Department: Economics
Course: Intro to Macroeconomics
Professor: RIchard Walker
Term: Fall 2017
Tags: national-income-accounting, GDP, and CPI
Name: Econ 201 Week 5 note
Description: These notes cover lecture from week 5
Uploaded: 10/23/2017
6 Pages 37 Views 29 Unlocks
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