Chapter 8: 

What is Economic growth?

● Macroeconomics 

○ the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth. 

- In macroeconomic analysis, economists study factors that affect many markets at the same time. 

Key Macroeconomic Issues: 

● Business cycle : 

○ A business cycle expansion : 

■ a period during which total production & total employment are increasing. 

○ A business cycle recession : 

■ a period during which total production & total employment are decreasing. ● Economic growth 

○ the ability of an economy to produce increasing Q of goods & service 

● Fluctuations in the total level of employment in an economy 

○ In the short run, the level of employment is significantly affected by the business cycle 

○ In the long run, the effects of the business cycle disappear, and other factors determine the level of employment. 

How government affects economic activity?

● Fluctuations in the inflation rate 

○ the % increase in the average level of prices from one year to the next. 

○ It affects both by the business cycle and by long-run factors. 

● Linkages among economies in the form of international trade & finance.

● GDP: 

○ Gross Domestic Product to measure total production. 

○ the market value of all final goods & services produced in a country during a period of time, typically one year 

○ Includes only current production 

■ Does not include the price of used (for production ) goods 

■ BEA: 

● Bureau of Economic Analysis in the Department of Commerce compiles the data needed to calculate GDP. 

● A final good/service: 

○ A good/service purchased by a final user 

● Intermediate good/service: Don't forget about the age old question of which hlc group is basically the unmarried members of the generation yers?

○ A good / service purchased that is an input into another good 

What is the Financial system?

■ Ex: a tire on a truck 

There are 2 main conceptual ways to measure the total economic activity in an economy: ○ total production & total income 

Production = Income = Expenditure 

The Circular Flow and the Measurement of GDP

● To measure overall economic activity: 

○ Measure the amount of money that households spend on goods & services ■ Or 

○ Measure income of households 

● How government af ects economic activity: 

○ It takes in taxes from households & firms Don't forget about the age old question of repucation

○ It uses those taxes to buy goods & services + to make transfer payments 

● Transfer Payments: 

○ Payments to households for which the government does not receive a good / service in return 

● Imports: 

○ When households buy goods & services from firms in other countries 

● Financial system: 

○ Firms that deal specifically with flows of money 

■ Ex: Bank 

Total Production Formula : Y = C + I + G + NX 

● Y - total production 

● C - consumption 

● I - investment 

● G - government expenditures 

● NX - net export → (X-M) = export - import If you want to learn more check out straight rebuy definition

● Gross Domestic Investment 

○ Business fixed investment 

■ Ex: Spending by firms on new factories

○ Residential Investment 

○ Changes in business inventories 

■ Changes in the stocks of goods 

● Government Expenditures: 

○ Government Purchases 

■ Ex: teachers’ salaries 

● [!] Spendings on transfer payments are not included 

● [!] Purchases by federal & local government 

● Consumption: 

○ Spending by households on goods/services, not including spending on new houses (counted instead in investments) 

○ In BEA statistics: consumed goods can be divided into 3 groups: 

■ Service: 

● a product which is intangible (in contrast to good) 

○ Ex: entertainment, healthcare, education 

■ Durable good: 

● a good that lasts 3 years or more. 

○ Ex: car, refrigerator 

■ Non-durable goods: Don't forget about the age old question of what is lipids?
We also discuss several other topics like mgmt 402

● a good that lasts less than 3 years 

○ Ex: food, clothing 

● Investment: 

○ Spending by firms on new factories, office buildings, machinery. Plus spending by households and firms on new houses 

○ BEA measures the following categories 

■ Business fixed investments 

● Physical assets, such as: 

○ Machinery, land buildings, vehicles

■ Residential investments 

● Expenditures on residential structures → residential equipment that is owned by landlords and rented to tenants 

■ Changes in business inventories 

● Government purchases: 

○ Spending by federal, state and local governments on goods & services 

■ Government consumption (teachers’ salaries + office supplies) + Government investments (highways & military bases) 

○ Does not include transfer payments, as those do not result in immediate production of new goods and services 

In the US 

● (C) Consumption 

○ Is the largest component of GDP 

○ → Services - the largest component 

● (NX) Net Exports is negative (-) 

○ -2.7%, as the value of (I) is bigger than (X) 

● (I) Investment: 16.3% 

● (G) Government consumption: 17.6%

3 different approaches to measure GDP: 

1. Production based 

Stage of Consumption 

Value of Sales

Oil drilling 

0.75

Refining 

1.25

Shipping Don't forget about the age old question of econ 421

1.85

Retail Sales 

3.65

Value added 

Total value added

0.75 - 0 = 0.75 

0.75 + 0.5 + 0.6 + 1.8 = 3.64

1.25 - 0.75 = 0.5

1.85 - 1.25 = 0.6

3.65 - 1.85 = 1.8

Questions to expect: 

● What is the value added in individual stages of production? 

● What is the total value added

2. Expenditure-based: Y = C + I + G +NX 

2013 

Product 

Q 

P

GDP (total of final 

values

Camera 

100 

10 

100 x 10

Legal Series 

50 

15 

50 x 15

Books 

200 

40 

200 x 40

Total GDP = 9,750 

2018 

Product 

Q 

P

GDP (total of final 

values

Camera 

120 

12 

120 x 12

Legal Series 

45 

20 

45 x 20

Books 

210 

45 

210 x 45

Total GDP = 11,790 

Nominal (or) Current GDP = Q x P 

● If you choose 2013 as the base year: 

○ Real GDP in 2013 = 100x10 + 50x5 + 200x40 = 9750 

○ Real GDP in 2018 = 120x10 + 45x5 + 210x40 = 10,225 

GDP deflator = ( Nominal GDP/Real GDP ) x 100 

● GDP deflator in 2013 = 100 

● GDP deflator in 2018 = 115 

○ The higher is GDP deflator → P level is conswidered to be more increased 

1) [ (115-100)/100 ] x 100% = 15% → incresed from 2013 to 2018 

2) [ (10,225-9,750)/9,750 ] x 100% → Real GDP has grown 4.87% from 2013 to 2018

3. Income based: 

● GNP: Gross National Product 

o Production performed by citizens of a nation including overseas production 

Ex: even if the citizen owns a factory taking place abroad, it will count towards GNP 

● (NI) National Income: 

o GDP - the Consumption of fixed Capital 

o GDP – depreciation 

o Depreciation will always be less than GDP 

● (PI) Personal Income: 

o Income received by households 

§ Includes transfer payments, but excludes firms’ retained profit 

o (NI) National Income + (Tr) Transfer payment from Government + (I) Interest payment from government debt – (Re)Retained earnings 

o NI = PI – Tr – I + Re 

2 types of production are omitted from the BEA’s measurement of GDP 

1. Household production 

a. Childcare 

b. Cleaning 

c. Cooking 

2. Underground Economy (informal sector) 

a. Common in developing countries

● GDP per Capita: 

○ GDP / Population 

■ Represents differences in standards of living from country to country ● Does not reflect 

○ Value of leisure 

○ Pollution 

○ Crime 

○ Social problems 

○ Distribution of income