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Econ 1012 Week Three notes

by: Gwendolyn Cochran

Econ 1012 Week Three notes Econ 1012

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Gwendolyn Cochran

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These notes are probably the most important notes taken so far; they detail GDP and the determinants of GDP which is highly important for macroeconomics
Dr. John Volpe
Class Notes
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This 4 page Class Notes was uploaded by Gwendolyn Cochran on Thursday January 28, 2016. The Class Notes belongs to Econ 1012 at George Washington University taught by Dr. John Volpe in Spring 2016. Since its upload, it has received 30 views. For similar materials see Macroeconomics in Economcs at George Washington University.

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Date Created: 01/28/16
Week Three Professor tells us toLISTEN TO PAULA KELLY & JO STAFFORD LOL Vocab to know for the quiz: Business cycle: Alternating periods of economic expansion and economic  recession. Expansion: The period of a business cycle during which the total production and total employment are increasing. Recession: The period of a business cycle during which total production  and total employment are decreasing. Economic growth: The ability of an economy to produce increasing  quantities of goods and services. Inflation rate: The percentage increase in the price level from one year to  the next. Gross Domestic Product: the market value of all final goods and services  produced in a country during a period of time, typically one year.  There are two ways to measure GDP: 1. Total Income 2. Total Production:  a. Final goods or services: something that is purchased by its final user and is not included in the production of any other good (a hamburger) i. NOT included= Intermediate goods: a good or service that is put into  another good or service (a tire for example is a good that becomes PART  of a car, so is not final) b. Using market values, not quantities. products are measured by their worth  not their weight  i. Since GDP is measured in “value” terms, there arise problems interpreting  changes over time if prices change. To separate these effects, the BEA  calculates: 1.  Nominal GDP: the value of final goods and services evaluated at current­ year prices 2. Real GDP:l the value of final goods and services evaluated at base­year  prices. ii. Stable prices are desirable because they allow for future spending,  therefore economists are interested in the price level (a measure of the  average prices of goods and services in the economy) 1. The price level is calculated by the GDP deflator: a measure of the price  level, calculated by dividing nominal GDP by real GDP and multiplying by  100  c. Only includes current production. Resale items are not included in GDP (ie. buying a dvd from target is counted in the GDP, but buying a used dvd off  of ebay doesn't count) To measure GDP, the Bureau of Economic Analysis (BEA) in the  Department of Commerce measures four major categories of expenditures: ● Personal Consumption Expenditures, or “Consumption” (C ) ○ spending by households on goods and services, not including spending on  new houses (which are counted instead in investment). ○ In BEA statistics, consumption is further divided into expenditure on  services, durable goods, and nondurable goods. ● Gross Private Domestic Investment, or “Investment” (I) ○ spending by firms on new factories, office buildings, and additions to  inventories, plus spending by households and firms on new houses. ○ The BEA measures the following categories of investment: business fixed  investment, residential investment, and changes in business inventories. ● Government Consumption and Gross Investment, or “Government  Purchases” (G) ○ spending by federal, state, and local governments on goods and services,  such as teachers’ salaries, highways, and aircraft carriers. ○ This does not include transfer payments, since those do not result in  immediate production of new goods and services. ● Net Exports of Goods and Services, or “Net Exports” (NX) ○ a the value of exports minus the value of imports. This difference might be  positive or negative; in recent years, this has been negative in the United  States. ○ Since we want to count domestic production (production in the United  States), we add up the value of the goods and services sold to foreigners,  and subtract off the value of the goods and services sold to Americans by  foreigners. GDP can be expressed as the sum of these:  Y = C + I + G + NX The Shortcomings of GDP are that the BEA omits two types of important  production: 1. Household production: childcare, cleaning, and cooking is not typically paid for with money. However such contributions are real—if they were  performed by a non­household­member, they would be paid for and  counted in GDP. 2. The Underground Economy: buying and selling of goods and services  might be concealed from the government to avoid taxes or regulations, or  because the goods and services are illegal. The shortcomings of GDP effect GDP per capita (i.e. GDP divided by  population) which is often used to represent differences in standards of  living from country to country. GDP per capita does not reflect  ● The value of leisure ● Pollution and other negative effects of production ● Crime and other social problems ● The distribution of income In fact, improvements in many of these will result in lower GDP per capita  (ie. lower crime rates mean lower government spending on police) The BEA performs a national income accounting for the United States.  Each quarter, it publishes the National Income and Product Accounts  tables which includes GDP and: Gross National  Production performed by citizens of a nation, including Product (GNP) overseas production (as opposed to GDP, which is  performed within national borders) National Income GDP minus the consumption of fixed capital; i.e. GDP  minus depreciation Personal  Income received by households; includes transfer  payments, but excludes firms’ retained earnings Income Disposable  Personal income minus personal tax payments; this  measures the amount that households are able to  Personal  spend or save Income


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