Econ 202 Week 1
Econ 202 Week 1 Econ 202
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This 4 page Class Notes was uploaded by Lauren Von Alst on Monday February 1, 2016. The Class Notes belongs to Econ 202 at University of Kentucky taught by Robert Perez Jr in Spring 2016. Since its upload, it has received 38 views. For similar materials see Principles of Economics: Microeconomics in Economcs at University of Kentucky.
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Date Created: 02/01/16
▯ Chapter 8: GPD: Measuring Total Production and Income GDP: stands for gross domestic product, is the total market value of all final goods and services produced in a country during a period of time, which is typically one year o Market value: measured in dollars o Final: purchased by a final customer, not a producer o GDP only counts current production United States GDP in 2013 was $16,799.7 billion There are four components of GDP: Y=C+I+G+NX o Consumption: Spending by households on goods and services, not including spending on new houses Three categories of consumption: Services Nondurable goods Durable goods o Investment Three types of investment: Business fixed investment: Spending by firms on factories, office buildings, machinery, etc. that will lead to production of goods and services Residential investment Changes in business inventories o Inventories: goods that have been produced but not yet sold (counted in year produced, not year sold) o Government purchases Public spending: federal employee salaries, building roads, military spending, etc. Does not include transfer payments (welfare programs, Social Security, etc.) These payments are not exchanged for a good or service o Net exports: NX=exports-imports Exports: produced in U.S. purchased by foreign consumers Imports: produced by foreign firms, purchased by American consumers BEA: Bureau of Economic Analysis, continually adjusts what to include in GDP 2013: began counting research and development (R&D) o Scientific research, writing a new song or book, etc. o Analogous to investing in capital Increased GDP by 3% BEA went back and adjusted past GDP estimates Shortcoming of GDP as a measure of production: GDP does not measure o Household production o Underground economy Taxes are typically high in low-income countries High taxes create incentives to produce in the underground economy Measuring the underground economy gives an idea of how many government policies are affecting economic growth Estimated $1.7 billion in U.S. Could be as high as 50% in low-income countries Shortcoming of GDP as a measure of well-being: GDP per capita (per person) is typically used to measure happiness o Does not include value of leisure Retirees do not produce, but they are probably happy o GDP does not include negative effects of production (externalities) Pollution, etc. o GDP does not include negative social effects High crime rates lead to… Higher GDP (police spending, security, etc.) Lower happiness o GDP measures the size of the pie, not how its divided If wealth is concentrated in a few people, then a lot of people are not happy Real and Nominal GDP: GDP is total market value (quantity x price) Nominal GDP: given years quantities, given years prices o Prices rise Real GDP: given years quantities, base years prices o Real GDP lets us tell just how much quantities have changed, not prices o More moderate o Prices are constant Problem: prices may change relative to one another from year to year Solution: chain-weighted prices o BEA averages prices in the base year and next year o Then, the BEA averages prices in that next year and the year after that o This minimizes distortions in real GDP Real GDP is higher than nominal before the base year and lower than nominal after the base year The GDP Deflator: Real GDP isolates quantity changes GDP deflator is a measure of price level o GDP Deflator = Nominal GDP/Real GDP x 100 Prices increase, production constant nominal GDP increases, real GDP constant GDP deflator increases Other Measures of Production and Income: Gross National Product: all production by Americans In 2012 GDP = $12.245 trillion, GNP = $16.497 trillion National Income: o Capital wears out (depreciates) o National income = GDP – depreciation o Very close in value to GDP Personal Income: o Income received by households o National income… Minus corporate earnings retained Plus transfer payments Disposable personal income: o Personal income minus personal tax
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