econ week 5 notes
econ week 5 notes ECON 2100
Popular in THE GLOBAL ECONOMY
Popular in Economcs
This 53 page Class Notes was uploaded by Khaila Coissiere on Saturday February 13, 2016. The Class Notes belongs to ECON 2100 at Georgia State University taught by Fatma Romeh Mohamed Ali (P) in Fall 2015. Since its upload, it has received 337 views. For similar materials see THE GLOBAL ECONOMY in Economcs at Georgia State University.
Reviews for econ week 5 notes
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 02/13/16
Chapter 3 Gross Domestic Product (GDP) Gross Domestic Product Defined The market value of all final goods and services produced within a country in a given time period. Gross Domestic Product Defined The market value… of all… final goods and services… produced… within a country… in a given time period. GDP Defined The market value… • We count goods and services based on their transactional price in the market. GDP Defined .. of all… • Goods not sold in the formal marketplace are not counted (i.e. household production) • Goods sold in illicit markets are not counted (i.e. drugs) GDP Defined .. final goods and services… • A good must be sold to its end user to be considered “final.” Intermediate goods do not count, because they are used to produce final goods. • Counting intermediate goods involve double counting. • Any good that is exported, whether intermediate or final, is “final” to the country that produces it and adds to its GDP. GDP Defined .. produced… • Transfer of funds such as government transfers or sales of stocks and bonds are not counted because no production has taken place. GDP Defined .. within a country… • Goods produced on a country’s soil count toward GDP, even if made by foreign workers. • e.g. the output of the Japanese-owned Toyota in Kentucky is part of the U.S. GDP GDP Defined .. within a country… • Gross National Product (GNP) measures the value of final goods and services produced by nationals (citizens) of a country. • the output of the Japanese-owned Toyota in Kentucky is not part of the GN, while the output of the American-owned company in south Africa is part of U.S. GNP GDP Defined .. in a given time period • Usually measured in a calendar year. • Old output is not counted because it was already counted back at the time it was produced (e.g., used goods). • Value added to used goods (say by a pawn shop) DOES count. Practice: What happens to GDP when… A farmer in Indiana sells corn to consumers at a farmer’s market? US GDP: Increases. Practice: What happens to GDP when… A farmer in Indiana sells corn to a company that will eventually make corn chips. US GDP: Does not change. The corn is an intermediate good. Practice: What happens to GDP when… A French cheese company sells mail order cheeses to US customers. US GDP: Does not change. The goods are not produced on US soil, just consumed here. Practice: What happens to GDP when… A homeowner sells his home to a buyer directly, without the help of any agents. US GDP: Does not change. Sale of used goods do not increase GDP. Practice: What happens to GDP when… A homeowner sells his home to a buyer with the help of a real estate agent. US GDP: Increases, but only by the market value of the real estate agent’s service (typically 6% of the home sale price). Practice… • KFC purchases $1,000 worth of chicken from Tyson Foods. KFC then bakes these chicken and sells it to the public for a total of $1,500. Taking these transactions together, what is the effect on GDP? Answer: GDP increased by $1,500 (the market value of the final good). More Practice: State whether GDP increases, decreases or stays the same • a. An individual sells her house on her own. • b. An individual sells his house through a broker. • c. Government increases Social Security payments. • d. Stock prices rise by 20%. • E. The United States legalizes the sale and use of marijuana. (the answers are in the textbook, page 48) GDP does not tell us… • In sum, GDP is not an accurate measure of social well-being. (1) does not measure income distribution. (2) does not measure non-monetary output or transactions (e.g., barter, household activities, underground market). (3) does not take things such as leisure, crime or environment into consideration (quality of life). Measuring GDP through Expenditure • GDP = C + I + G + (X – M) • C: Consumer spending • I:Investment spending • G: Government spending • X: eXports • M: iMports Components of GDP • Consumption Personal or consumer spending – Durable – Non-Durable Components of GDP • Investment • Spending by firms and businesses – physical capital – Changes in inventories Components of GDP • Government Spending Government purchases of goods/services – Bridges/Tunnels/Roads – Consulting services – Military equipment Components of GDP • Exports: Goods produced domestically, sold abroad • Imports: Goods produced abroad, consumed domestically. • Net Exports: (Exports – Imports) Components of GDP Over Time (U.S.) 2008 2009 2010 2011 2012 Gross domestic product 14,292 13,974 14,499 15,076 15,676 Personal consumption (C) 10,036 9,846 10,216 10,729 11,120 Investment (I) 2,088 1,549 1,737 1,855 2,060 Government Spending (G) 2,878 2,967 3,058 3,060 3,064 Net exports (X-M) -710 -389 -512 -568 -567 All amounts in $ billions GDP per capita • GDP per capita is the average GDP per person of a nation. Practice… • Which of the following would NOT be included in this year's GDP? a) the production of a television show b) the purchase of a new work truck c) the hiring of a new police officer d) your purchase of your neighbor's 2001 Toyota Answer is d Practice… • Of the following items, which would NOT be included in GDP? a) the dollar value of a repair job done by your professor on his or her own car b) the dollar value of a lawyer's service c) new car sales by a local car dealer d) production of new cars that were not sold in the current year Answer is a Practice… • The Arcadia Entertainment Co. produced 20,000 DVDs ofa movie in 2011. Only 4,000 copies remained unsold at the end of 2011. As a result: a) only 16,000 DVDs should be included in GDP in 2011 as consumption expenditure. b) all 20,000 DVDs will be included in GDP in 2011, 16,000 as consumption expenditure and 4,000 as investment expenditure c) only 16,000 DVDs are included in GDP of 2011; the remaining 4,000 are counted in GDP of 2012. d) all 20,000 DVDs are initially counted in 2011 GDP as consumption expenditure, but they will be subtracted and added to 2012 GDP as the merchandise gets sold. Practice… • The Arcadia Entertainment Co. produced 20,000 DVDs of the movie Thor in 2011. Only 4,000 copies remained unsold at the end of 2011. As a result: a) only 16,000 DVDs should be included in GDP in 2011 as consumption expenditure. b) all 20,000 DVDs will be included in GDP in 2011, 16,000 as consumption expenditure and 4,000 as investment expenditure c) only 16,000 DVDs are included in GDP of 2011; the remaining 4,000 are counted in GDP of 2012. d) all 20,000 DVDs are initially counted in 2011 GDP as consumption expenditure, but they will be subtracted and added to 2012 GDP as the merchandise gets sold. Chapter 3: Calculating GDP Nominal GDP vs. Real GDP Our Simple Economy • Suppose an economy produces three goods and services, Window Washing, Baseballs, and Hammers. Practice: our simple economy • What are the annual GDP of year 2006, 2007 and 2008? Calculating GDP GDP: The value of final goods and services GDP 200= P 200* Q2006 = $50.00 * 90 (Window Washing) + $2.00 * 75 (Baseballs) + $30.00 * 50 (Hammers) = $6,150 GDP 2007 GDP 2007 = P200* Q 2007 = $60.00*100 + $2.00*100 + $25.00*50 = $7,450 GDP 2008 GDP 2008 = P200* Q 2008 = $65.00 *100+ $2.25 *120 + $25.00 *65 = $8,395 There are two ways that GDP can increase: 1. An increase in the PRICES of goods and services. 2. An increase in the QUANTITY of goods and services. Nominal GDP • A GDP figure that has not been adjusted for inflation. It is also known as the "current dollar GDP". • The annual GDP of 2006, 2007, and 2008 are nominal GDP because we used current year prices in calculation. Real GDP • An inflation-adjusted measure that reflects the value of all goods and services produced in a given year, expressed in base-year prices. • It is often referred to as "constant-price GDP" "inflation-corrected GDP” or "constant dollar GDP”. Real GDP: inflation adjusted • Real GDP eliminates the changes in prices, and it allows comparing national economic output over time. • By using the prices from the base-year, (that is, holding prices constant over time,) we eliminate the impact that rising prices have on GDP , to get a measure of “real” economic activity. Calculating Real GDP • In order to calculating real GDP, we have to specify the base-year prices. • For our example, assume 2006 is the base year. This means that all values are in what we call “2006 dollars”, or “constant dollars. Practice: our simple economy • What are the real GDP of year 2006, 2007 and 2008? Real GDP of 2006 RGDP 200= P2006* Q2006 = $50.00 * 90 (Window Washing) + $2.00 * 75 (Baseballs) + $30.00 * 50 (Hammers) = $6,150 Tip: In the base-year, nominal GDP always equals to real GDP . Real GDP of 2007 RGDP 2007 = P2006* Q2007 = $50.00 * 100 + $2.00 * 10 + $30.00 * 50 = $6,700 Note: We use “current year’s quantities” and “base year’s prices” (constant prices). Real GDP of 2008 RGDP 2008 = P200* Q 2008 = $50.00 * 100 + $2.00 *120 + $30.00 * 65 = $7,190 Still, we use the current year’s quantities and base year’s prices. Nominal GDP vs. Real GDP Year Nominal GDP Real GDP 2006 $6,150 $6,150 2007 $7,450 $6,700 2008 $8,395 $7,190 Nominal GDP vs. Real GDP Real GDP constitute an accurate measure of what happens to economic output over time because it eliminates the price run-up which inflates nominal GDP. We refer to changes in real GDP over time as economic growth. Calculating an Economy’s Growth Rate • US real GDP growth rate is 2.43% in Jun 2014 Date US Real GDP Jun 30, 2014 15.99 trillion Jun 30, 2013 15.61 trillion How do we get this number, that real GDP growth rate equals to 2.43% ? The General Formula for Calculating a Growth Rate (Percentage Change) A simple example of growth rate Q: What is the percent increase from $30,000 to $32,000? A: Take the difference and divide by the original number and Do not forget to multiply by 100 ($32,000-$30,000)/$30,000 *100 = $2,000/$30,000 *100 = 0.067*100 =6.7% 49 Calculate the economy’s annual growth rate Year Nominal GDP Real GDP 2006 $6,150 $6,150 2007 $7,450 $6,700 2008 $8,395 $7,190 Calculating the economy’s growth rate: growth rate in real GDP from 2006 to 2007 Growth rate in real GDP from 2006 to 2007 = [(RGDP2007 – RGDP2006)/RGDP2006] x 100 = [(6,700 – 6,150)/6,150] x 100 = 8.94% The economy grows by 8.94%, from 2006 to 2007. Calculating the economy’s growth rate: growth rate in real GDP from 2007 to 2008 Growth rate in real GDP from 2007 to 2008 = [(RGDP2008 – RGDP2007)/RGDP2007] x 100 = [(7190 – 6700)/6700] x 100 = 7.31% The economy grows by 7.31%, from 2007 to 2008. Question: • How much is the economy’s two-year growth rate from 2006 to 2008? Growth rate in real GDP from 2006 to 2008 = [(RGDP2008 – RGDP2006)/RGDP2006] x 100 = [(7190 – 6150)/6150] x 100 = 16.91%
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'