ECON 252: Chapter 5 & 6 Notes
ECON 252: Chapter 5 & 6 Notes ECON 252
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This 3 page Class Notes was uploaded by Zach Weinkauf on Sunday February 21, 2016. The Class Notes belongs to ECON 252 at Purdue University taught by Andres Vargas in Fall 2016. Since its upload, it has received 32 views. For similar materials see Macroeconomics in Economcs at Purdue University.
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Date Created: 02/21/16
Chapter 5: The Wealth of Nations: Defining and Measuring Macroeconomic Aggregates 5.1 – Macroeconomic Questions Income per Capita – income per person. o Number of People in Country / Nation’s Aggregate Income Recessions – periods (lasting at least two quarters) in which aggregate economic output falls Unemployed o Does not have a job o Has actively looked for work in prior four weeks o Currently available for work Unemployment Rate – fraction of the labor force that is unemployed National income accounts – measure the level of aggregate economic activity in a country National Income and Product Accounts (NIPA) – system of national income accounts that is used by the U.S. government 5.2 – National Income Accounts: Production = Expenditure = Income Gross Domestic Product (GDP) – the market value of the final goods and services produced within the borders of a country within a particular period of time Identity – when two variables are defined in a way that makes them mathematically identical Factors of Production – inputs of the production process Circular Flows o Production o Expenditure o Income o Factors of Production Value Added – firm’s sales revenue - firm’s purchases of intermediate products from other firms Consumption – market value of consumption goods and consumption services that are brought by domestic households Investment – market value of new physical capital that is brought by domestic households and domestic firms Government Expenditure – market value of government purchases of goods and services Exports – market value of all domestic produced goods and services that are purchased by households, firms, and governments in foreign countries Imports – market value of all foreign-produced goods and services that are sold to domestic households, domestic firms, and the domestic government National Income Accounting Identity – Y = C + I + G + X – M, decomposes GDP into consumption + investment + government expenditure + exports – imports Labor Income – any form of payment that compensates people for their work Capital Income – any form of payment that derives from owning physical or financial capital 5.3 – What isn’t measured by GDP? Physical Capital Depreciation Home Production The Underground Economy Negative Externalities Gross Domestic Product vs. Gross National Product o GNP – market value of production generates by the factors of production – both capital and labor – possessed or owned by the residents of a particular nation Leisure 5.4 – Real vs. Nominal Nominal GDP – total value of production (final goods and services), using current market prices to determine the value of each unit that is produced Real GDP – total value of production (final goods and services), using market process from a specific base year to determine the value of each unit that is produced o Real GDP Growth of 2013 = (Real GDP in 2013 – Real GDP in 2012)/Real GDP in 2012 GDP Deflator = Nominal GDP/Real GDP x 100 Consumer Price Index – 100 times the ratio of the cost of buying a basket of consumer goods using 2013 prices divided by the cost of buying the same basket of consumer goods using the base-year prices Inflation Rate = (Price Index in 2013 – Price Index in 2012)/ Price Index in 2012 Chapter 6: Aggregate Incomes 6.1 – Inequality around the World Income per capita = GDP per capita = GDP/Total Population Purchasing Power Parity (PPP) – constructs the cost of a representative bundle of commodities in each country and uses these relative costs for comparing income across countries Income per worker = GDP/Number of people in employment Productivity – value of goods and services that a worker generates for each hour of work One dollar a day per person poverty line – measure of absolute poverty used by economists and other social scientists to compare the extent of poverty across countries 6.2 – Productivity and the Aggregate Production Function Three main reasons why productivity differs across countries o Human Capital – each person’s stock of skills to produce output or economic value o Physical Capital – any good, including machines and buildings, used for production Physical capital stock – an economy is the value of equipment, structures and other non-labor inputs used in production o Technology – uses its labor and capital more efficiently and achieves higher productivity Aggregate production function – describes the relationship between the aggregate GDP of a nation and its factors of production o Y = A x F(K,H) Total efficiency units of labor – product of the total number of workers in the economy and the average human capital of each worker Law of Diminishing Marginal Product – the marginal contribution of a factor of production to GDP diminishes when we increase the quantity used of that factor of production (holding all others constant) 6.3 – The Role and Determinants of Technology Research and Development – activities directed at improving scientific knowledge, generating new innovations, or implementing existing knowledge in production in order to improve the technology of a firm or an economy Efficiency of Production – the ability of an economy to produce the maximal amount of output from a given amount of factors of production and knowledge
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