Chapter 10 Notes
Chapter 10 Notes EC 111
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This 3 page Class Notes was uploaded by Julie Palatella on Sunday February 21, 2016. The Class Notes belongs to EC 111 at University of Alabama - Tuscaloosa taught by Zirlott in Spring 2015. Since its upload, it has received 13 views. For similar materials see Principles of Macroeconomics in Economcs at University of Alabama - Tuscaloosa.
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Date Created: 02/21/16
Chapter 10 Notes Gross Domestic Product (GDP)- measures total income of everyone in the economy Economy as a whole, income = expenditure (every dollar a buyer spends is a dollar of income for the seller) The Circular- Flow Diagram Simple depiction of the macro-economy Shows GDP like spending, revenue, factor payments, income What the diagram shows: o Government- collects taxes, buys goods and services o Financial system- matches savers’ supply of funds with borrowers’ demand for loans o Foreign sector- trades goods and services, financial assets, currencies with country’s residents Factors of Production Inputs like labor, land, capital, and natural resources Factor payments Payments to the factors of production (wages, rent) Households Own the factors of production, sell/rent them to firms for income Buy and consume goods/services Firms Buy/hire factors of production, use them to produce goods and services Sell goods/services Gross Domestic Product (GDP) is… The market value of all final goods & services produced within a country in a given period of time Market value- o Goods are valued at their market prices so all goods measured in the same units ($ in U.S.) o Things that don’t have a market value are excluded (homework- you do for yourself) Final goods- intended for the end user Goods and services- o Gdp includes tangible goods (dvds, bikes) o Intangible services (concerts, cell phone service) Produced- includes currently produced goods, not good produced in the past Within a country- measures value of production that occurs within a country’s borders, whether done by its own citizens or by foreigners located there (even if its produced by foreign country) Given period of time- usually a year or a quarter (3 months) Components of GDP Consumption o (When we go out and buy stuff) o Total spending by households on goods & services o Renters- consumption includes rent payments o Homeowners- consumption includes imputed rental value of the house but not the purchase price or mortgage payments o Rent apartment-consuming current service [apart of GDP] Investment o (capital spending) o Total spending on goods that will be used in the future to produce more goods (not financial assets) o Includes spending on capital equipment (machines, tools, technology) o Structures (factories, office buildings) o Inventories (goods produced but not yet sold) Only counts when it goes into inventory not going out o Houses (called residential fixed investment) Brand new recently constructed never been lived in house Government Purchases o All spending on the goods and services purchases by government at the federal, state and local levels o Goods excludes transfer payments like social security o Not purchases of goods and services Net Imports o Net exports = exports- imports o Exports represent foreign spending on the economy’s goods and services Nominal GDP Values output using current prices Not corrected for inflation Current year Quantity x Current price Real GDP Values output using the prices of a base year Real GDP is corrected for inflation (Current output) (Base year price) ** Base year will always be given to you ** GDP Deflator Measure of overall level of prices Equation o 100 x normal gdp/real gdp to measure economy’s inflation rate is to compute the percentage increase in the gdp deflator from one year to the next GDP deflator for the base year will always be 100 GDP and Economic Well-Being Real GDP and per capita is the main indicator of the average person’s standard of living GDP does not value: o Quality of the environment o Leisure time o Non-market activity (child care) o An equitable distribution of income Why we care about GDP: o Having large GDP enables a country to afford better schools, a cleaner environment, health care, etc o Quality of life are positively correlated with GDP (life expectancy/ literacy)
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