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## ECON 2133 Chapter 5 Notes

by: Henry Notetaker

32

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# ECON 2133 Chapter 5 Notes ECON 2133

Marketplace > East Carolina University > Economcs > ECON 2133 > ECON 2133 Chapter 5 Notes
Henry Notetaker
ECU
GPA 2.89

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These notes cover my professor's lecture on Chapter 5 (GDP)
COURSE
Macroeconomics
PROF.
TYPE
Class Notes
PAGES
3
WORDS
CONCEPTS
Macroeconomics
KARMA
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This 3 page Class Notes was uploaded by Henry Notetaker on Thursday February 25, 2016. The Class Notes belongs to ECON 2133 at East Carolina University taught by Nehad Elsawaf in Spring 2016. Since its upload, it has received 32 views. For similar materials see Macroeconomics in Economcs at East Carolina University.

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Date Created: 02/25/16
Chapter 5 Class notes on GDP In this chapter my professor goes over the components of GDP, what changes what, and GDP deflators. Enjoy. Macroeconomic Indicators (3) a) GDP- chapter 5 b) The general Price Level- chapter 6 (next) c) Unemployment Rate- Chapter 10 (after next) I) Measuring the Nations Income (GDP/Circular Flow chart) a) Gross Domestic Product (GDP): In general means total income of everyone in the economy. i) GDP= total income = total spending ii) Market Value of all final goods and services currently produced within a country in a given period of time. (1)All goods are measured in the same units (\$) (2)Things that don’t have market value are excluded. (a)Housework you do yourself. (paying to mow grass) (b)Illegal Drug market (3)Final G&S: Produced for consumption (a)GDP only includes these to avoid inflating the GDP (4)Intermediate G&S: Product used to create something else. (a)Apples used to create apple juice. (apples are excluded) iii) GDP includes tangible goods (goods that can be held) (1)DVD’s, mountain bikes, etc. iv) GDP includes intangible goods (goods with value but no physical presence) (1)Dry cleaning, concerts, cell phone service v) GDP measures the value of production that occurs within the countries boarders. (1)Over a period of time (a)A year or a quarter II) The Components of GDP a) There are two ways to approach this: i) Income: y= wages+rent+intrest+profit ii) Spending: total spending (1)We focus on the spending aspect b) Four components: i) Consumption (C) ii) Investment (I) iii) Gov’t Purchases (G) iv) Net Exports (NX= exports-income) c) They all add up to GDP (Y) i) Y=C+I+G+NX III) Consumption (C) a) Consumption is total spending by households on G&S b) Note on households: i) For renters, consumption includes rent payment. ii) For owners, it includes the input rental value of the house, BUT NOT the purchase price or mortgage payments. IV) Investments (I) a) Investment: Total spending on goods that will be used in future to produce more goods. b) Includes spending on: i) Capital equipment (machines, tools) ii) Structures (factories, office buildings, houses) iii)Inventories (goods produced but not yet sold) c) note: “investments” does not mean the purchase of financial assets like stocks and bonds. V) Gov’t Purchases (G) a) Gov’t Purchases: All spending on the G&S purchased by the gov’t at the federal, state, and local levels. b) G excludes transfer payments, such as Social Security checks or unemployment insurance benefits. i) Only excludes this until it is transferred to consumption when the people cash said checks. VI) Net Exports (NX) a) Net Exports: Exports – Imports (X-M) b) Exports represent foreign spending on the economy’s G&S c) Imports are the portions of C, I, and G that are spent on G&S abroad. d) Why do we subtract imports? i) They lower the GDP, because it is not domestically produced. VII) U.S. GDP and its components, 2007 Billions % of GDP Per Capita Y \$13,841 100.0 \$45,825 C \$9,734 70.3 \$32,228 I \$2,125 15.4 \$7,037 G \$2,690 19.4 \$8,905 NX -\$708 -5.1 -\$2,344 VIII)Real vs. Nominal GDP a) Inflation can distort economic variables like GDP, so we have two versions of GDP: i) One corrected for inflation, the other, not. b) Nominal GDP: Values output using current prices. i) Not corrected for inflation. c) Real GDP: Values output using the prices of a base year. i) Corrected for inflation. IX) The GDP Deflator a) A measure of the overall level of prices. b) Definition: GDPD= 100x Nominal GDP/Real GDP c) One way to measure the economy’s inflation rate is to compute the percentage increase in the GDP deflator for one year to the next. X) GDP and Economic Well-Being a) Real GDP per capita is the main indicator of the average person’s standard of living. b) But GDP does no value: i) Quality of the environment ii) Leisure time iii)Non-market activity, such as the child care a parent provides his or her child at home. iv)An equitable distribution of income. XI) Then Why Care about GDP? a) Having a large GDP enables a country to afford better schools, a cleaner environment, health care, etc. b) Many indicators of the quality of life are positively correlated with GDP. I will be posting examples on computing GDP (nominal/real) and its deflator soon

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