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Econ 225 Chapter 8 Book/PowerPoint Notes

by: Danielle Rios

Econ 225 Chapter 8 Book/PowerPoint Notes EC 225

Marketplace > Southeast Missouri State University > Economics > EC 225 > Econ 225 Chapter 8 Book PowerPoint Notes
Danielle Rios
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About this Document

These notes outline Chapter 8 in Macroeconomics 6th Edition by R. Glenn Hubbard and Anthony Patrick O'Brien, and they coincide with the PowerPoint Dr. Chen put on Moodle.
Principles of Macroeconomics
Dr. Chen Wu
Class Notes
Economics, business, Econ225




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This 3 page Class Notes was uploaded by Danielle Rios on Wednesday August 24, 2016. The Class Notes belongs to EC 225 at Southeast Missouri State University taught by Dr. Chen Wu in Fall 2016. Since its upload, it has received 75 views. For similar materials see Principles of Macroeconomics in Economics at Southeast Missouri State University.


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Date Created: 08/24/16
Chapter 8- GDP: Measuring Total Production Income Introduction  Microeconomics vs. Macroeconomics o Micro focuses on how firms and households make choices o Macro focuses on the overall economy  Business cycle: alternating periods of expansion (when total production and employment increase) and recession (when total production and employment decrease) o In the short run (SR), employment levels are affected by business cycles, but in the long run (LR) other factors affect employment level as the effects of the business cycle disappear  Economic Growth: refers to an economy’s ability to produce high quantities of goods and services (g/s)  Inflation rate: yearly increase of prices as a percentage 8.1 Measuring Total Production in Terms of GDP  GDP is the market value of g/s produced in one country in (on average) 1 year increments; this is also the most popular way to measure and economy’s activity o Measured using market values (in dollars) for g/s produced to avoid confusion (how many grapes equal 1 gallon of almond milk, etc.) o Uses market values of final goods only  Final goods refer to items which are not needed to produce another g/s (lamps, bicycles, etc.)  Intermediate goods are items which are used as parts for another g/s (light bulbs, tires, etc.) o To calculate GDP (example on 252 in textbook), one must: 1. distinguish between final and intermediate goods 2. multiply the price per unit (ppu) by the quantity to get the value 3. add the values together to get GDP  Components of GDP o Bureau of Economic Analysis (BEA) defines four categories of expenditures for GDP  Consumption (C): household spending on g/s, but does not include spending on houses (3 categories)  Services  Nondurable goods  Durable goods  Investment (I): spending by firms on additions to their businesses and spending by households/firms on new houses (3 categories)  Business Fixed Investment: office spaces, factories, and machinery/technology  Residential Investment: spending on new houses  Changes in Business Inventories: measures any changes to the stock of goods that have not been sold, but have been produced  Purchase of stock shares, etc. are not part of the definition of “investment” as they do not lead to the production of new g/s  Government Purchases (G): refers to the spending by the government on g/s, but transfer payments are not included  Net Exports (NX): exports (value of g/s sold to other countries)-imports (value of g/s purchased from other coutries)  Domestic products are produced in the U.S.  GDP = C + I + G + NX  Based on Figure 8.2 on pg. 256 in textbook o Consumption is the greatest aspect of GDP, and services are the greatest aspects of consumption o The U.S. net exports are negative because imports > exports o As changes to the economy occur, the BEA adjusts how to measure GDP  There are 2 main ways of measuring economic activity o Total production o Total income o Visit the Circular Flow Chart on pg. 253 in textbook  Measuring GDP Using the Value- Added Method o Firm adds a market value to a product to use in the value-added method o Example on page 358 8.2 GDP and Measuring Well-Being/Production  Shortcomings (Measuring Total Production) o Excludes In-Home Production: (someone making furniture, phone cases, clothing, etc. for personal use and not sold in markets) o Excludes the Underground Economy/Informal Sector: g/s purchased or sold which avoid taxes/regulations from the government  Shortcomings (Measuring Well-Being) o To calculate the levels of GDP per person in an economy, divide the country’s GDP by the population of the country o Leisure’s value is not included in the total calculation o Excludes pollution and other negative impacts of production o Excludes the distribution of income 8.3 Real vs. Nominal GDP (Problem 8.3 in book)  Economic Policy’s goal is to maintain a steady price level o Real GDP  Calculated by finding the value of all final g/s taken into account at base- year prices o Nominal GDP  Calculated by finding the value of final g/s taken into account at current- year prices  There is not any significance in choosing the base-year. 2009 is today’s standard  In years < 2009, nominal GDP < real GDP because prices were lower than in 2009  In 2009, nominal/real GDP were equal  After 2009, nominal GDP > real GDP because prices are higher than in 2009  GDP Deflator: price level is the measure of average prices of g/s in a country’s economy o To Calculate: (Nominal GDP / Real GDP) * 100 8.4 Other Measures of Total Production/Income  National Income Accounting: tracking total production/income on a quarterly basis o The National Income and Product Accounts (NIPA) are the tables which hold this information  Gross National Product: final g/s produced by U.S. residents (including overseas production)  National Income: GDP – depreciation o Depreciation is the value of worn out equipment (in NIPA tables, consumption of fixed capital) o National income < GDP by depreciation o Disposable income < personal income by taxes  Personal Income: transfer payments (payments from government to households)  Disposable Personal Income: personal income – payment of personal taxes (Figure 8.4 on 266)  Division of Income (production must be rewarded with income) o GDP as a sum of income payments is called Gross Domestic Income o All compensation employees receive= wages o Interest refers to the net interest households receive o Rent o Profits of sole property owners o Figure 8.5 on 257 These notes are by Danielle Rios


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