Macroeconomics 352x Week 2 Notes
Macroeconomics 352x Week 2 Notes ECON 352
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This 4 page Class Notes was uploaded by Manisha Malhotra on Thursday September 8, 2016. The Class Notes belongs to ECON 352 at University of Southern California taught by Fatemeh Ibrahimi Nazarian in Fall 2016. Since its upload, it has received 8 views. For similar materials see in Economics at University of Southern California.
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Date Created: 09/08/16
Macroeconomics 352x Notes Chapter 2: The Measurement and Structure of the National Economy (8/30) • National income accounts: an accounting framework used in measuring current economic activity • 3 alternative approaches give the same measurements • Product approach: the amount of output produced • Income approach: the incomes generated by production • Expenditure approach: the amount of spending by purchasers • Juice business example shows that all 3 approaches are equal • Important concept in product approach: value added = value of output minus value of inputs purchased from other producers • total production = total income = total expenditure Product Approach to measuring GDP • GDP (Gross Domestic Product) is the market value of final goods and services newly produced within a nation during a fixed period of time • Market value: allows adding together unlike items by valuing them at their market prices • Problem: misses nonmarket items such as homemaking, the value of environmental quality, and natural resource depletion • There is some adjustment to reflect the underground economy • Government services (that aren’t sold in markets) are valued at their cost of production • Newly produced: counts only things produced in the given period; excludes things produced earlier • Final goods and services not intermediate, capital goods are final goods • GNP (Gross National Product) = output produced by domestically owned factors of production • GDP = output produced within a nation • GDP = GNP NFP • NFP = net factor payments from abroad, payments to domestically owned factors located abroad payments to foreign factors located domestically Expenditure Approach to measuring GDP • Measures total spending on final goods and services produced within a nation during a specified period of time • 4 main categories of spending: consumption (C), investment (I), gov purchases of goods and services (G), and net exports (NX) • Y = C + I + G + NX (the incomeexpenditure approach) • Consumption: spending by domestic households on final goods and services (About 2/3 of US GDP) • 3 categories: consumer durables (cars, furniture), nondurable goods (food, clothing), services (Education) • Investment: spending for new capital goods + inventory investment (About 20% of US GDP) • Business fixed investment, residential fixed investment, inventory investment • Gov. purchases of goods and services: spending by the gov on goods and services (About 1/5 of US GDP) • Most by state and local gov (not fed gov), not all gov expenditures are purchases of goods/services, some gov spending is for capital goods that add to the nation’s capital stock (highways, airports, etc.) • Net exports: exports imports • Exports: goods produced in the country that are purchased by foreigners • Imports: goods produced abroad that are purchased by residents in the country • Imports are subtracted from GDP because they represent goods produced abroad and were included in consumption, investment, and gov. purchases Income Approach to measuring GDP • Adds up income generated by production (including profits and taxes paid to the gov.) • GNP NFP = GDP • Measures of aggregate saving: • saving = current income current spending • saving rate = saving/ current income • private saving = private disposable income consumption • gov. saving = net government income gov purchases of goods and services • National saving = private saving + gov. saving • Stocks and flows: • Flow variables: measured per unit of time (GDP, income, saving, investment) • Stock variables: measured at a point in time (quantity of money, value of houses, capital stock) • Flow variables often equal rates of change of stock variables • Wealth is a stock, saving is a flow • National wealth: domestic physical assets + net foreign assets (9/1) • Nominal GDP is the dollar value of an economy’s final output measured at current market prices • Real GDP is an estimate of the value of an economy’s final output, adjusting for changes in the overall price level • A price index measures the average level of prices for some specified set of goods and services, relative to the prices in a specified base year • GDP deflator = 100 nominal GDP / real GDP • base year P = 100 • Price indexes with fixed sets of goods don’t reflect substitution by consumers when 1 good becomes relatively cheaper than another (Substitution bias) Chapter 3: Productivity, Output, and Employment • Factors of production include capital (K), labor (L), others (raw materials, land, energy) • Productivity of factors depends on technology and management • The production function: Y = AF(K,N) • CobbDouglas Production Function • The shape of the production function • Slopes upward: more of any input produces more output • Slope becomes flatter as input prices: diminishing marginal product as input increases • Marginal product of capital, MPK = delta Y / delta K • Equal to slope of production function graph • MPK always positive • Diminishing marginal productivity of capital (MPK declines as K rises) • Marginal product of labor, MPN = delta Y / delta N • Equal to slope of production function graph • MPN always positive • Diminishing marginal productivity of labor • Supply shock = productivity shock = a change in an economy’s production function • Supply Shocks affect the amount of output that can be produced for a given amount of inputs • Shocks may be positive or negative (ex. weather) • Negative shock: usually slope of production function decreases at each level of input • Positive shock: usually slope of production function increases at each level of output • MPN = w (real wage)= W/p or MRPN = nominal wage = W • W = P x w = p x (W/p) • Labor demand curve shows relationship between the real wage rate and the quantity of labor demanded • Changes in wages make a movement along the curve (NOT A SHIFT) • Higher capital stock raises MPN, so shifts labor demand curve to the right; opposite for lower capital stock • Aggregate labor demand is the sum of all firms’ labor demand • Labor supply of individuals depends on laborleisure choice • An increase in the real wage has offsetting income and substitution effects • Substitution effect: Higher real wage encourages work, since reward for working is higher • Income effect: Higher real wage increases income for same amount of work time, so person can afford more leisure, so will supply less labor • A pure substitution effect: a oneday rise in the real wage • A temporary real wage increase has just a pure substitution effect, since the effect on wealth is negligible • Wealth shifts the labor supply curve