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Chapter 5-GDP

by: alex formichella

Chapter 5-GDP econ 222

alex formichella

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Notes on all of chapter 5!
Principles of Macroeconomics
Pattama Shimpalee
Class Notes
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This 7 page Class Notes was uploaded by alex formichella on Friday September 16, 2016. The Class Notes belongs to econ 222 at University of South Carolina taught by Pattama Shimpalee in Fall 2016. Since its upload, it has received 6 views. For similar materials see Principles of Macroeconomics in Macro Economics at University of South Carolina.


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Date Created: 09/16/16
l5.1 GDP, Income, and Expenditure    ● National income and product accounts or national accounts ​provide a set of  numbers that indicate the country’s state of economic performance.  (National accounts)  ○ Almost all countries have some form of national accounts  ● Simon Kuznets and Richard Stone  ○ They developed the basic concept of GDP and some economic values  to monitor how the economy is doing  ● GDP ​is the total market value of all final goods and services produced within  a country in a given period of time  ● Expenditure/spending ​approach GDP=C+I+G+NX (This measures the total  expenditure on the economy’s output of goods and services, in home,  consumer, government, and foreign)  ○ C=Consumer Expenditure (US)  ■ It is the expenditure by households on consumption goods and  services, produced within a country in a specific time  ■ Divided into three main categories  ● Durable goods  ○ Ex. Car, Clothes, Iphone, Ipad  ● Non durable goods  ○ Ex. food, gas, makeup  ● Services  ○ Ex. education and non-education services (tuition  fees, doctor, haircuts)   ○ I=Investment (FIRMS)  ■ Investment is the purchase of new capital goods (tools.  Instruments, machines, buildings, and other constructions) and  additions to inventories.  ■ Includes spending on   ● Physical capital (machines, tools)  ● Construction of structures (factories, office buildings,  new ​houses)  ● Changes to inventories (inventories are goods produced  but not yet sold.)  ■ The purchase of stocks and bonds is called financial investment,  it's not just investment.  ○ G=Government Expenditure (on goods and services) (GOVERNMENT)  ■ Stands for government expenditures on goods and services  ■ It is all spending on the goods and services purchased by  government at the federal state, and local levels.  ● Ex. School buses, tanks, battleships, war, wages and  income of all government employees  ■ Total government spending=​G+Tr  ● Tr stands for ​government transfer payments  ○ Social Security  ○ Unemployment insurance benefits  ○ Pensions  ○ NX=Net Exports   ■ Net Exports  ● =Exports-Imports=Trade balance  ● =X (Exports) -IM (Imports)  ● Exports  ○  are things that you send to a foreign country   ○ The goods and services that are made in one  country and transmitted to foreigners  ● Imports   ○ are things that you bring into the country  ○ The goods and services that are brought by  residents, governments or businesses of a  country, but made outside the country  ○ Top 10 trading partners of the U.S  ■ Canada  ■ China  ■ Mexico  ■ Japan  ■ Germany  ■ South Korean  ■ UK  ■ France  ■ Brazil  ■ Saudi Arabia  ○ X>IM=Trade surplus (good)  ○ X<IM=Trade deficit (bad)  ● Income Approach​ GDP=(Wages)+(Rent+Interest+profit)+(Indirect taxes-tax  subsidies)+(Deprecation)   ○ It measures the annual incomes of all individuals in a country.    Item  Amount in 2013 (Second  Percentage of GDP  quarter)  (billions of dollars)  Wages (Compensations of  8,820  52.9  employees)  +  Interest, rent, and profit  4,290  25.7  (net operating surplus)  =  Net Domestic product at  13,110  78.7  factor cost  Indirect taxes less  1,080  6.5  subsidies  +  Depreciation (capital  2,632  15.8  consumption)  GDP (income approach)  16,822  100.9  +  Statistical discrepancy  -154  .9  =  GDP (expenditure  16,688  100.00  approach)    ● Subsidy-sum of money granted by the government (tax credit) (loans)  ● Uses factor cost  ● Get a different value than expenditure approach    The Circular-Flow Diagram (See in notebook)  ● It illustrates the flow of funds through the four sectors of the  economy-households, firms, governments, and the rest of the world-via  three types of markets-factor markets, for goods and services. And  financial markets.   ● Factor market​ is a market that allows people to sell resources?  ○ Wages   ○ Profit (dividends)  ○ Interest   ○ Rent  ● Households   ○ Receive income from many ways  ■ Wages  ■ Profit  ■ Interest  ■ Rent  ○ Will use income to buy goods and service  ■ Shopping, taxes, and ​Savings to banks  ● Firms  ○   ● Government receives income mainly from taxes, especially income taxes,   ○ Will use to buy goods and services for payment back to households  ○ Government also receives income from borrowing  ● Rest of the World  ○ Exports  ○ Imports    Nominal GDP  ● Values output using current prices  ● Growth of nominal GDP NGDPt = ((NGDPt-NGDPt-1) / NDGPt-1)) * 100  ● Not corrected for inflation    Real GDP  ● Values output of using the prices of a base year  ● Grown of RGDPt = ((RGDPt - RGDPt-1) / (RGDPt-1)) * 100  ● Use most recent year as the base year    ***GO TO NOTEBOOK***    Computing real GDP in each year    Government Budget Balance  ● Government revenue-Government  ● Taxes-(Government expenditure +transfer payment)  ● Taxes>(G + Tr) =Budget Surplus  ● Taxes<(G + Tr) =Budget Deficit    Disposable Personal Income (DPI)  ● (Wage + Profit + Interest + Rent)+Tr-T  ● Disposable income is the total income that households have left after paying  taxes  ○ Can include pensions and social security    GDP   ● The ​market value ​of all ​final ​goods and services produced within a country  in a given period of time  ● Includes all items produced in the economy and sold legally in markets  ● Includes tangible goods and intangible services  ○ EX. haircuts, cell phone services  ● Only current production is counted  ● GDP measures the value of production that occurs within a country’s  borders  ● Calculated usually in a year or a quarter (3 months)    Intermediate Goods    GNP  ● =GDP + (Net factor income from abroad)  ● ((Income earned above earned by U.S firms and citizens) - (Income earned in  the U.S by foreign firms or residents))  ● GNP is an economic measurement of the total value of all final goods and  services that a nation produces in a year and the income earned by its  citizens (excluding income generated by foreigners in the nation’s economy)  ○ GNP > GDP    GDP Deflator  ● Measure of the level of prices of all new, domestically produced final goods  and services in the economy  ● GDP deflator = Nominal GDP / Real GDP *100    Inflation Rate  ● The inflation rate is the percentage change in a price index from one period  to the next  ● Inflation rate= GDP deflator(t) - GDP deflator(t-1) / GDP deflator (t-1) *100    Deflation  ● Deflation is a decrease in the overall price level of goods and services  ● Deflation occurs when the inflation rate falls below 0% a negative inflation  rate    The Use and LImitations of Real GDP  ● We use estimates of real GDP  ● A business cycle is a short-run alternation between economic upturns and  downturns  ● A business cycle is a periodic, but irregular, up and down movement of total  production and other measures of economic activity  ● Four Stages  ○ Recessions  ■ Are periods of economic downturns  ○ Expansion  ■ Sometimes called recoveries, are periods of economic upturns  when output and employment are rising  ○ Trough  ■ A point at which and economy turns from recession to  expansion  ○ Peak  ■ Shows highest values of GDP in cycle  ● Depression  ○ A very deep downturn and prolonged downturn    Potential real GDP (Yp)  ● (Yp) is the value of real GDP when all the economy’s factors of  production-labor, capital, land, and entrepreneurial ability-are fully employed    Potential Output  ●  (also referred to as gross domestic product) refers to the highest level  of real gross domestic product (output) can be sustained over the long  term  ● When current real GDP is equal to potential real GDP. If so, then the  economy has full employment with no inflation.    We use Estimates of real GDP  ● Compare standard of living over time  ● To compare the standard of living among countries    Shortcomings of GDP   ● The quality of the environment isn’t there  ● No quality of life  ● Non-market activity, such as the child care a parent provides his or her  child at home 


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