Chapter 5-GDP econ 222
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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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