ECON 2105, week 6 notes
ECON 2105, week 6 notes ECON 2105
Popular in Macroeconomics
Popular in Macro Economics
This 7 page Class Notes was uploaded by Randi on Sunday September 25, 2016. The Class Notes belongs to ECON 2105 at University of Georgia taught by McWhite in Summer 2016. Since its upload, it has received 6 views. For similar materials see Macroeconomics in Macro Economics at University of Georgia.
Reviews for ECON 2105, week 6 notes
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 09/25/16
Week 6 Notes ECON 2105 PROF. MCWHITE Chapter 6: Understanding GDP, Spending, and Income • Gross Domestic Product o The market value of all final goods and services produced in a country during a given period o It measures a nation’s production and income at the same time Ø You buying stuff is someone else’s income… add all of this up for a nation • GDP is used to compare countries • How do we measure how the economy is doing? o Recession: § A fall in GDP over 2 quarters o Real GDP § Value of the goods and services produced by the nation’s economy minus the value of the goods and services used up in production, adjusted for price changes • Graphs of dollars values over time need to be adjusted because of Inflation: o Changes in the price level • Real vs. Nominal GDP o Nominal: Prices and other values in those years o Real: Prices and other values adjusted for inflation § Adjusted to prices in the base year** § How much stuff can I buy with these dollars? § When prices go up, GDP goes up as well **This is why we are more concerned with real GDP • Purchasing Power Parity (PPP) o The idea that a unit of currency should be able to buy the sane quantity of goods and services in any country o China has the largest economy based on PPP as of last year o USA has the largest economy based on Real GDP (stuff produced) • GDP per capita o GDP is a good measure to compare economies, but GDP per capita is a better comparison to use between individuals in the same economy Week 6 Notes o GDP per capita is how much stuff per person in the country GDP / Population • What countries produce over time changes o For example: The US has gone from mostly agriculture à mostly manufactured goods à to now mostly services • Market value o Many countries produce a lot of similar and different things, so we use market value to count it o The more valuable items have heavier weight Price X the Quantity of All Goods • Final goods and service o When it gets to the consumer that is a final good or service, or when it is in inventory to be used later o Make sure to avoid double counting • What is made and sold this year adds to GDP 1. When BMW makes care in the USA à counts as USA GDP 2. When Ford builds a car in Europe à does not count as USA GDP • What makes up GDP? o The Expenditure Method: § Consumption (C) § Investment (I) § Government Purchases (G) § Net Exports (NX) Total = GDP Week 6 Notes 1. Consumption o Spending by household makes up Consumption o Durable goods: § Things that are expected to last more than a year (roughly speaking) § Example: furniture o Nondurable goods: § Things that will be consumed immediately or not last very long § Example: Happy Meal o Services: § When you pay people to do something 2. Investment o Spending by firms o Spending on capital goods o A share of stock is not considered part of GDP o Example: Business: A corporation fixed one of its machines Residential: Buying a home Inventory: What is not sold to consumers 3. Government Purchases o Purchases by local, state, and federal government o Does not include transfer payments (example: social security) o Doesn’t include interest on debt o Government spending has increased over the years • Example goods: tanks, street signs, missiles, buildings Example services: teachers, trash services, police 4. Next Exports Exports – Imports o Exports: o Goods produced domestically, sold abroad o Imports: o Goods produced abroad, sold domestically o Our net exports have been negative for a long time o A good has to be produced/sold in the same year to count towards the year’s GDP PRACTICE: • A 1973 corvette sold in 2016 is not counted in this year’s GDP Week 6 Notes • A vacuum cleaner made and sold in 2016 counts towards this year’s GDP Week 6 Notes • Price Level and GDP Deflator o Comparing different years is more accurate using real GDP o Nominal GDP: GDP in the current year’s prices o Price level: Index values of prices in the economy • GDP Deflator: o A measure of price level o Calculated value used to determine real GDP CALCULATIONS • Nominal GDP o Sum of each good (Price X Quantity) of good or service • Real GDP o Determine the base year (this will be given) o Sum of each good (Price in base year X Quantity) of good or service • GDP Deflator (Nominal GDP / Real GDP) X 100 *base year will always be 100 • Real GDP (Nominal GDP / GDP Deflator) X 100 • We use growth rates to determine where the economy is going o This changes from year to year • Example: Nominal GDP Growth Rate for 2014 = (GDP2014 – GDP2013) / GDP2013 X 100 • Calculation of Price Level Changes (GDP.Deflator 2014 – GDPDeflator2013) / GDPDeflator2013 X 100 • With the changes in the price level and the Nominal GDP, we can determine the change in real GDP Growth in Nominal GDP = Growth in Real GDP = Growth in Price Level Week 6 Notes • Issues with GDP: 1. Non-‐market goods/services 2. Underground/illegal markets 3. No value for standard of living • Environmental quality • Leisure time • Higher per capita GDP correlates with higher standard of living 1. Non-‐Market Activities Example 1: o You go to Lowes and buy tiles to fix your kitchen… this is included in GDP o You hire someone to fix the kitchen for you… this is included in GDP o You watch videos online and fix the kitchen yourself… Not included in GDP Example 2: o Your house is a mess, so you hire a maid… this is included in GDP o You clean the house yourself… Not included in GDP Example 3: o You hire a professional lawn care company to cut your grass… this is included in GDP o You pay your neighbor’s kid to do it for you… probably not included in GDP (cash exchange) • Cash exchanges may not be documented and sent into the IRS • In countries where governments are more corrupt, there is usually a higher cash economy 2. Illegal markets • Exchanges on black markets are not counted in GDP • Illegal markets can’t be prevented and are hard to keep track of 3. No value for standard of living • Standard of living is subjective • Environmental quality: o Less environmental regulation could improve GDP o Would this be a good thing? • More spending to prevent crime/treat cancer could increase GDP • Leisure time: o Are we better off if we spend a lot of time at work? Week 6 Notes
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'