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ECON 2105, week 6 notes

by: Randi

ECON 2105, week 6 notes ECON 2105

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About this Document

These notes cover chapter 6 material
Class Notes
Inventory, consumption, netexports, Calculations, GDP, realGDP, recession, PPP, investment
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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.

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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            


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