Econ 2 Week 1 Lecture 1 Notes
Econ 2 Week 1 Lecture 1 Notes ECON 2
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This 4 page Class Notes was uploaded by Anna on Tuesday September 27, 2016. The Class Notes belongs to ECON 2 at University of California - Los Angeles taught by Rojas in Fall 2016. Since its upload, it has received 63 views.
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Date Created: 09/27/16
Week 1 Lecture 1: Measuring a Nation’s Income (Chapter 23) U.S. necessities seem to play role of luxuries; people have smartphones (luxury) but cannot afford healthcare/education (necessity) Difference between textbook definition and reality Macroeconomics- study of economy as a whole 1. Income and Expenditure a. Gross Domestic Product - market value of all final goods and services produced within a country in a given period of time i. measures total income of everyone in the economy ii. GDP also measures total expenditure iii. Income equals expenditure - every dollar a buyer spends is a dollar of income for the seller 2. Circular Flow Diagram a. Illustrates GDP as spending, revenue, factor payments, and income b. Preliminaries: i. Factors of production are inputs like labor, land, capital, and natural resources ii. Factor payments are payments to the factors of production (wages, rent) c. Missing: i. Government ii. Financial system iii. Foreign sector 3. GDP is… a. Market value of all final goods and services produced within a country in a given period of time i. All goods are measured in the same units ii. Goods are valued at their market prices (if no price, then it is not counted) iii. Things that do not have market value are excluded (housework you do for yourself) b. Market value of all final goods and services produced within a country in a given period of time i. Final goods - intended for the end user ii. Intermediate goods - used as components or ingredients in production of other goods iii. GDPonly includes final goods, already embody value of intermediate goods used in production c. Market value of all final goods and services produced within a country in a given period of time i. Tangible goods (mountain bikes, beer, cars, computers) ii. Intangible services (dry cleaning, concerts, cell phone service, housing) d. Market value of all final goods and services produced within a country in a given period of time i. Timeline, take time to build; start build in January, finished in March ● Include March in GDP because that is finalized product ii. GDPincludes currently produced goods, not goods produced in the past e. Market value of all final goods and services produced within a country in a given period of time i. GDP measures value of production that occurs within a country’s borders, whether done by own citizens or by foreigners located there f. Market value of all final goods and services produced within a country in a given period of time i. Usually a year or quarter (3 months) 4. Components of GDP (Y) a. Y = C + I + G + NX b. Consumption (C) i. Total spending by households on goods/services ii. Housing costs ● For renters, consumption includes rent payments ● For homeowners, consumption includes rental value of house, not purchase price or mortgage payments a. Infer monthly payment (consistent with market price) c. Investment (I) i. Total spending on goods that will be used in future to produce more goods ii. Includes spending on capital equipment, structures, inventories iii. Opening new factories that create job opportunities iv. Does NOT mean purchase of financial assets like stocks/bonds d. Government Purchases (G) i. All spending on goods/services purchased by government at federal, state, local levels ii. Subsidies, public goods, defense, education, infrastructure, welfare iii. Excludes transfer payments (Social Security, unemployment insurance -- money that households are spending) iv. NOT purchases of goods/services e. Net Exports (NX) i. NX = exports - imports ii. Exports represent foreign spending on economy’s goods/services iii. Imports are portions of C, I, and G that are spent on goods/services produced abroad iv. Advantages of importing more than exporting: give more U.S. dollars to foreign countries → foreign countries spend dollars in U.S. → create jobs v. Subtract imports because those goods are produced in foreign countries ● Not domestically produced → not included in our GDP f. Examples i. Sarah spend $1200 on new laptop to use in her publishing business, laptop built China ● $1200 increase in investment, $1200 decrease net exports, GDP is unchanged ii. Jane spends $800 on a computer to use in her editing business. She got last year’s model on sale for a great price from a local manufacturer. ● Current GDP and investment do not change, because computer was built last year → $800 goes into last year’s GDP iii. General Motors builds $500 million worth of cars, but consumers only buy $470 million of them. ● Consumption rises by $470 million, inventory investment rises by $30 million, and GDP rises by $500 million. 5. Versions of GDP a. Inflation can distort economic variables like GDP b. Nominal GDP i. Values output using current prices ii. Not corrected for inflation iii. Changes in nominal GDP reflects both price and quantities c. Real GDP i. Values output using prices of base year ii. Is corrected for inflation iii. Measured using constant prices from base year iv. Change in real GDP is amount that GDP would change if prices were constant (if zero inflation) d. Real GDP and Nominal GDP trace each other e. Graph with base year at 2009: 2009 prices relative to any other year are higher, but then after 2009, 2009 prices relative to years after are lower → nominal GDP less than real GDP before 2009, nominal GDP higher than real GDP after 2009, intersect at 2009 6. GDP Deflator a. Measure of the overall level of prices b. GDPdeflator = 100 x (nominal GDP/real GDP) c. Measure economy’s inflation rate - compute percentage increase in GDP deflator from one year to next 7. GDP and Economic Well Being a. Real GDP per capita is main indicator of average person’s standard of living b. GDP is not perfect measure of well being i. Does not value: ● Quality of environment ● Leisure time ● Non market activity (i.e child care a parent provides at home) ● Equitable distribution of income ● Larger population → larger GDP but not necessarily mean better standard of living 8. Why Do We CareAbout GDP? a. Large GDP enables a country to afford better schools, cleaner environment, health care, etc b. Many indicators of quality of life are positively correlated with GDP c. Other than GDP, also need to consider government role in economy, stability of government to allow economic activity, and resources to determine quality of life Discussion Examples 1. AFerrari is produced in Italy and sold to a person in the U.S. The price of the car is $900 and the commission of the dealer is $50. What are the expenditures and GDP contributions for Italy and the U.S.? ● Italy: exports = 900 ➢ GDP of Italy = $900 ● USA: imports = -900; consumption (buyer) = 900; consumption (service) = 50 ➢ GDP of U.S. = $50
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