Principles of Macroeconomics
Principles of Macroeconomics ECO 2013
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Date Created: 10/12/15
CHAPTER 5 MEASURING A NATION S INCOME Review Problems 1 7 ll 12 Introduction Macroeconomics is the study of the economy as a Whole The goal of macroeconomics is to explain the economic changes that affect many households rms and markets at once Collecting data and keeping track of statistics helps economists monitor What is happening in the macroeconomy De nition of Microeconomics the study of how households and rms make decisions and how they interact in markets De nition of macroeconomics the study of economyWide phenomena including in ation unemployment and economic growth 101 The Economy39s Income and Expenditure De nition of Gross Domestic Product the market value of all nal goods and services produced Within a country in a given period of time It not only measures the total income of everyone in the economy but the total expenditure as well Taken as a Whole people in the economy can only spend as much as they earn in income And since the market value of a transaction is the same for a buyer and a seller income must equal expenditure 102 The Measurement of Gross Domestic Product Key points from the de nition of GDP GDP is calculated using market prices because they re ect how much consumers are Willing to pay for them GDP includes all items produced that are sold legally in markets It does not include illegal transactions or household production GDP includes only nal goods and not intermediate goods to avoid doublecounting GDP includes tangible goods and intangible services GDP is calculated using current production not production or transactions that took place in the past GDP only counts those goods and services produced Within the boundaries of a country Whether produced by resources owned domestically or not GDP measures the value of production that takes place in a speci c interval of time FYI Three Other Measures of Income These three are other common measures of income For monitoring the general economy it doesn39t really matter which measure of income is used since all uctuate together lNel National Product the total income of the residents of a nation subtracting losses om depreciation Depreciation is the wear and tear on the capital stock sometimes called quotconsumption of xed capitalquot 2Pers0nal Income the income that households and noncorporate business receive It does not include corporate retained earnings since that money hasn39t yet been paid out to stockholders but it does include the interest income that households receive om holding government debt and income received as transfer payments from government programs like welfare and Social Security 3Disp0sable Personal Income Personal Income less taxes 103 The Components of GDP Consider GDP as the sum of all the expenditures in the economy GDP which is denoted Y is divided into four components 1 Consumption 2 Investment 3 Government Purchases 4 Net Exports YCIGNX Consumption is spending by households on goods and services Investment is the purchase of capital equipment inventories and structures Government Purchases include spending by all levels of govemmentcity state federal Net eXports is our exports minus our imports the purchases of domestically produced goods and services by foreigners less the domestic purchases of foreign produced goods and services 104 Real versus Nominal GDP GDP is calculated by valuing the goods and services produced at current market prices Therefore if total spending rises om year to year it is impossible to determine With just a glance if the reason is because production increased or current market prices increased or both Real GDP is a measure Which helps isolate the two effects Real GDP is a measure of the changes in production only disregarding any changes in prices The way we39ll isolate real GDP is to pick a year and a set of prices and keep them constant Real GDP answers the question What would be the value of the goods and services produced this year if we valued these goods and services at the prices that prevailed in some speci c year the base year in the past De nition of nominal GDP the production of goods and services valued at current prices De nition of real GDP the production of goods and services valued at constant prices it is sometimes called constant GDP or GDP adjusted for in ation it is a better gauge than nominal GDP of how the economy is doing since it measures production changes only and no price changes De nition of GDP de ator a measure of the price level calculated as the ratio of nominal GDP to real GDP We decompose nominal GDP changes into changes in real GDP and changes in the GDP de ator The rst measures production changes and the latter measures changes in prices Case Study Real GDP over Recent History Real GDP grows over time but not steadily The interruptions in the trend increase are called recessions Macroeconomists attempt to explain both longrun growth and shortrun uctuations in real GDP 11 105 GDP and Economic WellBeing GDP is an indirect measure of the quality of life of a nation39s society It leaves some things out though 0 leisure 0 quality of the environment 0 the value of activities that take place outside a market like childrearing and volunteer work Case Study International Differences in GDP and Quality of Life 106 Conclusion It is important not only to measure a nation39s income but also to explain and determine how a nation39s economy can grow to improve the quality of life for its citizens