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by: Harrison Fahey


Harrison Fahey
GPA 3.9

C. Cook

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C. Cook
Class Notes
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This 5 page Class Notes was uploaded by Harrison Fahey on Tuesday October 13, 2015. The Class Notes belongs to ECON 2010 at Louisiana State University taught by C. Cook in Fall. Since its upload, it has received 17 views. For similar materials see /class/223031/econ-2010-louisiana-state-university in Economcs at Louisiana State University.




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Date Created: 10/13/15
Ch 7 GDP Measuring Total Production and Income Definitions Microeconomics is the study of how households and rms make choices how they interact in markets and how the government attempts to in uence their choices Macroeconomics is the study of the economy as a Whole including topics such as in ation unemployment and economic growth Business cycle is the alternating periods of economic expansion and economic recession Expansion is the period of a business cycle during which total production and total employment are increasing Recession is the period of a business cycle during which total production and total employment are decreasing Economic growth is the ability of an economy to produce increasing quantities of goods and services In ation rate is the percentage increase in the price level from one year to the neXt Gross Domestic Product GDP Measures Total Production 0 Gross Domestic Product GDP the market value of all final goods and services produced in a country during a period of time typically one year o GDP is measured using market values not quantities o GDP includes only the market value of final goods 0 Final Good or Service one that is purchased by its final user and is not included in the production of any other good or service o Intermediate Good a good or service that is an input into another good or service such as a tire on a truck GDP includes only current production o ATable is a final good wood is an intermediate good GDP and Income 0 When we measure the value of total production in the economy by calculating GDP we are simultaneously measuring the value of total income Firms sell goods and services to three groups domestic households foreign firms and households and the government 0 Who produces goods and services 0 Who receives the profit from production of goods and services 0 Transfer Payments payments by the government to individuals for which the government does not receive a new good or service in return 0 Welfare Social Security etc 0 Nothing is produced just a w quot of money from one individual to another 0 Look at the diagram on P 217 Components of GDP 0 Consumption spending by g 1quot on goods and services not including spending on new houses 0 Spending on new houses is considered investment 0 What about spending on old houses 0 Investment divided into three categories 0 Business fixed investment spending by firms on new factories office buildings and machinery used to produce other goods 0 Residential investment spending by households on new housing 0 Changes in business inventories are also included in investment 0 Government Purchases spending by federal state and local governments on goods and services such as teachers salaries highways and aircraft carriers 0 Net Exports exports minus imports 0 Exports domestic goods or services that are sold to foreign markets I Chinese business man buys financial services from American firm 0 Imports foreign goods or services that are sold to the domestic market I You buy anything with the inscription Made in China unless you re in China 0 A few notes about actual levels of the components of GDP 0 Consumer spending on services is greater than the sum of spending on durable and nondurable goods Business fixed investment is the largest component of investment 0 o Purchases made by state and local governments are greater than purchases made by the federal government 0 Imports are greater than exports so net exports are negative Measuring GDP 0 Value Added refers to the additional market value a firm gives to a product and is equal to the difference between the price for which the firm sells a good and the price it paid other firms for intermediate goods Shortcomings of GDP 0 Can t measure household production or the underground economy 0 Household Production goods and services people produce for themselves o Cooking at home vs eating in a restaurant o Washing your own clothes vs a fluff and fold service 0 Underground Market the buying and selling of goods and services that is concealed from the government to avoid taxes or regulations or because the goods and services are often illegal o Illegal Drugs o Guns o Gambling 0 Can t measure wellbeing Money can buy everything o Value for leisure not included Pollution is not measured Crime is not accounted for 000 However does provide a tangible measure of how well off a society is doing I Countries with high GDPcapita tend to have low levels of pollution crime and have more leisure Real vs Nominal GDP 0 Real the value of final goods and services evaluated at baseyear prices 0 Nominal the value of final goods and services evaluated at currentyear prices GDP de ator 0 Price Level measure of the average prices of goods and services in the economy 0 GDP Deflator a measure of the price level calculated by dividing nominal GDP by real GDP and multiplying by 100 Other Measures GNP Gross National Product the value of final goods and services produced by residents of the US even if the production takes place outside the United States NNP Net National Product If we subtract the value of the wornout machinery equipment and buildings from GNP we obtain the net national product National lncome If we subtract the value of sales taxes from net national product we obtain the national income Personal lncome Personal income is income received by households 0 It is calculated by subtracting the earnings that corporations retain rather than pay to shareholders in the form of dividends 0 We also add in the payments received by households from the government in the form of transfer payments or interest on government bonds Disposable Personal lncome Disposable personal income is calculated as personal income minus personal tax payments such as the federal personal income tax o It is the best measure of the income households have available to spend The Division of lncome We can measure GDP in terms of total expenditure or as the total income received by households The largest component of income received by households is wages which are about three times as large as the profits received by sole proprietors and the profits received by corporations combined


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