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Principles of Macroeconomics

by: Grayce Heidenreich

Principles of Macroeconomics EC 202

Marketplace > North Carolina State University > Economcs > EC 202 > Principles of Macroeconomics
Grayce Heidenreich
GPA 3.84


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This 4 page Class Notes was uploaded by Grayce Heidenreich on Thursday October 15, 2015. The Class Notes belongs to EC 202 at North Carolina State University taught by Staff in Fall. Since its upload, it has received 38 views. For similar materials see /class/223926/ec-202-north-carolina-state-university in Economcs at North Carolina State University.


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Date Created: 10/15/15
NCSU EC202 PRINCIPLES OF MACROECONOMICS Department of Economics Summer 2008 CHAPTER 7 GDP Measuring Total Production and Income 1 Recall that economics can be divided into the subfields of microeconomics and macroeconomics o Microeconomics is the study of how households and firms make choices how they interact in markets and how the government attempts to influence their choices 0 Macroeconomics is the study of the economy as a whole including topics such as inflation unemployment and economic growth 2 One of the most important aspects of macroeconomics is to understand how total production is measured Total production is measured by gross domestic product Gross domestic product GDP is defined as the market value of all final goods and services produced in a country during a period oftime Consider this definition in more details is measured using market values not quantities 0 GDP includes only the market value of final goods 0 Final good or service is a good or service purchased by a final user 0 Intermediate good or service is a good or service that is an input into another good or service such as a tire on a truck 0 GDP includes only current production 3 Measuring GDP 31 Expenditure method The value of total production is equal to the value of total income The circularflow diagram shows that one can measure GDP by either calculating the total value of expenditures on final goods and services or by calculating the value of total income The Bureau of Economic Analysis BEA divides its statistics on GDP into four major categories of expenditures a Consumption is the part of GDP purchased by households as final users Almost everything households buy during the year is included as part of consumption spending when we calculate GDP Excluding I used goods I construction of new homes counted as private investment Including l total value of all food products that farm families produce and consume themselves I total value ofthe housing services provided by owneroccupied homes b Private investment Including I Business Purchases of Plant Equipment and Software A firm s plant equipment and software are intended to last for many years only a small part of them is used up to make the current year s output Thus they are regarded as final goods and firms that buy them as final users of those goods I New Home Construction I Changes in Inventories The change in firms inventories is considered to be a part of investment in measuring GDP It is important to include changes in business inventories in order to adjust GDP for output sold this year that was produced in previous years and to adjust GDP for output produced this year but not sold during the year Excluding I Government Investment Total investment spending has two components private investment spending and government investment spending I Consumer durables I Human capital 39 leueual state quot 39 In Macro we make no difference between state and local governments purchases Important to distinguish between Government purchases which are counted in GDP Government outlays which are not counted in GDP ayments represent money redistributed 39om one group of citizens taxpayers to another poor they e Transfer p unemployed elderly While transfers are included in government budgets as outlays ar not purchases of currently produced goods and services and so they are not included in government purchases or in GDP d Net Exports NX Total Export Ex Total Import lm Y CIGNX COMPONENTS or GDP 5quot 5 billions of dollars 3353 Consumption E21A 70 l as 988 anon r Nondulable Goods 2353 7 000 a a Rs 4355 luv 1925 000 Buslness xed investment was 5000 Resldential Construction 674 Change in Business lnventolles 55 0 Government Purchases 22ls 3000 7 9quot 523 2000 Slate and Local LSBE Net Experts 524 mom 7 Ex ons ll74 0 Imports 1795 4 000 rConsumpllon Investmenl Government Ne exports Total in 511734 2000 32 An alternative way of calculating GDP is the ValueAdded method which refers to the market value a firm adds to a product Then GDP is a sum ofvalues added by all rms in economy 4 Does GDP Measure What We Want It to Measure Although GDP is extremely useful it suffers from measurement problems I It doesn t take quality changes into account While BEA includes impact of quality changes for many goods and services such as automobiles and computers it does not have the resources to estimate quality changes for millions of different goods and services It can t accurate ure underground production Some production is hidden from government authorities eit er because it is illegal or engaged in it are avoiding taxes Production in these hidden markets cannot be measured accurately an must e imate it I It does not include nonmarket production goods and services that are produced but not sold in the marketplace Whenever a nonmarket transaction becomes a market transaction GDP will rise even though total production has remained the same Because u quot quot 39 changes in GDP GDP39 39 weIIueing ID I The value of leisure is not included in GDP is not adjusted for pollution or other negative effects of production 0 GDP is not adjusted for changes in crime and other social problems 5 Real GDP versus Nominal GDP The Bureau of Economic Analysis separates price changes from quantity changes by calculating a measure of production caIled real GDP 0 Real GDP refers to the value of final goods and services evaluated at base year prices Nominal GDP refers to the value of nal goods and services evaluated at current year prices Price level is a measure of the average prices of goods and services in the economy GDP deflator is a measure of the price level calculated by dividing nominal GDP by real GDP and multiplying by 100 GDP De ator Nomin alGDPx 100 Real GDP GDP De atort 7 GDP De ator GDP De ator In ation Ratet H X 100 GDP De atorH GDP billlons 13000 Base year 2000 12000 H000 10000 9000 8000 7000 Nominal GDP 6000 5000 i i I990 I992 1994 1996 1998 2000 2002 2004 Calculating Nominal GDP 20 2 6 Other Measures of Total Production and Total Income National income accounting refers to the methods the BEA uses to keep track of total production and total income in the economy The statistical tables containing this information are called the National Income and Product Accounts NIPA In addition to computing GDP the BEA also computes the following ve measures of production and income 0 Gross National Product GNP The value of final goods and services produced by residents of the United States even if the production takes place outside of the United States 0 Net National Product NNP The value of GNP minus depreciation 0 National Income The value of GNP minus indirect business taxes 0 Personal Income Income received by households including transfer payments 0 Disposable Personal Income Equal to personal income minus personal tax payments


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