CHAPTER 6 Macroeconomic Measurements, Part II: GDP and Real GDP

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ECONOMICS, 5e Roger Arnold. CHAPTER 6 Macroeconomic Measurements, Part II: GDP and Real GDP. MACROECONOMIC QUESTIONS. A Nation's Income The most central issue of macroeconomics is an economy's total production of goods and services - PowerPoint PPT Presentation

Transcript of CHAPTER 6 Macroeconomic Measurements, Part II: GDP and Real GDP

  • CHAPTER 6Macroeconomic Measurements,Part II: GDP and Real GDP ECONOMICS, 5eRoger Arnold

  • MACROECONOMIC QUESTIONSA Nation's IncomeThe most central issue of macroeconomics is an economy's total production of goods and servicesA nation's income is the total of all the incomes of the people that live there

  • MACROECONOMIC QUESTIONSGross Domestic Product (GDP)The dollar value of total output of goods and services is called nominal GDPPart of the increases in GDP reflect inflationAdjusting GDP for inflation gives real GDP

  • MACROECONOMIC VARIABLESDefinitionsReal gross domestic product is a measure of a country's total output of final markets goods and services during some yearNominal gross domestic product is the dollar value of a country's output of final market goods and services during some year

  • SOURCE: Bureau of Economic Analysis.

  • Exhibit 4 The Circular Flow: Total Purchases (Expenditures) Equal Total Income in a Simple Economy

  • CIRCULAR FLOW AND AGGREGATE DEMANDTypes of SpendingConsumption, or consumer spending, is spending by people on the final goods and services for current use

  • CIRCULAR FLOW AND AGGREGATE DEMANDTypes of SpendingInvestment refers to spending to create new capital goods, such as machines, equipment, inventories, human skills, and knowledge

  • CIRCULAR FLOW AND AGGREGATE DEMANDTypes of SpendingGovernment purchases refers to all spending by the government except transfer payment (direct payments of money to people)

  • CIRCULAR FLOW AND AGGREGATE DEMANDTypes of SpendingExports are sales of goods and services to people and firms in other countries

  • CIRCULAR FLOW AND AGGREGATE DEMANDTypes of SpendingExports are sales of goods and services to people and firms in other countriesImports are purchases of goods and services from people and firms in other countries

  • CIRCULAR FLOW AND AGGREGATE DEMANDTypes of SpendingNet exports, or the balance of international trade, equals exports minus imports

  • Exhibit 1 The Components of GDP

  • What is the difference between GDP and GNP?GNP is the value of all final goods and services produced by citizens of a nation regardless of their location.GDP is the value of all final goods and services produced within the border of a nation regardless of citizenship.GNP = GDP + net foreign factor income

  • Why do we make the distinction about FINAL goods?Final goods are in the hands of the ultimate user.Intermediate goods are inputs into the production of final goods.We only use final goods to avoid the problem of DOUBLE COUNTINGAlternatively, we can use the value added at each stage of production

  • What GDP OmitsCertain Nonmarket Goods and ServicesUnderground ActivitiesSales of Used GoodsFinancial TransactionsGovernment Transfer PaymentsLeisure

  • GDP and Well BeingGDP is useful in measuring the productive capacity of an economy.GDP is not necessarily a good measure of happiness or well being.Measurements of well being often include measures of education, access to health care, infant mortality, and life expectancy.

  • Two Ways of Measuring GDPExpenditure approachIncome approachSee pages 79-80 in your workbook.

  • The Expenditure ApproachHousehold sector: ConsumptionBusiness sector: Gross private domestic investmentGovernment sector: Government purchasesForeign sector: Net exports

  • The Income Approach gives us NATIONAL INCOMECompensation of employeesProprietor's IncomeCorporate profitsRental income Interest

  • From National Income to GDP: Making Some Adjustments- Income earned from the rest of the world+ Income earned by the rest of the world+ Indirect business taxes+ Capital consumption allowance (depreciation)+ Statistical discrepancy

  • From National Income to GDP: Making Some Adjustments

    GDP = NI + indirect business taxes + depreciation net foreign factor incomeNI = GDP - indirect business taxes - depreciation + net foreign factor income

  • Other National IncomeAccounting MeasurementsNet Domestic Product = GDP - DepreciationPersonal Income = National Income - undist. corp. profits - Social Security taxes - corp. profits taxes + transfer pmts. + net interestDisposable Income = Personal Income - Personal taxesDisposable Income = Personal Cons. + Personal Saving

  • Desirable Economic States or GoalsPrice stabilityLow unemploymentHigh and sustained economic growth

  • MACROECONOMIC MODELSBusiness CyclesBusiness cycles are 2-year to 5-year fluctuations around trends in real GDP and other related variables

  • MACROECONOMIC MODELSBusiness CyclesA recession is a large fall in the growth of real GDP and related variablesA depression is an especially large recession

  • What Is a Business Cycle?PeakContraction (Recession)TroughRecoveryExpansion

  • Exhibit 7The Phases of the Business Cycle