Macroeconomics – Unit 2

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Next week we’ll have a quiz on growth based on ....

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reading assignment, lecture notes

and homework.

game, classwork activities,

Under traditional free market theory, the government has a _________ role in the economy.

(1) enforce ____________

(2) provide for _________ property rights

(3) provide ________ goods

limited

contracts

private

public

Basically, economists believed in the self-correcting nature of the market. But then on October 29, ______ we had the ....

Great Crash followed by a decade known as the Great ____________ which convinced many that we need to monitor the economy and prevent big downturns.

1929

Depression

The primary goals of a country’s macroeconomics policy makers

2. maximize employment

i.e., low unemployment

1. maximize economic growth

3. maintain stable price level

i.e., low inflation

First we’ll examine ….

maximize economic growth

To examine growth, there are several possible factors we could measure:

(a) income approach – looking at all households’, firms’ & government incomes

(con’t)

possible factors we could measure:

(b) expenditure approach – gov’t adds up all the money spent on buying this year’s output

(c) output – gov’t determines value added…the money spent on making goods (inputs) is deducted from money received from sale of goods (output).

Most countries have settled on the expenditure method where gov’t adds up all the money spent on buying this year’s output.

Primary measure:

Real GDP –

real gross domestic product

the total market value of all final goods and services produced in an economy in a one-year period

GNP – gross national product

Since 1992 we’ve used -- GDP – gross domestic product

the total market value of all final goods and services produced in an economy in a one-year period; a geographic measure

another possible measure…

aggregate final output of citizens and businesses of an economy in a one-year period; a citizenship measure

GNP GDP

(2) Donald Trump opens a new casino in Monaco near southern France

(1) a U.S. college student works in an Italian hotel for the summer

(3) Nandini, an Indian citizen, works at MicroChip in Chandler on a 2-year contract

(2) A Subway franchise on the ASU campus pulled in $300,000.

Would the value of this output be included in ….

both

GNP

both

GDP

GNP

So how shall we measure GDP?

We could use the income approach where we look at all the income coming into households, firms & government.

Or...we could use the expenditure approach where we add up all the money spent on buying this year’s output

Households

$ Firms

$ $$

$

$$

$$

$

G&SG&S

G&S

G&S

$$$$

$

$$ $ $ $

Land, Labor, Capital, Entrepreneurship

resources

resources

resources

resources

GOV.

What is represented here?

households sending resources to business

What is represented here?

businesses sending payments to households

What is represented here?

households paying for goods & services

What is represented here?

businesses sending goods & services to households

here?transfer payments

here?taxes

here?taxes

here?subsidies

Households

$ Firms

$ $$

$

$$

$$

$

G&SG&S

G&S

G&S

$$$$

$

$$ $ $ $

Land, Labor, Capital, Entrepreneurship

resources

resources

resources

resources

GOV. TaxesTransferpayments

Taxes Subsidies

Which side illustrates the expenditure approach and which the income?

expenditure approachincome approach

and these two approaches will yield equal results

consumption – payments by households for goods and services.

government purchases – payments for goods and services and investment in equipment and structures

investment – household spending on owner-occupied housing and business spending on equipment, structures, and inventories

real GDP = C GI (X-M)+ + +

C

I

G

expenditure approach

Exports bring money into our economy, but imports send money out so are excluded from GDP

real GDP = C GI (X-M)+ + +

(X-M)

expenditure approach

real GDP = C GI (X-M)+ + +

= 69%

19%16%

-4%+ + +

income approach

NI =

Emp Comp InterestRents Profits+ + +

The income approach adds up payments from firms to households also called _____________ payments.

National Income = total income earned by citizens and businesses of a country.

factor

income approach

NI =

Emp Comp InterestRents Profits+ + +

Employee Compensation – wages and salaries + benefits + gov’t taxes for Soc Sec & unemployment insurance

Rents – income from property received by households

income approach

NI =

Emp Comp InterestRents Profits+ + +

interest – income private businesses pay to households that have lent businesses money, usually through purchasing bonds

profits – amount left over after compensation, rents, and interest have been paid out

You should memorize the formula for NI, but not many details. The more common approach is the real GDP or ______________ approach.

expenditure

real GDP = C GI (X-M)+ + +

the total market value of all final goods and services produced in an economy in a one-year period

note…. “total market value”

so services or goods that never reach the market are excluded; Ryan cuts his own grass

expenditure approach

real GDP = C GI (X-M)+ + +

the total market value of all final goods and services produced in an economy in a one-year period

note…. “final goods and services”

so intermediate goods are excluded; goods that are used in the production of other goods; must exclude to avoid double counting

real GDP = C GI (X-M)+ + +

the total market value of all final goods and services produced in an economy in a one-year period

note…. “final goods and services”

so transfer payments are excluded, i.e. food stamps given to a family excluded

so purchase of stock or bond is excluded; a financial transaction does not involve the production of a good or service

real GDP = C GI (X-M)+ + +

the total market value of all final goods and services produced in an economy in a one-year period

note…. “in a one-year period”

so used goods are excluded; they must be produced within that year

AP Workbook, Act. 12 p. 71-73 with partner

20 min

the end