Chapter 23 astronomy concept and exercise.pptx

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1. Chapter 23: measuring a nation’s income

2. Income  and  Expenditure Measuring  GDP The  Components  of  GDP Real  and  Nominal  GDP GDP  and  Economic  Well-­‐Being Outline

3. Income  and  Expenditure GDP  measures  two  things  at  once: The  total  income  of  everyone  in  the  economy. The  total  expenditure on  the  economy’s  output  of  goods  and  services. Because  for  the  economy  as  a  whole,  income  must  equal   expenditure. “For  every  buyer  there   must  be  a  seller.”

4. Income  and  Expenditure The  circular  flow  diagram  (Figure  1)  illustrates  this: In  markets  for  factors  of  production  (inputs): Households  sell  or  rent  labor,  land,  and  capital.  Their  income  equals  GDP. Firms  buy  or  hire  labor,  land,  and  capital.  Their  wages,  rent,  and  profit  equal GDP. In  markets  for  goods  and  services  (outputs): Firms  sell  goods  and  services.  Their  revenue equals  GDP. Households  buy  goods  and  services.  Their  expenditure equals  GDP. This  diagram ignores  the  financial  sector,  the  government,  and  the  foreign  sector.    

5. GDP GDP  is  the  market  value  of  all  final  goods and  services  produced  within  a  country   in  a  given  period  of time.

6. 1. GDP  is  the  market  value  … GDP  measures  all  goods  in  terms  of  their  market  value,  in  the  common  unit  of  dollars. “You  can’t  compare  apples  and  oranges.”    If  an  apple  costs  twice  as  much  as  an  orange,  then  it   contributes  twice  as  much  to  GDP. Non-­‐market  activities  like  leisure,  housework,  and  child  care  don’t  contribute  to  GDP. 2. …  of  all  … That  last  caveat  notwithstanding,  GDP  tries  to  be  comprehensive. 3. …  final  … International  Paper  makes  paper,  which  is  used  by  Hallmark  to  make  a  greeting  card. In  this  example,  paper  is  an  intermediate  good,  since  it  is  used  as  an  input  for  producing  yet  another   good. The  greeting  card  is  a  final good,  since  it  is  sold  to  and  used  by  and  end  user. Since  the  value  of  the  final  good  reflects  the  value  of  the  intermediate  good,  only  the  value  of  the  final   good  is  included  in  GDP  to  avoid  double  counting. 4. …  goods  and  services  … Goods  include  cars,  food,  clothing,  etc. Services  include  haircuts,  medical  care,  etc. 5. …  produced  … GDP  only  includes  newly  produced  goods. Buy  a  new  car: that  contributes  to  GDP.  Buy  a  used  car: that  does  not  contribute  to  GDP. 6. …  within  a  country  … US  GDP  counts  all  goods  and  services  produced  in  the  US. A  Canadian  works  in  the  US;  her  income  counts  in  US  GDP. A  US  citizen  works  in  Canada;  his  income  does  not  count  in  US  GDP 7. …  in  a  given  period  of  time … Usually  within  a  quarter  (3  months)  or  a  year.

7. The components of gdp Y = GDP C = Consumption I = Investment G = Government Purchases NX = Net Export (X-M)

8. consumption Consumption is spending by households on goods and services, with the exception of purchases of new housing. Consumption  is  spending  by  households  on: Durable  goods  (cars,  appliances). Nondurable  goods  (food). Services  (haircuts).

9. investment Investment is the purchase of goods (called capital goods ) that will be used in the future to produce more goods and services. Investment is the sum of purchases of business capital, residential capital, and inventories. Investment  is  spending  by  firms  on  goods  that  will  be  used  in  the  future  to  produce  more  goods  and   services: Capital  equipment  (machines  and  tools). Structures  (factories,  office  buildings). Inventories  (goods  produced  but  not  yet  sold). By  convention,  the  purchase  of  a  newly  built  house  is  a  form  of  spending  by  households that  is  also   included  in  investment.

10. Government purchases Government purchases measure spending on goods and services by local, state, and federal governments Government  spending  includes: Purchases  of  goods  and  services  by  federal,  state,  and  local  governments. Salaries  of  government  workers. Other  forms  of  government  disbursements,  like  social  security  payments,  are  called  transfer  payments and  are  not  counted  in  GDP.

11. Net exports Net exports equal the foreign purchases of domestically produced goods (exports) minus the domestic purchases of foreign goods (imports). Net  exports  equal: Exports:  purchases  of  domestically  (US)  produced  goods  by  foreigners. Minus  imports:  purchases  of  foreign  goods  by  US  households  and  firms.

12. 1. c 2. d

13. 3. b 4. c 5. b

14. 6. d 7. c 8. a

15. Real vs nominal GDP GDP = Quantity * Price [Current Price (Nominal GDP)] or [Base-year Price (Real GDP)] As we have seen, GDP measures the total spending on goods and services in all markets in the economy. If total spending rises from one year to the next, at least one of two things must be true: (1) the economy is producing a larger output of goods and services, or, (2) goods and services are being sold at higher prices. When studying changes in the economy over time, economists want to separate these two effects. In particular, they want a measure of the total quantity of goods and services the economy is producing independent of changes in the prices of those goods and services.

16. To sum up: Nominal GDP uses current prices to value the economy’s price change of goods and services . Real GDP uses constant base-year prices to value the economy’s production of goods and services . Because price changes do not affect real GDP , changes in real GDP reflect only changes in the quantities produced. Thus, real GDP measures the economy’s production of goods and services .

17. Gdp deflator a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100

18. What  happens  when – The  quantities  of  all  goods  and  services  produced  rise,  but  prices  stay  the  same. Real  GDP  rises. Nominal  GDP  rises  by  the  same  amount. The  GDP  deflator  stays  unchanged. -­‐ The  prices  of  all  goods  and  services  rise,  but  quantities  produced  stay  the  same. Real  GDP says  unchanged. Nominal  GDP  rises. The  GDP  deflator  rises. The  percentage  increase  in  the  GDP  deflator  from  one  period  to  the   next defines  the   rate  of  inflation .

19. 9. a 10. b

20. Is gdp a good measure of economic well being

21. Is gdp a good measure of economic well being GDP  measures  the  level  of  income  and  expenditure  in  the  economy. Since  most  people  would  prefer  more  income  and  expenditure  to  less,  GDP  per  person  can  serve  as  a   measure  of  economic  well-­‐being. But  let’s  remember  that  GDP  is  a  measure  based  on market  value and  therefore  does  not  include: Leisure. Childcare  from  a  parent. Volunteer  work. Environmental  quality. Equity  in  the  distribution  of  income  and  expenditure.

22. 11. c 12. c

23. Is gdp a good measure of economic well being Microeconomics: The study of how households and firms make decisions and how they interact in markets. Macroeconomics: The study of economywide phenomena, including inflation, unemployment, and economic growth. Gross Domestic Product (GDP): The market value of all final goods and services produced within a country in a given period of time. Consumption: Spending by households on goods and services, with the exception of purchases of new housing. Investment: Spending on business capital, residential capital, and inventories. Government Purchases: Spending on goods and services by local, state, and federal governments. Net Exports: Spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports). Nominal GDP: The production of goods and services valued at current prices. Real GDP: The production of goods and services valued at constant prices. GDP Deflator: A measure of the price level calculated as the ratio of nominal GDP to real GDP times 100