ECON 205 1st Edition Lecture 6 Outline of Last Lecture What determines how much of a good is exported or imported Who gains and losses from trade What is the effect of tariffs Outline of Current Lecture Using Gross Domestic Product GDP to measure a nation s income Correcting for inflation GDP and Economic well being Current Lecture Income and Expenditure GDP is the total income of everyone in the economy GDP is also the total expenditure on the economy s output of goods and services According to GDP income is equivalent to money spent Circular Flow Diagram Simple depiction of macroeconomics Illustrates GDP as spending revenue factor payments and income Preliminaries o Factors of production i e resources o Factor payments are payments to the factors of production i e wages Households o Own factors of production Sell rent to firms for income through investments o Buy and consume goods Firms o Buy resources o Sell products Diagram omits o The government which collects taxes and buys goods services GDP o Financial system like household savings Diagram assumes that all money made is money spent o International Sector No international trade is represented Even if you ass the government international sector and the financial system the basics of the diagram would still be the same Definition of GDP market value of all final goods and services produced within a country in a given period of time Goods are all measured in the same units Goods and services without price are not included i e housework Includes production by immigrants living in the US GNP gross national product measures income of all citizens of a nation regardless of where they reside abroad Goods and services measured are intended for the end user o So you don t include a good twice i e producer sells screws to make a playground Count those screws as a part of the playground rather than individually Includes tangible goods and intangible services Includes only currently produced goods not goods from previous years Measured over a year and also typically over quarters 3 months 4 components will be on midterm and or final o Consumption C total spending by households on goods and services o Investment I total spending on goods that ll be used in the future to produce more goods Capital equipment structures and inventories o Government Purchases G all government spending on goods and services Excludes transfer payments like social security o Net Exports NX exports minus imports Exports represent foreign spending on economy s goods and services Imports represented by C I and G This is to avoid double counting those goods and services o C I G NX Y GDP Real vs Nominal Goods Inflation the change increase in overall price level o Can distort economic variables like GDP Nominal GDP values output using current prices o Not corrected for inflation Real GDP values output using the prices of a base year o Is corrected for inflation When you measure economic growth should use real GDP GDP deflator is a measure of the overall level of prices o GDP deflator 100 x nominal GDP real GDP o Helps measure inflation rate GDP and Economic Well being Real GDP per capita is the main indicator of the average person s standard of living GDP is not a perfect measure of well being GDP does not value o Quality of environment o Leisure time o Non market activity such as the child care a parent provides Having a large GDP enables a country to afford higher standards of living and better policies for its citizens GDP is the main measure of a nation s economic well being although it surely is not perfect