ECON 205 1st Edition Lecture 6Outline 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 tariffsOutline of Current Lecture - Using Gross Domestic Product (GDP) to measure a nation’s income- Correcting for inflation- GDP and Economic well-beingCurrent LectureIncome 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 spentCircular-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 paymentsto the factors of production(i.e. wages)- Households…o Own factors of production Sell/rent to firms forincome (throughinvestments)o Buy and consume goods- Firms…o Buy resourceso Sell products- Diagram omits…o The government, which collects taxes and buys goods & serviceso Financial system, like household savings Diagram assumes that all money made is money spento International Sector No international trade is represented- Even if you ass the government, international sector, and the financial system, the basicsof the diagram would still be the sameGDP- Definition of GDP: market value of all final goods and services produced within a countryin 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 usero 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 serviceso Investment (I)- total spending on goods that’ll be used in the future to produce more goods Capital equipment, structures, and inventorieso 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 serviceso C + I + G + NX = Y (GDP)Real vs. Nominal Goods- Inflation- the change (increase) in overall price levelo Can distort economic variables like GDP- Nominal GDP- values output using current priceso Not corrected for inflation- Real GDP- values output using the prices of a base yearo Is corrected for inflation- When you measure economic growth, should use real GDP- GDP deflator is a measure of the overall level of priceso GDP deflator = 100 x (nominal GDP)/(real GDP)o Helps measure inflation rateGDP 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 environmento Leisure timeo 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