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O-K-State ECON 2203 - Principles of Macroeconomics 1
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ECON 2203 1st EditionLecture 2KeyEquationsExamplesDefinitionsImportant InformationOutlines - Microeconomics and Macroeconomics - The Measurements of GDP - The Economy’s Output, Income and Expenditure - The component of GDP- Calculate GDP from expenditure side - Real, Nominal GDP - GDP deflator, and Inflation rate - Is GDP a good measure?Gross Domestic Product (GDP) is the market of value of goods and services produced within a country in a given period of time“... Goods and services...”Tangible goods & intangible servicesFor examples: Tangible goods: foods, cars, clothing... Intangible services: Haircuts, housecleaning, and doctor visits... “... Produced...in a given period of time”Goods and services currently producedFor example: the value of the used car is not included in GDPGDP reported quarterly or annually “...Within a country...”Goods and services produced domesticallyRegardless of the nationality of the producer For Example: Your Macroeconomics teacher, Diana, is from China but contributes to U.S. GDP“...Market value...” These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Market prices measure the amount of people who are willing to pay for different goods they reflect the value of the goods“...Final...” Value of intermediate goods is already included in the prices of the final goods In this example, GDP increases $8 instead of $11“...All...”All items produced in the economy and sold legally in markets (excludes most items)• Produced and sold illicitly• Produced and consumed at homeHousing Services 1. Rental Housing – The value of rents contribute to GDP 2. Owner-occupied housing – Assume the owner is renting the house himself – The value of owner-occupied housing in GDP is estimated by its rental valueExample: James owns two houses. He rents one house to the Johnson family for $10,000 per year. He lives in the other house. If he were to rent the house in which he lives, he could earn $12,000 per year in rent. How much do the housing services provided by the two houses contribute to GDP? $10,000 – directly contributed to the GDP (rental value)$12,000 – estimated value contributes to the GDP (estimated rental value)a. $12,000b. $22,000c. $10,000d. $0 Summary for GDP definitionGross Domestic Product (GDP) is the market value of all final goods and services produced within a country in a given period of time. o Goods produced and consumed at homeo Intermediate goodso Used goodso Goods and services produced domestically by foreigners o Housing services: Rent a house vs. Own a house The Economy’s Output, Income and Expenditure Total output (GDP) = Total Income – To judge whether an economy doing well or poorly, it is natural to look at the value of the total output it creates that is total income that everyone is earning. Total Income = Total Expenditure– Because every transaction has two parties: a buyer and a seller. – The seller’s income comes from the buyer’s expenditure- Thus, every transaction contributes equally to the economy’s income and to its expenditure. For example: You buy a cup of coffee at $2.00 at StarbucksTotal Output: A cup of coffee ($2.00) Total Income: $2.00 (Starbucks) Total Expenditure: $2.00 (You) Total output (GDP) = Total income = Total expenditure The Circular-Flow Diagram Households buy goods and services from firms, and firms’ use their revenue from sales to pay wages to workers, rent to landowners, and profit to firm owners. GDP equals the total amount spent by households in the market for goods and services. It also equals the total wages, rent, and profit paid by firms in the markets for the factors of production. GDP measure both income and expenditure of a countryTwo methods to calculate GDP:– Either adds everyone’s income – Or add everyone’s expenditure Note: In Starbucks example, GDP increases $2 not $4 because only a cup of coffee is


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O-K-State ECON 2203 - Principles of Macroeconomics 1

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