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GradeBuddy AEM 260 1ST EditionLecture 6PREVIOUS LECTUREI. The Variety Of Demand CurvesII. What Determines Price Elasticity Of DemandIII. Price Elasticity And Total RevenueIV. Price Elasticity Of SupplyV. The Variety Of Supply CurvesVI. Determinants Of Supply ElasticityVII. Other ElasticitiesCURRENT LECTUREI. Income And ExpenditureII. The Circular Flow DiagramIII. GDP Is…IV. The Components Of GDPV. ConsumptionVI. InvestmentVII. Government PurchasesVIII. Net ExportsIX. Real Vs. Nominal GDPINCOME AND EXPENDITURE- Gross Domestic Product (GDP): measures total income of everyone in the economy- GDP also measures total expenditure on the economy’s output of goods and services- For the economy as a whole, income equals expenditureo Because every dollar a buyer spends is a dollar of income for the sellerTHE CIRCULAR FLOW DIAGRAM- A simple depiction of macroeconomy - Illustrates GDP as spending revenue, factor payments ect.- Preliminaries:o Factors of productiono Goods and services- Wages, rent, profit=GDP- Income=GDP- Spending=GDP- Revenue=GDP- The diagram omits certain aspects:o The government Collects taxes and buys goods and serviceso The financial systemGradeBuddy  Matches saver’s supply of funds with borrowers demand for loanso The foreign sector Trades goods and services, financial assets ect.GDP IS…- GDP is: the market value of all final goods and services produced within a country in a given period of time o More technical definition- Goods are valued at their market price so…all goods measured in the same units (e.g. dollars in the US)- Things that do not have a market value are excluded (e.g. housework you do yourself)- Final Good: intended for the end usero Hamburger buns you buy for a party- Intermediate Good: used as component or ingredient in the production of other goodso Hamburger buns McDonald’s buys to use for their hamburgers- GDP only includes final goods-they already embody the value of the intermediate goods used in their production- GDP includes tangible goods (bikes, DVDs, beer ect.) and intangible services (concerts, cell phone service, hair cuts ect.)- GDP includes currently produced goods. Not goods produced in the pasto Selling of used cars is not included in the GDP even though it is a million dollar businesso Used or produced in past-not included- GDP measures the value of production that occurs within a country’s borders,whether done by its own citizens or foreigners located there- GDP is usually measured by years and by quarters (3 months)THE COMPONENTS OF GDP- Recall that GDP is total spending - 4 components to GDPo Consumption (C)o Investment (I)o Government Purchases (G)o Net Exports (NX)- These components add up to GDP (Y)o Y=C+I+G+NX- Most missed questions are about what categories items go into and what items are included in GDPCONSUMPTIONGradeBuddy - Total spending by households on goods and services- Note for housing costs:o For renters: consumption includes rent paymentso For house owners: includes the imputed rental value of the house, but not the purchase price or mortgage payments Most houses are used-cant use the purchase priceINVESTMENT- Total spending on goods that will be used in the future to produce more goods- Includes spending on:o Capital equipment (machines, tools, technology)o Structures (factories, office buildings)o Inventories (goods produced but not yet sold) Goods are only counted when they go into inventory. Not when they come out. When they come out they are considered consumptiono Houses (called residential fixed investment) These are brand new never been lived in, recently constructed houses (or condos) Houses are considered consumption once someone moves in When you own your own home you constantly invest in it- Investment does NOT mean the purchase of financial assets like stocks and bondso Not tangible item or serviceo Considered a dead instrument or a stream of paymentGOVERNMENT PURCHASE- All the spending n the goods and services purchased by government at the federal, state and local levels- Government purchases excludes transferable payments (social security, unemployment insurance benefits)o They are not goods or servicesNET EXPORTS- Net exports=exports-imports- Exports represent foreign spending on the economy’s goods and services- Imports are the portions of consumption, investment, and government spending that are spent on goods and services produced abroadREAL VS NOMINAL GDPGradeBuddy - Inflation can distort economic variables like GDP, so we have 2 versions of GDP- Nominal GDP: values of output using current price. It is not corrected for inflation- Real GDP: values output using the prices of a base year. Real GDP is corrected for inflationo Economists prefer realo We calculate both because prices are CONSTANTLY changing. We cannot fix prices forever because that would become misleadingo Current dollar=nominal


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