ECN 222 1st Edition Lecture 8Outline of Last Lecture - Review- Changes in Equilibrium- Using Supply and Demand ModelOutline of Current Lecture - How much stuff?- Long-run Aggregate Supply- Income and Expenditure- Gross Domestic Product (GDP)- Components of GDPCurrent LectureHow much stuff? Measuring a Nations Income (Ch.10)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. Price LevelCPI Ch.11(Price of all goods in an economy)Short-run Aggregate Supply Ch.20Long-run Aggregate Supply = A f(L,K,H,N)- Long-run Aggregate Supply = A f(Labor(L), Tools(K), Skill(H), Natural Resources(N))- Aggregate Demand = consumption(C) + investment(I) + Government(G) +Net eXports(NX)Questions to think about:- What is Gross Domestic Product (GDP)?- How is GDP related to a nation’s total income and spending?- What are the components of GDP?- How is GDP corrected for inflation?Income 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:o Income equals expenditure because every dollar a buyer spends is a dollar of income for the sellerWhy do we care about GDP?- Having a large GDP(income) enables a country to afford better schools, a clearer environment, health care, etc.- Many Indicators of the quality of life are positively correlated with GDPGross Domestic Product (GDP)- Definition: is the market value of all final goods and services produced within a country in a given period of time.Explanation of Explanation- Market Value:o Goods are valued at their market prices, so: All goods measured in the same units (e.g., dollars in the US)o Things that don’t have a market value are excluded, e.g. house work you do for yourself.- Final Goodso Intended for the end userYN= Natural rate of outputOutput Y Aggregate Demando Intermediate goods: used as components or ingredients in the production of other goodso Final goods include intermediate goodso GDP only includes only Final Goods- they already embody the failure of the intermediate goods used in their production.- Goodso i.e. DVD’s, mountain bikes, beer- Serviceso i.e. dry cleaning, concerts, cellphone service- Producedo GDP includes currently produced goods, not goods produced in the past. - Within a Countryo GDP measures the value of production that occurs within a country’s borders,whether done by its own citizens or by foreigners located there.- In a given Period of Timeo Usually a year or a quarter (3 months)Components of GDP- GDPUS= Y= Consumption(peoples) + Investment(companies) + Government + Exports – Imports =Net Exports- Y = C + I + G + NX- Recall: GDP is total spending- Four Components1. Consumption (C)2. Investment (I)3. Government Imports (G)4. Net Exports (NX)- Consumption (C) o Is total spending by households on goods and serviceso Note on housing costs: Renters and Homeowners both “consume” housing services For Renters: - consumption includes rent payments For home owners:- Consumption includes the imputed rental value of the house, (“as if” renting their home) but not the purchase price or mortgage