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GSU ECON 2105 - Ch 6 INTRO Handout

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9 2 14 Chapter 6 Introduction to Macroeconomics and Gross Domestic Product This chapter provides an introduction to one of the key measures of a nation s economic activity Course Overview Part 1 Measuring Economic Activity Chapters 6 7 8 What are the statistics we use to measure economic activity GDP Unemployment Price Level Inflation How are they measured What do they tell us What do they miss Part 2 Modeling Economic Activity in the Long Run and the Short Run Chapters 11 and 13 What are the factors that affect the level of economic activity What determines the long run productive capacity of the economy growth What causes short run fluctuations in economic activity recessions and expansions 1 9 2 14 Part 3 Using Policy to Affect the Level of Economic Activity Chapters 15 16 17 18 The goal of policy is to have a stable level of economic activity Not too fast and not too slow We want to smooth out the business cycle What is fiscal policy and how does it affect the economy What is monetary policy and how does it affect the economy Chapter Overview How is macroeconomics different than microeconomics What does GDP tell us about the economy How is GDP computed What are some shortcomings of GDP data Intro to Macro and GDP Microeconomics Studies individual units that comprise the economy households firms a single industry A single household s decisions how many hours to work how to spend one s income etc A single firm s decisions who much to produce what price to charge A single product or industry what is the price and quantity sold for the product 2 9 2 14 Macroeconomics The study of economy wide issues It studies economic aggregates adding up and combining across goods markets industries Total output not just production by one firm or industry Total employment across the economy not just at one firm Total prices usually expressed as a type of average across many goods in the economy not just one product Gross Domestic Product GDP Aggregate total gross amount of everything produced in an economy This gives us a number we can use to measure and analyze economic growth It allows us to compare an economy s production over time It allows us to compare production in regions or countries It is not a perfect measure some qualities of life are not easily captured by numbers Production Equals Income Output and income are essentially the same Nations that produce a large amount of highvalue output are relatively wealthy Nations that don t produce much high value output are relatively poor Idea the output you produce is sold and you receive income from what you sell A dollar spent is a dollar earned by someone else 3 9 2 14 Defining GDP Gross Domestic Product is the market value of all final goods and services produced in a nation within a specific period of time Typically the time period is one year Serves as a barometer for the economy Sum of output from all economic activity output becomes income Output GDP Income Three Uses of GDP Data GDP statistics can be used and abused The three main uses for GDP data are 1 Estimate living standards across time and nations 2 Measure economic growth 3 Measure business cycles short run ups and downs in economic activity Measuring Living Standards Total GDP may not be the best standard to compare countries or even a single country over time It does not adjust for population size of a country A better measure is per capita GDP Per Capita GDP GDP per person GDP Population Average living standards in a nation 4 9 2 14 How GDP of each state compares to other countries Measuring Economic Growth We use GDP to measure changes in living standards over time The best measure of this is the growth rate percentage change in real per capita GDP over time Real GDP takes out the effects of inflation It adjusts GDP to account for changes in prices over time Measuring Business Cycles Business Cycle Short run fluctuations in economic activity Business cycles cause output to be above or below the long run trend Parts of a business cycle Expansion Peak Contraction Trough 5 9 2 14 Measuring GDP GDP is the market value of production It is an aggregate measure it combines production of many very different goods How do we add up apples computers and airplanes GDP includes both goods and services Goods tangible food clothing cars etc Services intangible health care entertainment travel banking Services is a larger share than it used to be Quantity x Price Oranges 180 x 0 90 Bikes 20 x 85 Market Value GDP includes only final goods and services Final goods goods sold to the final user or consumer Intermediate goods are not included in GDP Intermediate goods goods that firms repackage or bundle with other goods to be sold at a later stage Intermediate goods are excluded to avoid double counting them What determines if a good is final is how it is used and not the good itself 6 9 2 14 Intermediate Steps in Producing a Gallon of Gasoline Steps Value added during step Prices of completed steps 1 Oil drilling 2 Refining 3 Shipping 4 Retail Sale 3 00 3 30 3 60 4 00 Sum total GDP Measures Production We only count goods that are produced within a year A good is included whether or not it was sold We do not include goods sold in a year unless they were produced that year so we don t count it twice Examples We don t include the sale of used goods We don t include the sale of stocks and bonds or other financial transactions however any fees for service that are charged are included in GDP Computing GDP Based on Expenditures The Bureau of Economic Analysis BEA collects data and computes GDP This is referred to as National Income Accounting GDP C I G NX Consumption C Investment I Government Purchases G Net Exports NX 7 9 2 14 The Pieces of GDP in 2010 Billions of Dollars Consumption C Durable Goods Nondurable Goods Services Investment I Business Fixed Investment Residential Construction Change in Business Inventories 1 728 2 338 1 66 9 Government Purchases G Federal State and Local 1 222 8 1 780 0 Net Exports NX Exports Imports 1 839 8 2 356 7 Total GDP 10 245 5 71 1 795 1 12 3 002 8 21 516 9 4 14 526 5 100 1 085 5 2 301 5 6 858 5 Consumption C Final purchase of goods and services by households with the exception of new housing Durable Goods Consumed over a long period of time cars appliances etc Subject to cyclical fluctuations Nondurable Goods Consumed over a short period of time food magazines etc Not as affected by the business cycle Investment Private spending on tools factories and


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