Lecture notes on Chapter 8- 10.1Chapter 8Recall that macroeconomics is the study of the economy as a whole.Macroeconomists try to explain economic events and to formulate polices that will improve the performance of an economyThe three most IMORTANT indicators of the performance of an economy are the growth rate of GDP (Ch. 8, 10.1), the unemployment rate (Ch. 9). Inflation rate (Ch. 9)Gross domestic product (GDP): the market value of all final goods and services produced in a country during a period of time, typically 1 year.In practice the measure of GDP is quite complicated, and we will ignore many of the technical details.The market value…In microeconomics, production of a good or service is measured by quantity (Q*)In Macroeconomics, production of all goods and services is measured by the market value…of all..GDP does not include the values of household production, or production in the underground economy.Household production refers to goods and services people produce for themselves, such as meals, cleaning, yard work, and child care.Underground Economy: Buying and selling of good and services that is concealed from the government to avoid taxes or regulations or because the goods and services are illegal…final goods and services…Final good or service: A good or service purchased by a final userIntermediate good or service: a god or service that is an input into another good or service, such as a tire on a truck.The values of intermediate goods and services are included in the prices of final goods and services, so we use only the values of final goods and services when computing GDP.…produced…(used goods are not included in GDP)GDP Includes only the values of newly- produced goods and services, not the values of used goods that are sold… in a country…GDP measures the value of the total production that occurs within the geographical boundaries of a country, regardless of the citizenship of the producers (its about WHERE the production occurs)In contrast, Gross National Product (GNP) measures the value of the total production by the citizens of a country regardless of their geographical location (so its about who does the producing)In the US, the Bureau of Economic Analysis ( BEA) measures and reports GDP every quarter (Three months).The BEA measures the value of total production during the quarter, then multiplies that value by 4, so each quarterly report provides an estimate of annual GDP.The BEA also adjusts GDP for regular seasonal changes, such as Christmas.GDP= OUTPUT= PRODUCTION=EXPENDITURES= INCOMEEvery dollar spent by a burger is a dollar of income for the seller, so GDP equals bothThe value of total expenditures on the economy’s total productions by buyers (households, firms, the government, and the rest of the world.The value of total income received by the households who supplied the factors of production that produced the economy’s total production (wages for labor, interest for the use of capital , rent for natural resources and profit for entrepreneurs)The BEA divides income (GDP or Y) into four categories of expenditures: consumption (c), investment (I), government purchases (g), net exports (NX)Y= C+I+G+NX is called the national income accounts identityConsumption: Spending by households on goods and services, not including spending on new housesInvestment: spending by firms on new factories, office buildings, machinery, and additions to inventories, plus spending by households and firms on new housesRecall, that capital is manufactured goods that are used to produce other goods and services.In economics, investment refers to the purchase of physical capital e.g., machines, computers, and tools ), which is a productive resource, not to the purchase of financial capital (e.g., cash, stocks, bonds, and bank accounts), which is not a productive resource.Household spending’s on new houses countries investment because new houses produce housing services, however, household spending on housing services counts as consumptionGovernment purchases: spending by the federal, state, and local services of government employmentGovernment purchases include spending on the labor services of government employeesTransfer payments: Payments by the government to households for which the government does not receive a new good or service in returnGovernment purchases do not include transfer payments (social security, parks, highways, unemployment insurance benefits) because they are not received in the exchange for the production of new goods or services.Recall that exports are goods and services produced domestically but sold in other countriesRecall that imports are goods and services bought domestically but produced in other countriesWhile international trade has grown significantly since the 20th century, it remains less important to the US than it is to most other countries, whose imports and exports make one quarter to more than three quarters of GDPNet export: exports minus importsDomestic households spending on imports is included in C, domestic firm spending on imports is included in I, an domestic government spending on imports is including in G, so imports are subtracted in NX to eliminate the value of foreign products from domestic GDPGDP is calculated using both quantities and prices, so changes in GDP may be due to changes in quantities, changes in prices, or changes in bothThe BEA separates quantity changes from price changes by calculating a measure of output called real GDP and a measure of the price level called the GDP deflator.Nominal GDP: the value of final goods and services evaluated at current-year prices.Real GDP: the value of final goods and services evaluated at base-year pricesReal GDP holds prices constant, so changes in real GDP must be due to changes in quantities.The percentage change in real GDP is one measure of the growth rate of an economy.The Real GDP is what is reported in the news and what I use, unless I state otherwisePrice level: a measure of the average prices of goods and services in the economy.GDP deflator: a measure of the price level, calculated by dividing nominal GDP by real GDP and multiplying by hundredThe GDP deflator holds quantities constant, so changes in the GDP deflator must be due to changes in pricesNominal and real GDP are always equal in the base year, so the GDP deflator is always 100 in the base year.Interpretation: if the GDP deflator equals 117 in the current year, then the price level is 17%