ECON 1200 1st Edition Exam #2 Study Guide- Macroeconomics- The study of the economy as a whole (macroeconomists try to explain economic events and to formulate policies that will improve the performance of the economy)- The 3 most important indicators of the performance of an economy are the growth rate of GDP, the unemployment rate, and the inflation rate- GDP (Gross Domestic Product)—The market value of all final goods and services produced in a country during a period of time (usually 1 year) o In practice, the measurement of GDP is quite complicated and we will ignore many of the technical detailso FINAL GOODS AND SERVICES- a good or service purchased by a final serviceo INTERMEDIATE GOODS AND SERVICES- a good or service that is an input into another good or service The values of intermediate goods or services are included in the prices of final goods and series, so we use only the values of final goods and services when computing GDPo GDP does not include the values of household production or production in the underground economy HOUSEHOLD PRODUCTION- goods and services that people produce for themselves, such as meals, cleaning, yardwork, childcare, etc. UNDERGROUND ECONOMY- buying and selling of goods and services that is concealed from the government to avoid taxes or regulations or because the goods and services are illegal - GNP (Gross National Product)—measures the value of the total production by the citizens of a country, regardless of their geographical locationo About WHO does the producing- The BEA (Bureau of Economic Analysis) measures the value of the total production during the quarter, then multiplies that value by 4 so each quarterly report represents the whole year- The BEA also adjusts GDP for regular seasonal changes, such as Christmaso Economists use the terms “GDP”, “output”, “production”, “expenditures”, and “income” interchangeably- GDP= Outputs= Productions= Expenditures= Income- Every dollar spent by a buyer is a dollar of income for the seller, so GDP= both:o The value of total expenditures on the economy’s total production by buyers (households, firms, government, and the rest of the world)o 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 of Y) into 4 categories of expenditures: Consumption (C), Investment(I), Government purchases (G) and Net exports (Nx)o Y= C+I+G+Nxo CONSUMPTION—spending by households on goods and services, not including spendingon new houseso INVESTMENTS—spending by firms on new factories, office buildings, machines, and additions to inventories, plus spending by households and firms on new houseso GOVERNMENT PURCHASES—Spending by federal, state, and local governments on goods and services  Include spending on the labor services of government employees TRANSFER PAYMENTS—payments by government to households for which the government does not receive a new good or service in return They do not include transfer payments (social security, unemployment benefits)- While international trade has grown significantly since the mid-20th century, it remains less important to the US than it is to most other countires- NET EXPORTS= exports-imports- Domestic household spending on imports is included in C; domestic firm spending on imports is included in I, and domestic government spending on imports is included in G; so imports are subtracted from Nx to eliminate the value of foreign products from domestic GDP- GDP is calculated using both quantities and prices o Changes in GDP may be due to changes in quantities, changes in prices, or changes in both- The 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 deflatoro NOMINAL GDP—The value of final goods and services evaluated at current year priceso REAL GDP—The value of final goods and services evaluated at base year prices Real GDP holds prices constant so changes in GDP must be due to changes in quantityo PRICE LEVEL—A measure of the average prices of goods and services in the economyo GDP DEFLATOR—A measure of the price level calculated by dividing nominal GDP by realGDP and multiplying by 100- The GDP deflator holds quantities constant, so changes in the GDP deflator must be due to changes in prices (NO units on the deflator)- Nominal and Real GDP are always equal in the base year, so the deflator must be equal to 100- INFLATION—The percentage increase in the price level from year 1 to the next year- GDP Deflator= (Nominal GDP year X/ Real GDP year X)*100- %Change GDP Deflator= (Newer value-older value)/older value *100%- INFLATION RATE: (GDP deflator new- GDP deflator old)/ GDP deflator old *100%- ECONOMIC GROWTH—the ability of an economy to produce increasing quantities of goods and serviceso Occurs when a country’s real GDP per capita increaseso A country’s real GDP per capita equals the country’s real GDP divided by its population- Real GDP per capita is a measure of:o The annual income of the average person in the countryo The ability of the average person in the country to purchase goods/serviceso The standard of living of the country’s populationo The well bing of the country’s population- Real GDP per capita is not a perfect measure of well-being becauseo It does not include the value of leisureo It is not adjusted for pollution or other negative effects of productiono It is not adjusted for changes in crime or other social problemso It measure income but doesn’t consider income distribution- Despite these imperfections, the higher a country’s real GDP per capita, the better off the country’s people typically are because:o They can purchase more and better goods and serviceso They have access to better nutrition, health care, education, and sometimes, pollution reduction- Real GDP per capita varies significantly over time and across countries- Differences in economic growth rates cause the rankings of countries by real GDP per capitao The richest will not always stay richesto The poorest will not always stay poorest- In the long run, small differences in economic growth rates result in big differences in standards of living- Countries that tend to grow slowly