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UIUC ECON 303 - chap02

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Slide 1IN THIS CHAPTER, YOU WILL LEARN:Gross Domestic Product: Expenditure and IncomeThe Circular FlowValue addedNOW YOU TRY Identifying value addedFinal goods, value added, and GDPThe expenditure components of GDPConsumption (C)U.S. consumption, 2011Investment (I)U.S. Investment, 2011Investment vs. CapitalStocks vs. FlowsStocks vs. Flows - examplesNOW YOU TRY Stock or Flow?Government spending (G)U.S. Government Spending, 2011Net exports (NX)U.S. Net Exports, 2011NOW YOU TRY An expenditure-output puzzle?Why output = expenditureGDP: An important and versatile conceptGNP vs. GDPNOW YOU TRY Discussion QuestionGNP vs. GDP in select countries, 2010Real vs. nominal GDPNOW YOU TRY Real and Nominal GDPNOW YOU TRY AnswersReal GDP controls for inflationU.S. Nominal and Real GDP, 1960-2012GDP DeflatorNOW YOU TRY GDP deflator and inflation rateNOW YOU TRY AnswersTwo arithmetic tricks for working with percentage changesTwo arithmetic tricks for working with percentage changesChain-Weighted Real GDPConsumer Price Index (CPI)How the BLS constructs the CPINOW YOU TRY Compute the CPINOW YOU TRY AnswersThe composition of the CPI’s “basket”Why the CPI may overstate inflationThe size of the CPI’s biasCPI vs. GDP DeflatorTwo measures of inflation in the U.S.Categories of the populationTwo important labor force conceptsNOW YOU TRY Computing labor statisticsNOW YOU TRY AnswersThe establishment surveyTwo measures of employment growthCHAPTER SUMMARYCHAPTER SUMMARYThe Data of MacroeconomicsChapter 22CHAPTER 2 The Data of MacroeconomicsIN THIS CHAPTER, YOU WILL LEARN:…the meaning and measurement of the most important macroeconomic statistics:gross domestic product (GDP)the consumer price index (CPI)the unemployment rate23CHAPTER 2 The Data of MacroeconomicsGross Domestic Product: Expenditure and IncomeTwo definitions:Total expenditure on domestically-produced final goods and services.Total income earned by domestically-located factors of production. Expenditure equals income because every dollar a buyer spendsbecomes income to the seller. Expenditure equals income because every dollar a buyer spendsbecomes income to the seller.4CHAPTER 2 The Data of MacroeconomicsThe Circular FlowHouseholdsFirmsGoodsLaborExpenditure ($)Income ($)5CHAPTER 2 The Data of MacroeconomicsValue addedValue added: The value of output minus the value of the intermediate goods used to produce that output6CHAPTER 2 The Data of MacroeconomicsNOW YOU TRYIdentifying value addedA farmer grows a bushel of wheat and sells it to a miller for $1.00. The miller turns the wheat into flour and sells it to a baker for $3.00. The baker uses the flour to make a loaf of bread and sells it to an engineer for $6.00. The engineer eats the bread. Compute value added at each stage of production and GDP67CHAPTER 2 The Data of MacroeconomicsFinal goods, value added, and GDPGDP = value of final goods produced = sum of value added at all stages of production.The value of the final goods already includes the value of the intermediate goods, so including intermediate and final goods in GDP would be double counting.8CHAPTER 2 The Data of MacroeconomicsThe expenditure components of GDPconsumption, Cinvestment, Igovernment spending, Gnet exports, NXAn important identity:Y = C + I + G + NXaggregate expenditurevalue of total output9CHAPTER 2 The Data of MacroeconomicsConsumption (C)durable goods last a long time e.g., cars, home appliancesnondurable goodslast a short time e.g., food, clothingservicesintangible items purchased by consumers e.g., dry cleaning, air traveldefinition: The value of all goods and services bought by households. Includes:10CHAPTER 2 The Data of MacroeconomicsU.S. consumption, 201146.916.57.771.17,0792,4841,16310,726 Services Nondurables DurablesConsumption% of GDP$ billions11CHAPTER 2 The Data of MacroeconomicsInvestment (I)Spending on capital, a physical asset used in future production Includes:Business fixed investmentSpending on plant and equipmentResidential fixed investmentSpending by consumers and landlords on housing units Inventory investmentThe change in the value of all firms’ inventories12CHAPTER 2 The Data of MacroeconomicsU.S. Investment, 2011 0.32.210.212.7463381,5321,916 Inventory Residential Business fixed Investment% of GDP$ billions13CHAPTER 2 The Data of MacroeconomicsInvestment vs. CapitalNote: Investment is spending on new capital.Example (assumes no depreciation): 1/1/2012: Economy has $10 trillion worth of capitalduring 2012:Investment = $2 trillion1/1/2013: Economy will have $12 trillion worth of capital14CHAPTER 2 The Data of MacroeconomicsStocks vs. FlowsA flow is a quantity measured per unit of time. E.g., “U.S. investment was $2 trillion during 2012.”FlowStockA stock is a quantity measured at a point in time. E.g., “The U.S. capital stock was $10 trillion on January 1, 2012.”15CHAPTER 2 The Data of MacroeconomicsStocks vs. Flows - examplesthe govt budget deficitthe govt debt# of new college graduates this year# of people with college degreesa person’s annual savinga person’s wealthflowstock16CHAPTER 2 The Data of MacroeconomicsNOW YOU TRYStock or Flow?the balance on your credit card statementhow much you study economics outside of classthe size of your compact disc or MP3 collectionthe inflation ratethe unemployment rate1617CHAPTER 2 The Data of MacroeconomicsGovernment spending (G)G includes all government spending on goods and services.G excludes transfer payments (e.g., unemployment insurance payments), because they do not represent spending on goods and services.18CHAPTER 2 The Data of MacroeconomicsU.S. Government Spending, 2011- Federal20.13,031Govt spending- State & localDefense8.211.95.52.71,2331,798825408Non-defense% of GDP$ billions19CHAPTER 2 The Data of MacroeconomicsNet exports (NX)NX = exports – importsexports: the value of g&s sold to other countriesimports: the value of g&s purchased from other countriesHence, NX equals net spending from abroad on our g&s20CHAPTER 2 The Data of MacroeconomicsU.S. Net Exports, 2011$ billions % of GDPNet exports of g & s –579 –3.8 Exports 2,086 13.8 Goods 1,473 9.8 Services 612 4.1 Imports 2,664 17.7 Goods 2,238 14.8 Services 426 2.821CHAPTER 2 The Data of MacroeconomicsNOW YOU TRYAn expenditure-output puzzle?Suppose a firm: produces $10 million


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