UB ECO 182DIS - chapter 8 econ (14 pages)

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chapter 8 econ



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chapter 8 econ

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Pages:
14
School:
University at Buffalo-SUNY
Course:
Eco 182dis - Intro To Microeconomics
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Chapter 4 8 Measuring the Economy s Performance Level of GDP measures the level of economic activity GDP per capita GDP population measures standard of living measures Economic Growth The Circular Flow Diagram a visual model of the economy Economy is the mechanism that distributes the scarce resources and goods services The main way in which resources are distributed in the U S are through markets assume no government initially Two types of actors 1 Households own and sell resources Buy 2 business sell Buy Two markets 1 Resource market 2 Business Households Resource Market Since every dollar a buyer spends is a dollar of income for the seller this implies that Total spending income earned By households on households Goods and Services Total by The value of the goods produced is called GDP Thus GDP measures both 1 Spending on goods and Services 2 Income earned producing goods and services Gross Domestic Product GDP is the market 1 value of all final 2 goods and services produced 3 domestically 4 in a given period quarterly or annually 1 Goods are valued at their market prices so that all goods are measured in the same units Problem is that things that don t have a market value are excluded non market activities from GDP This includes 1 Goods and services that are produced at home and mowing lawn home child care 2 Goods and services that are sold in the black market unreported activity 2 Final goods intended for the final user Intermediate goods used as ingredients in the production of other goods GDP only includes final goods they already embody the value of the intermediate goods used in their production counting intermediate goods results in double counting Example flour bought by bakery not included in GDP Flour bought by household should be included 3 Produced only includes newly produced goods Excludes old goods 4 Domestically Within a Country regarless of who produces the good Excludes imported goods even if produced by a domestic a American company producer Important questions to ask are 1 Does this activity generate new economic activity in the domestic economy 2 Has it already been counted 3 Can it be measured In Class Example Say whether or not the following transactions would be counted in 2010 GDP 1 2 3 4 5 6 7 McDonalds buys buns for it s Big Macs Excluded intermediate You hire a maid to clean your house yes You mow your own lawn no home production You buy a new BMW that was built in Ohio Yes You buy an IBM computer that was made in China no You buy a 2006 Subaru Tribeca for 20 000 No used You buy stock issued by Google No no goods or services exchanged savings or investments not counted in GDP Summary Goods Excluded From GDP 1 Intermediate 2 Used goods 3 Imported goods 4 Financial transactions 5 Non market activities GDP as a measure of Economic wellbeing Higher GDP means higher income earned and higher spending on G S This may imply that an economy has more money to spend on education health care infrastructure GDP is usually positive related with other measure of Quality of life such as life expectancy GDP is an imperfect measure of wellbeing Limitations It ignores things like 1 The quality of the environment negative 2 distribution of Income Thus GDP may overstate well being 3 leisure time has increased but not considered in GDP 4 household production But GDP may also understate well being Many countries are looking for a better measure of Society s well being that incorporates many measures of well being GNH Gross National Happiness value is proposed to be an index function of the total average per capita of the following measures 1 Economic Wellness 2 Environmental Wellness 3 Physical Wellness 4 Mental Wellness 5 Workplace Wellness 6 Social Wellness 7 Political GDP marked value of all final goods and Wellness services produced domestically How is GDP measured GDP measures both income earned by producing the goods and spending on the goods services Method I Expenditure Method of Computing GDP GDP is measured by adding up all of the spending by all the different sectors of the economy Four Sectors spending 1 Households Consumption C 2 Businesses Investment I 3 Government Government G 4 International sector Net Exports Exports Inports These spending levels all add up to GDP denoted Y Y C I G NX Consumption C Spending by households on goods and services 1 Durable goods 1 years 2 Non Rent and estimated value of living in own durable foods 3 Services home Exception purchases of new homes INVESTMENT SPENDING Investment I Additions to Done mostly by firms productive Capacity 1 Capital Expenditures Cap Ex A Fixed structures B Non fixed equip software and vehicles 2 Residential structures 3 Change in inventory Inventory are goods produce but not yet sold Change in inventories can be positive or negative If inventories are increasing then they will be Positive If inventories are being used up then they should be Negative If positive add to GDP If negative don t want to count in GDP already counted Government Purchases G Spending on the goods and services provided by the government at the federal state and local level such as spending on roads bridged education etc This will exclude spending by the government on transfer payments such as social security unemployment food stamp and etc because no good or service is received in return Net Exports NX Exports imports where exports represent goods produced domestically but and imports are the portions of C I and G that are spent on Goods and Services produced abroad Adding up all the components of GDP gives GDP Y C I G NX The largest component of GDP has always been consumption The most volatile component of GDP is Investment spending and has recently made up a smaller part of GDP A C up by 200 and GDP up by 200 Method II Measuring GDP using the Income Approach GDP is measured by adding up all of the Income earned by the different resources Mostly Four Resources Income 1 Labor Wages 2 Land Rent 3 Capital Interest 4 Entrepreneurship Profits Gross Domestic Income GDI Wages rent interest Profits A few adjustments need to be made to get to GDP called Non Income Expenses 1 Depreciation Money spent to replace old capital 2 Indirect Business Taxes Money included in the market price of a good but not received as income Since this money goes to replace old equip and to the govt it would not be counted as income so must be added to GDI to get GDP Income method GDP Wages rent interest profit Non income expense indirect business taxes


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