Chapter 4(8) – Measuring the Economy’s Performance________________________measures the level of economic activity.__________________________measures standard of living__________________________ measures Economic GrowthThe Circular-Flow Diagram : a visual model of the _____________. Economy is the mechanism that _______________ the _______________.The main way in which resources are distributed in the U.S. are through ________________. (assume no government initially) Two types of “actors”: 1.______________ own and sell __________ Buy ________________2._______________ sell ______________ Buy_____________ Two markets:1.2.Since every dollar a buyer spends is a dollar of ________ for the seller this implies that: Total __________ Total ________ earnedby households on by households Goods and Services The value of the goods produced is called _________, Thus GDP measures both1. 2.Gross Domestic Product (GDP)is the ____________(1) value of all _________(2) goods and services ___________(3), _______________(4) in a given period (quarterly or annually)1) Goods are valued at their ___________ prices, so that all goods are measured in the ___________ units.Problem is that things that don’t have a market value are ______________ from GDP. This includes: 1. Goods and services that are produced ______________ and2.Goods and services that are sold __________________.2 - Final goods: intended for the _______ user Intermediate goods: used as ___________in the production of other goods GDP only includes __________goods – they already embody the value of the ___________used in their production. (counting intermediate goods results in ______________)Example: 3 – Produced – only includes_____ goods.Excludes ______ goods.4 – Domestically ( Within a Country)- regarless of who _______________Excludes ___________________ even if produced by _______________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. McDonalds buys buns for it’s Big Macs.2. You hire a maid to clean your house3. You mow your own lawn.4. You buy a new BMW that was built in Ohio.5. You buy an IBM computer that was made in China.6. You buy a 2006 Subaru Tribeca for $20,000.7. You buy stock issued by Google.Summary: Goods Excluded From GDP1. 2.3. 4.5.GDP as a measure of Economic well-being.Higher GDP means higher ________________- and higher ________________. This may imply that an economy has moremoney to spend on _______________________.GDP is usually _________ related with other measure of Quality of life.. such as ______________GDP is an imperfect measure of well-being…Limitations : It ignores things like: 1. The quality of the ___________. 2. _____________ of IncomeThus GDP may _____________ well-being3. ___________ time.4. ___________ production. But GDP may also _____________ well-beingMany 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 Wellness:How is GDP measured?GDP measures both: ____________ and _____________.Method I. Expenditure Method ofComputing GDPGDP is measured by adding up all of the ________ by all ___________ of the economy.Four Sectors spending1.2.3.4.These spending levels all add up to GDP (denoted Y)Y= Consumption, C – Spending by households on goods and services:1._____________, 2._______________ 3_______________Exception : purchases of ________________.Investment – I – Additions to _________Capacity1. Capital Expendituresa. b.2.3. (Inventory are goods produce but not _____)Change in inventories can be positive or negative. If inventories are increasing then they will be ________.If inventories are being used up then they should be _______.Government Purchases(G) – Spending on the goods and services provided by the government at the _____________________ level such as spending on _________________________.This will exclude spending by the government on ____________ such as ______________ because_____________________.Net Exports (NX) = ____________________ where exports represent goods produced ______________________ and imports are the portions of C, I, and G that are spent on Goods and Services__________________. Adding up all the components of GDP givesGDP = Y = The largest component of GDP has always been ____________. The most volatile component of GDP is _______________ and has recently made up a __________ part of GDP.Method II.Measuring GDP using the IncomeApproachGDP is measured by adding up all of the Income earned by the different ________ . (mostly)Four Resources Income1. 2. 3.4.Gross Domestic Income (GDI)= 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 _________ of a good but not received as _______.Since this money goes to _________________ and to the ____________________, it would not be counted as income so must be added to GDI to get GDP.Nominal vs. Real valuesNominal Values - Measurements in terms of the ____________ at which goods are sold; expressed in ________ dollars, also called money values Nominal GDP = Real Values - Measurements _________________have been made for changes in the average of _______ between years; expressed in _______ dollars(Done by using prices from a __________ which is chosen arbitrarily.Real GDP = Price Index- GDP Deflator = Nominal GDP/Real GDP * 100In class Example (use 2013 as the base year)Q Gas P gas Q pizza Ppizza Q soda Psoda2013 1000 3.75 10000 2.00 5000 1.502014 1200 2.75 1100 2.50 4900 2.00 Nominal GDP2013 Nominal GDP 2014Real GDP 2013 Real GDP 2014GDP Deflator 2013 GDP Deflator 2014% Change in Nominal GDP =% Change in Real GDP = % Change in GDP Deflator =Important notes from looking at graph1. Nominal GDP usually grows ______ than Real GDP due to ________2. Nominal GDP=Real GDP in ______ since it uses
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