03 14 2013 Vocab Microeconomics the study of how households and firms make decisions and how they interact in markets the study of small parts of economics Macroeconomics study of economy phenomena including inflation unemployment and economic growth the study of economics as a whole Gross Domestic Product The market value of all final goods and services produced within a country in a given period of time Or Total income of everyone in the economy nation Consumption Spending by households on goods and services with the exception of purchases of new housing Investment Spending on capital equipment inventories and structures including household purchases of new housing Government Purchases Spending on goods and services by local state and federal governments Net Exports Spending on domestically produced goods by foreigners exports minus spending on foreign goods by domestic residents imports Nominal GDP The production of goods and services valued at current prices Real GDP The production of goods and services valued at constant prices GDP Deflator A measure of the price level calculated as the ratio of nominal GDP to real GDP times 100 NOTES services by firms The goal of Macroeconomics is to explain the economic changes that affect many households firms and markets simultaneously GDP is said to be the best single measure of a societies economic well being for MOST but NOT ALL purposes GDP measures 2 things at once the total income of everyone in the economy and the total expenditure on the economy s output of goods and For an economy as a whole INCOME EXPENDITURE GDP can be computed in 2 ways by adding up the total expenditure by households OR by adding up the total income wages rent and profit paid GDP excludes most items produced and sold illicitly such as illegal drugs It also excludes most items that are produced and consumed at home and therefore never enter the marketplace GDP includes only FINAL goods NOT INTERMEDIATE goods Exception occurs when a product is Final for the Moment meaning the product is not being used now and is just in a firms inventory to be used at a GDP measures the value of production within the geographic confines of a GDP is measured in quarters Seasonal adjustments occur due to holidays The 2 ways of calculating GDP give almost the exact same answer the difference between the 2 calculations of GDP is called STATISTICAL later date country DISCREPANCY GDP Y Consumption C Investment I Government Purchases G Net Exports NX Y C I G NX Investment means purchases of goods such as capital equipment structures and inventories used to produce other goods Government purchase is when the government pays someone s salary to get something in return Army they do not get anything in return Transfer Payments are like social security or unemployment checks where When a domestic household firm or government buys a good or service from abroad the purchase reduces net exports but because it also raises consumption investment or government purchases it does not affect GDP If total spending increases from one year to the next one of the following must be true The economy is producing a larger output of goods and services Goods and services are being sold at higher prices REAL GDP PRODUCTION Real GDP shows how the economy s overall production of goods and services change over time To calculate Real GDP first you have to designate one year as a BASE YEAR REAL GDP uses CONSTANT BASE YEAR prices to place a value on the economy s production of goods and services REAL GDP is NOT affected by changes in PRICE Changes in REAL GDP means there is a change in the amount being PRODUCED services REAL GDP is a measure of the economy s PRODUCTION of goods and REAL GDP is a better gauge of economic well being REAL GDP reflects QUANTITY PRODUCED NOMINAL GDP NOMINAL GDP uses CURRENT prices to place a value on the economy s productions of goods and services NOMINAL GDP reflects both the QUANTITIES of goods and services the economy is producing AND the PRICES of those goods and services The goal of computing GDP is to gauge how well the overall economy is performing Real vs Nominal GDP changes constant GDP DEFLATOR Price changes can distort economic variables like GDP so we have 2 versions of GDP One is corrected for price changes the other is not Nominal Values output using current prices It is not corrected for price The prices in real GDP is the amount that GDP would change if prices were Reflects only the PRICES of goods NOMINAL GDP GDP Deflator x 100 REAL GDP GDP deflator for the base year is ALWAYS 100 The GDP deflator measures the current level of prices relative to the level of prices in the base year The GDP deflator is one measure that economists use to monitor the average level of prices in the economy and thus the rate of inflation GDP Deflator is the ratio of nominal GDP to real GDP GNP vs GDP Gross National Product Total income earned by the nation s factors of production regardless of where located Gross Domestic Product Total income earned by domestically located factors of production regardless of nationality GNP GDP Factor payments from abroad Factor payments to abroad INFLATION A situation in which the economy s overall price level is rising Inflation rate is the percentage change in some measure of the price level from one period to the next Average increase in price level GDP deflation yr 2 GDP deflation yr 1 Inflation rate year 2 x 100 GDP Alternative Measures of Inflation GDP Deflator Consumer Price Index Producer Price Index RECESSION The rule of thumb is 2 consecutive quarters of falling GDP Recessions are not only associated with lower incomes but also with other forms of economic distress rising unemployment falling profits increased bankruptcies and so on IN THE END WE CAN CONCLUDE THAT GDP IS A GOOD MEASURE OF ECONOMIC WELL BEING FOR THE MOST PART BUT NOT ALL PURPOSES
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