Thursday June 18 2015 Final Review Ch 6 23 3 big statistics to measure the economy GDP Unemployment In ation GDP Gross Domestic Product measure of amount of production of physical things measures amount of income revenue costs expenditures in an economy Unemployment The state a person is in if he she cannot get a job despite being willing and able to work and actively seeking work high rates of unemployment are undesirable because they indicate that a nation is not using a large portion of its most valuable resource the talents and skills of its people a problem that can be xed If not willing to work not a part of the labor force stay at home mom In ation an increase in the overall price level reduces purchasing power of peoples savings price level includes outputs and inputs prices of goods services and prices of resources Real GDP Real Gross Domestic Product measures the nal value of goods and services produced within the borders of a country during a speci c period of time typically a year 1 can tell whether the economies output is growing measures economic activity resource usage total amount of production total Thursday June 18 2015 stuff we buy to determine RGDP more output greater consumption possibilities adjusted for in ation RGDP eliminates these kinds of price changes As a result we can compare RGDP numbers from one year to the next and really know if there is a change in output rather than prices doesn t reveal the why in changes RGDP NOMINAL GDP PRICE INDEX IN HUNDRETHS Nominal GDP totals the dollar value of all goods and services produced within the borders of a country using their current prices during the year that they were produced But because nominal GDP uses the prices in place in the year the output was produced it suffers from a major problem it can increase from one year to the next even if there is no increase in output GDP per capita RGDP POPULATION per capita per person Modern Economic Growth where output per person rises Saving and Investment Saving 2 when current consumption is less than current output or when current spending is less than current income Investment when resources are devoted to creating increasing future output Thursday June 18 2015 The amount of investment is ultimately limited by the amount of saving increased saving can only come at the price of reduced current consumption society must decide how to balance the reductions in current consumption required to fund current investment against the increase in future consumption that the added current investment will make possible Households are the principle source of saving businesses are the main economic investors How does savings by households get transferred to businesses so that businesses can purchases newly created capital goods Banks and other nancial institutions they collect the savings of households and then lend the funds to businesses which invest in equipment factories and other capital goods Ch 7 24 National Income Accounting measures the economies overall performance enables economists and policy makers to assess the health of the economy by comparing levels of production at regular intervals track the long run course of the economy to see whether it has grown been constant or declined formulate policies that will safeguard and improve the economy s health The primary measure of an economies performance is its annual total output of goods services aggregate output 3 Gross Domestic Product de nes aggregate output as the dollar value of all nal goods services produced within a country at a speci c time Thursday June 18 2015 GDP is a monetary measure it measures the value of output in monetary terms Measuring Aggregate Output to measure aggregate output correctly all goods and services produced in a particular year must be counted only once because most products go through a series of production stages before they reach the market some of their components are bought and sold many times GDP includes only the market value of nal goods and not intermediate goods Final goods Intermediate goods products that are purchased by their end users prodcuts that are purchased for resale further processing manufacturing the value of nal goods includes the value of all intermediate goods that were used in producing them so including intermediate goods would be multiple counting and would distort the value of the GDP Value added is the market value of a rms outputs less the value of the inputs the rm has bought from others Non production transactions 2 types purely nancial transactions and secondhand sales both are excluded form GDP 4 Thursday June 18 2015 Financial Transactions Public transfer payments social security welfare payments that the government makes directly to households Recipients contribute nothing to current production so including these would be overstating the GDP Private transfer payments funds transfered form one private individual to another do not enter GDP parents giving children money Stock market transactions buying selling of stocks bonds create nothing in the way of current production not included in GDP swapping of paper but payments for the stockholder are included because their services are provided and thus a part of the economy s current output of goods services Secondhand Sales contribute nothing to current production The Expenditure Approach 4 categories GDP C I G Xn views GDP as the sum of all money spent in buying it add up all the spending on nal goods services that has taken place throughout the year Personal Consumption Expenditures all expenditures by households on goods services durable goods products that have expected lives over three years nondurable goods products with less than three year lifespan services work done by people what affects this wealth personal assets and paper wealth debts changes in living style Gross Private Domestic Investment 5 Thursday June 18 2015 all nal purchases on machinery equipment and tools by businesses all constructions changes in inventories increase in inventories are considered investment because they represent unconsumed output Net Private Domestic Investment includes only investment in the form of added capital depreciation the amount of capital that is used up over the course of a year Net investment gross investment depreciation Government Purchases 2 components 1 expenditures for goods and services that government consumes in providing public services which have long lifetimes 2 expenditures for publicly