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UNC-Chapel Hill ECON 101 - Chapter 24

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Lecture Outline – GDP and MeasurementA. Intro to Macroeconomics1. What is the difference between microeconomics and macroeconomics?a. Micro: the study of how households and firlms make choices, how they in-teract in markets, and how the government attempts to influence their choices. Specific marketsb.Maco: the study of the economy as a wholei. Inflation, unemployment, economic growth2. What sort of things will we study in macroeconomics? What are some of the impor-tant questions?a. How do we measure total output in an economyb.How do we determine if an economy is doing wellc. What determines the total amount of employment and unemploymentd.What determines the overall level of prices, and the rate of inflation (over-all increase in the average price level)e. Why the economy goes through cyclesB. What is GDP?1. Define GDP.a. Gross Domestic Product: The market value of all final goods and services produced within a country in a given period of time.i. Goods are valued at their market prices. GDP measures all goods using same units (Ex. US Dollars)ii. Things that don’t have a market value are excludeda. ex. Housework you do for yourselfb. What goods are included in the calculation of GDP? What goods are not included in the calculation of GDP?i. Things that don’t have a market value are excludedii. Intermediate goods are used as components or ingredients in the pro-duction of other goods1iii. Only final goods are included in GDP (to avoid double counting). In-cludes tabgible goods and intangible goods (services)a. Includes currently produced goods and services. Does not include used goods ( ex. houses, cars)b. Does not include the sale of financial assets such as stocks and bondsc. Services provided by realators, stock brokers, used cars salesperson are includedd. GDP measures the value of production that occurs within a country’s borders whether done by its own citizens or for-eigners within the country.i. Ex. Cars produced in Mexico by American firms: NOT includedii. Cars produced in US by japanese firms ARE in-cludedc. Is GDP measured in terms of units or dollars?i. Yes, dollarsd. What is a final vs. intermediate good? Provide an example of each. Explain why only final goods are included in the calculation of GDP.i. Intermediate good is good used in the process of producing some-thing. Ex. Cotton for a shirt, value of cotton woven into fabric(labor)ii. Final good = the shirte. Explain why GDP is a measure of production.i. MEasure of production because it includes tangible and intangible goods which is labor/services/concertsf. What is the difference between GDP and GNP? Give an example of something that is included in the calculation of GDP, but is not included in the calculation of GNP, and vice versa.i. Gross National Product: The value of the goods and services pro-duced by US residents no matter where they live.22. How often is GDP reported? Which U.S. government agency reports the value of GDP?a. USUALLY A YEAR OR A QUARTER (3 MONTHS)b.Produced by the Bureau of Economic Analysis3. Roughly, how large is the U.S. economy as measured by GDP? In terms of GDP, where does the United States’ economy rank in the world?a. US economy has the largest GDP in the world. 15 trillion in 20114. What is the difference between GDP and the GDP growth rate? How is the GDP growth rate calculated?a. Growth rate of GDP tells us how rapidly the cuntry’s production is rising or falling over timeb.GDP of 2005 - GDP of 2004/ GDP of 2004 = GDP growth rate for 2005C. Nominal vs. Real GDP1. What is the difference between nominal and real GDP?a. Inflation can distort economic variables like GDPb.Nominal GDP: values output using current prices. It is not corrected for inflationc. Read GDP: values output using the prices of a base year. Read GDP is cor-rected for inflationi. How is each calculated?a. Nominal: for each year, use output produced x market priceto get total value and add the other goods produced in each year.3b.c. Use base year prices to evaluate the current prices.d.e. Nominal GDP is measures using the current pricesf. Read GDP is measured using constant prices from the base yearg. The change in real GDP is the amount that GDP would change if prices were constant (i.e. zero inflation).h. Change in nominal GDP reflects both prices and quantities.ii. What do we mean if we say the “base year” is 2009?a. Use price of a good in 2009 and evaluate output in future years using base year pricesiii. What is the relationship between nominal and real GDP in the base year?4a. Read and nominal GDP will be equal to each other in the base year.b. Change in nominal GDP is larger because it relects both prices and quntities (if price increases)c. Growth rate in real GDP will be lower than growth rate in nominal GDP2. Which measure – real or nominal GDP – is best for comparing GDP over time? Why?a. Real GDP so that all prices are on an equal level.3. What has been the average growth rate of real GDP over the past 60+ years?a. 3.4%D. Cyclical and Short-Run Changes in GDP1. What is a recession? a. Determined by National Bureau of economic researchb.Recession: a significant widespread decline in economic activity spread across the economy, lasting for more than a few months, normally visible by a decline in real GDP, real income, employment, industrial production, and wholesale-retail salesc. What organization determines if the U.S. is in a recession or not?i. National Bureau of ecomomis researchd. What economic variables decline during a recession?e. decline in real GDP, real income, employment, industrial production, and wholesale-retail salesf. How often do recessions occur?i. there have been 11 recession since 1948g. Why is it difficult to determine when a recession starts? Ends?i. unpredictable because there are so many different components in a macroeconomy2. What is a business cycle?a. short run movement in real GDP around its long term trend (of 3.4 %)E. The Many Ways of Splitting GDP51. Production Approach: Basic definition of GDP tells us that it is a measure of pro-duction so GDP can be measured by recording how much output rolls out of all the factories, offices, and other facilities across the economy.2. National Spending Approach: This method of calculating GDP focuses on aggregate spending in the economy. Y = C + I + G + NXa. Y=nominal GDPb.C= the market value of consumption goods and servicesc. I= the market value of investment goodsd.G=the market value of


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UNC-Chapel Hill ECON 101 - Chapter 24

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