ECON 1202 1st Edition Lecture 8Outline of Last Lecture I. How much input is efficient?II. Price Controls III. Determining Tax Incidence Outline of Current Lecture I. Microeconomics vs. MacroeconomicsII. Gross Domestic Product Measures Total ProductionIII. 4 Major Categories to Measure GDPCurrent LectureChapter 8: Measuring Total Production and IncomeI. Microeconomics vs. Macroeconomicsa. Micro: study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices b. Macro: study of economics as a wholei. Business cycle: alternating periods of economic expansion and economic recessionii. Expansion: period of a business cycle during which the total production and total employment are increasingiii. Recession: the period of a business cycle during which total production and total employment are decreasingiv. Economic growth: the ability of an economy to produce increasing quantities of goods and services1. Doesn’t necessarily mean increase in GDPa. Means increase in real GDPv. Inflation rate: the percentage increase in the price level from one year to the nextII. Gross Domestic Product Measures Total ProductionThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.a. The most common measure used by economists of overall economic activity in an economy is Gross Domestic Product, or GDPi. Gross Domestic Product: the market value of all final goods and services produced in a country during a period of time, typically one year. 1. Cant add together the number of cars, melons, haircuts, etc. without agreeing on a common way to measure them2. Best way is to value each good and service in monetary terms3. A final good or service is a good or service purchased by a final user. There are what are used to calculate GDPa. If we counted intermediate goods and services: ones that were inputs into another good or services, such as a tire ona truck, we would end up double counting. 4. To measure total output in a given year, we measure the goods and services produced only in that given year. a. This avoids double counting; if you buy a DVD in 2011 that DVD counts in 2011’s in GDP. If you resell it in 2012, it will not be counted again.5. There are two main conceptual ways to measure the total economic activity in an economy: total production or total incomea. When we measure one, we are also measuring the other.b. Everything that is produced and sold constitutes income for someone; so we have the choice of measuring the value of products produced and sold, or the value of incomes, and each is a valid way of measuring economic activity. b. Transfer payments: payments to households for which the government does not receive a good or a service in returni. NOT included in GDP ii. Social security, MediCare, MediCaidc. Some economic activity takes place between households, firms, and the rest of the world. d. Households buy goods and services from firms in other countries, these are known as importse. Firms sell goods and services to firms in other countries, these are known as exportsf. There are firms that deal specifically in flows of money, we label these firms as the financial systemi. Households elect not to spend some of their income and instead save t with financial system firms like banksIII. 4 Major Categories to Measure GDPa. To measure GDP, the Bureau of Economic Analysis (BEA) in the Department of Commerce measures four major categories or expenditures:i. Personal Consumption Expenditures, or Consumption (C)1. Consumption is spending by households in goods and services, not including spending on new houses (which are counted instead in investment)2. Largest component of GDP; within that, services are the largest component, almost half of GDPii. Gross Private Domestic Investment, or Investment (I)1. Investment is spending by firms on new factories, office buildings, and additions to inventories, plus spending by households and firms on new houses. 2. BEA measures the following categories of investment: business fixed investment, residential investment, and changes in business inventoriesa.iii. Government Consumption and Gross Investment, or Government Purchases (G)1. These are spending by federal, state, and local governments on goods and services such as teacher’s salaries, highways, and aircraft carriers.2. Doesn’t including transfer payments, since those don’t result in immediate production of new goods and servicesiv. Net Exports of Goods and Services, or Net Exports (NX)1. Net exports are defined as the value of exports minus the value of imports. This difference might be positive or negative; in recent years, this has been negative in the USAGDP can be expressed as the sum of these:Y= C + I + G +