ECON 1202 1st Edition Lecture 9 Outline of Last Lecture I. Microeconomics vs. MacroeconomicsII. Gross Domestic Product Measures Total ProductionIII. 4 Major Categories to Measure GDPOutline of Current Lecture I. Components of GDPII. Does GDP Measure What We Want It to Measure?III. Real GDP vs. Nominal GDPCurrent LectureI. Components of GDPa. Household sector- The more we consume in households, this leaves less production for investment, which inhibits long-term growthb. Government sectorc. Business sectord. Net export sectorII. Does GDP Measure What We Want It to Measure?a. GDP can be a useful tool to measure total output in an economy. Many people gofurther than this, interpreting GDP as a measure of the well-being of citizens. b. GDP has shortcomings, both in its measure of total production, and its usefulnessas a measure of well-being- Two important types of production are omitted from the BEA’s measurement of GDP1. Household Productiona. Household production (i.e. childcare, cleaning and cooking) is not typically paid for with money. However such contributions are real—if they were performed by a non-household member, the would be paid for and counted in GDPThese 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.i. Hiring painters vs. painting yourself2. The Underground Economya. Buying and selling of goods and services might be concealed from the government to avoid taxes or regulations, or because they goods and services are illegal. This constitutes the underground economy i. This may be 10% more of the economy in America, and substantially more in low-income households.- How important are these shortcomings? It dependso If we are comparing GDP from year to year, the size of household production and the underground economy is probably about the same from year to year, so GD growth is a reasonable measure of the growth in total productiono However, over long periods of time, they could be more serious As women have entered the workforce, household production has shifted more due to restaurant meals and daycaresc. In developing countries, the underground economy is often referred to as the informal sector, as opposed to the formal sector, in which output of goods and services is measured.- In many developing countries, the informal sector is very large; often above 50% of the total output- Economists studying economic development say this often reflects poorgovernment policies: high taxes and regulations, and long confidence in the security of private property from government seizured. Shortcomings of GDP as a measure of well-being- GDP per capita (GDP divided by population) is often used to represent differences in standards of living from country to country. However even if it accurately measured total production, it would not reflect:1. The value of leisure2. Pollution and other negative effects of production3. Crime and other social problems4. The distribution of income- In fact, improvements in many of these will result in lower GDP per capitao i.e. Lower crime would allow lower spending on police, prisons, and private security. This could decrease GDP but surely result in improvements in economic well-beingIII. Real GDP vs. Nominal GDPa. Real GDP: Gross domestic product that is corrected for inflationb. Since GDP is measured in “value” terms, we might have problems interpreting changes over time if prices change. Is an increase in GDP due to production increasing, or due to prices increasing?- To separate these effects, the BEA calculates both nominal GDP-- value of final goods and services evaluated at current year prices-- and real GDPc. Nominal GDP and real GPD are two different things; the base year is where they are equal- Its all measured on the value of