Econ Midterm - Lecture 4 Gdp

Front 1

Healthy Economy has...

Back 1

1. High Employment
2. High Incomes
3. Low Inflation
4. Many opportunities for people
5. Low levels of Pollution
6. Vacation Time

Front 2

Measuring Total Production

Back 2

Increased employment and increased incomes require HIGH production

How do we measure total amt. produced in an economy?
1. Gross Domestic Things - GDT
2. Gross Domestic Weight - GDW
3. Gross Domestic Product

Front 3

GDT Gross Domestic Things

Back 3

Sum of the quantity of goods/services

Limitations = What is considered a thing? Very different things make equal contributions? (Cars vs.

Front 4

GDW Gross Domestic Weight

Back 4

Sum of the product of Quantity and Weight of goods/services produced

Limitations = How much does a haircut weigh? -- services can't be weighed

Front 5

GDP Gross Domestic Product

Back 5

Sum of the product of Quantity and Price of goods/services produced

- Market value of the final goods and services produced in a country during a given period*

Front 6

Defining GDP: Market Value

Back 6

Prices not stable (be careful about comparisons across time; comparing prices across countries)

Not everything produced goes through market

Front 7

Defining GDP: Final Goods and Services

Back 7

Intermediate products not explicitly included but value of production that takes place during intermediate included in value of final product.

Ex. Car costs $20,000; tires, wheels, etc. have separate costs --> all included in final price with production value

Front 8

Defining GDP: Produced

Back 8

Production creates income, so focus on things produced!

Selling an existing asset doesn't produce more income.

Front 9

Defining GDP: In a country during a given period

Back 9

Creates 2 Boundaries:
1. Production within geographic boundary of country
2. Production within particular time period; particularly a year

Front 10

How is GDP measured?

Back 10

INCOME APPROACH:
- Compensation of employees
- Corporate profits
- Proprietor's Income
- Net interest
- Rental income
- Indirect business taxes

Front 11

GDP(Y) Equation - Expenditure Method

Back 11

Y = C + I + G + NX

C = consumption
I = investment
G = government expenditures
NX = Net Exports (Exports (X) - Imports (M) )

* Note - Social Security/federal payments - unemployment service check = NOT IN GDP

Front 12

CONSUMPTION

Back 12

1. Goods: Durable (provide service for more than 1 yr.) and Non-durable

2. Services: transactions where no tangible product is traded

* rent is part of this; living/owning own house is also part of this

Front 13

INVESTMENT

Back 13

1. New factories and equipment
2. New housing
3. Spending on Intellectual Property Products
4. Net change in inventories (End of Year Inventory - Start of year inventory)

*NOT purchase of stocks/bonds --> already existing so not part of investment or GDP

Front 14

GOVERNMENT EXPENDITURES

Back 14

1. State & Local (bigger than federal) - schools, roads, etc.
2. Federal

Front 15

Problems with using GDP as welfare measure

Back 15

1. Leisure --> GDP may be same but average work per day more in certain countries. (valued but not considered within GDP)

2. Bads & Goods --> Ex. pollution - externality (doesn't go through markets) by-product of production

3. Income Distribution --> may be very different per country but same GDP

4. Non-Market Activity --> service exchanged among family members?

Front 16

Net Economic Welfare (Nordhaus & Tobin)

Back 16

Adjusted GDP by:
1. Adding leisure time
2. Correcting non-market activity
3. Adjusting Pollution Levels

--> noticed BUSINESS CYCLES (keeping track since 1800s) - expansion, peak, contraction/recession, trough