Chapter 23 astronomy concept and exercise.pptx

1. Income and Expenditure
2. Measuring GDP
3. The Components of GDP
4. Real and Nominal GDP
5. GDP and Economic Well-‐Being

GDP measures two things at once:
1.The total income of everyone in the economy.
2.The total expenditure
on the economy’s output of goods and services.
Because for the economy as a whole, income must equal
expenditure. “For every buyer there must be a seller.”

The circular flow diagram (Figure 1) illustrates this:
• In markets for factors of production (inputs):
- Households sell or rent labor, land, and capital. Their income equals GDP.
- Firms buy or hire labor, land, and capital. Their wages, rent, and profit equal
GDP.
• In markets for goods and services (outputs):
- Firms sell goods and services. Their revenue equals GDP.
- Households buy goods and services. Their expenditure equals GDP.
This diagram
ignores the financial sector, the government, and the foreign sector.

GDP is the market value of all final goo
ds
and services produced within a country
in a given period of time.

1. GDP is the market value …
GDP measures all goods in terms of their market value, in the common unit of dollars.
“You can’t compare apples and oranges.” If an apple costs twice as much as an orange, then it contributes twice as
much to GDP. Non-‐market activities like leisure, housework, and child care don’t contribute to GDP.
2. … of all …
That last caveat notwithstanding, GDP tries to be comprehensive.
3. … final …
International Paper makes paper, which is used by Hallmark to make a greeting card.
In this example, paper is an intermediate good, since it is used as an input for producing yet another good.
The greeting card is a final good, since it is sold to and used by and end user.
Since the value of the final good reflects the value of the intermediate good, only the value of the final good is incl
uded in GDP to avoid double counting.
4. … goods and services …
Goods include cars, food, clothing, etc. Services include haircuts, medical care, etc.
5. … produced …
GDP only includes newly produced goods. Buy a new car: that contributes to GDP. Buy a used car:
that does not contribute to GDP.
6. … within a country …
US GDP counts all goods and services produced in the US.
A Canadian works in the US; her income counts in US GDP.
A US citizen works in Canada; his income does not count in US GDP
7. … in a given period of time …
Usually within a quarter (3 months) or a year.

1. Y = GDP
2. C = Consumption
3. I = Investment
4. G = Government Purchases
5. NX = Net Export (X-M)

 Consumption is spending by households on goods and services, with the exception
of purchases of new housing.
Consumption is spending by households on:
• Durable goods (cars, appliances).
• Nondurable goods (food).
• Services (haircuts).

 Investment is the purchase of goods (called capital goods) that will be used in the
future to produce more goods and services. Investment is the sum of purchases of
business capital, residential capital, and inventories.
Investment is spending by firms on goods that will
be used in the future to produce more goods and
services:
• Capital equipment (machines and tools).
• Structures (factories, office buildings).
• Inventories (goods produced but not yet sold).
By convention, the purchase of a newly built house is a form of spending by household
s that is also included in investment.

 Government purchases measure spending on goods and services by local, state,
and federal governments
Government spending includes:
• Purchases of goods and services by federal, state, and local governments.
• Salaries of government workers.
• Other forms of government disbursements, like social security payments, are calle
d transfer payments and are not counted in GDP.

 Net exports equal the foreign purchases of domestically produced goods (exports)
minus the domestic purchases of foreign goods (imports).
Net exports equal:
• Exports: purchases of domestically (US) produced
goods by foreigners.
• Minus imports: purchases of foreign goods by US
households and firms.

 GDP = Quantity * Price
 [Current Price (Nominal GDP)] or [Base-year Price (Real GDP)]
 As we have seen, GDP measures the total spending on goods and services in all
markets in the economy. If total spending rises from one year to the next, at least one
of two things must be true:
(1) the economy is producing a larger output of goods and services,
or,
(2) goods and services are being sold at higher prices.
 When studying changes in the economy over time, economists want to separate these
two effects. In particular, they want a measure of the total quantity of goods and
services the economy is producing independent of changes in the prices of those goods
and services.

To sum up:
 Nominal GDP uses current prices to value the economy’s price change of goods
and services.
 Real GDP uses constant base-year prices to value the economy’s production of
goods and services.
 Because price changes do not affect real GDP, changes in real GDP reflect only
changes in the quantities produced. Thus, real GDP measures the economy’s
production of goods and services.

 a measure of the price level calculated as the ratio of nominal GDP to real GDP
times 100

What happens when –
• The quantities of all goods and services produced rise, but prices sta
y the same.
- Real GDP rises.
- Nominal GDP rises by the same amount.
- The GDP deflator stays unchanged. -‐
• The prices of all goods and services rise, but quantities produced sta
y the same.
- Real GDP says unchanged.
- Nominal GDP rises.
- The GDP deflator rises.
The percentage increase in the GDP deflator from one period to the
next defines the rate of inflation.

 GDP measures the level of income and expenditure in the economy.
 Since most people would prefer more income and expenditure to less, GDP
per person can serve as a measure of economic well-‐being.
 But let’s remember that GDP is a measure based on market value
and therefore does not include:
1. Leisure.
2. Childcare from a parent.
3. Volunteer work.
4. Environmental quality.
5. Equity in the distribution of income and expenditure.

 Microeconomics: The study of how households and firms make decisions and how
they interact in markets.
 Macroeconomics: The study of economywide phenomena, including inflation,
unemployment, and economic growth.
 Gross Domestic Product (GDP): The market value of all final goods and services
produced within a country in a given period of time.
 Consumption: Spending by households on goods and services, with the exception of
purchases of new housing.
 Investment: Spending on business capital, residential capital, and inventories.
 Government Purchases: Spending on goods and services by local, state, and federal
governments.
 Net Exports: Spending on domestically produced goods by foreigners (exports) minus
spending on foreign goods by domestic residents (imports).
 Nominal GDP: The production of goods and services valued at current prices.
 Real GDP: The production of goods and services valued at constant prices.
 GDP Deflator: A measure of the price level calculated as the ratio of nominal GDP to
real GDP times 100

Chapter 23 astronomy concept and exercise.pptx

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