question

Microeconomics

answer

-the study of individuals that comprise the economy -a single household's decisions-what job to take, how to spend income -a single firm's decisions-output, pricing

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Macroeconomics

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-the study of economy-wide issues; key word is "aggregate" -how many people have jobs? Are incomes rising or falling in general?

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Gross Domestic Product

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-total (gross) amount of everything produced within a specific economy -measure that we use to analyze economic growth -can compare regions or nations -not perfectly straightforward, some qualities of life not easily captured by numbers

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Defining GDP

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-market value of all final goods and services produced in a nation within a specific period of time -sum of output from all economic activity -output becomes income

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Three uses of GDP data: Why is GDP useful?

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1. Estimate living standards across time and nations 2. Measure economic growth 3. Determine whether an economy is experiencing short run expansion or recession

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Measuring living standards

answer

:)

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Total GDP

answer

-may not always be best standard to compare countries -doesn't adjust for population size of country

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per capita GDP

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-GDP per person -average living standards in a nation

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per capita Real GDP

answer

-adjust for differences in price level

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Measuring Business Cycles

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parts of a business cycle: -expansion -contraction -peak -trough

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Why does GDP count the "market value?"

answer

-we can't just count quantities - United States produced 12 billion bushels of corn -United States produced 8 million cars -just looking at quantity-produced numbers, corn seems more "important" to our GDP relative to cars

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calculating market values

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the sum of all -*(price x quantity )*

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Why does GDP include both goods and services?

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services --> outputs that provide benefits without the production of a tangible product the composition of our industries and economy has greatly changed over the last 50 years services now about 70% of total GDP

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intermediate goods

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goods that firms package or bundle with other goods to be sold at a later stage ex: milk sold to a coffee shop, tires sold to a car manufacturer, builder buying dry wall from Home Depot

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Final goods

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buying dry wall from Home Depot -goods sold to final users, or consumers -to get an accurate GDP estimate and avoid double counting -final goods are included in GDP -intermediate goods not included in GDP

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Why does the definition of GDP include the word "produced?"

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-has to do with double-counting again...don't want to recount a good that was produced last year ex: don't count resold used car -stocks and bonds sold do not count, except for the fees that pay for service stocks and bonds don't count towards GDP, just an exchange of ownership

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Looking at GDP as Different Types of Expenditures

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the Bureau of Economic Analysis (BEA) is the U.S. gov't agency that tallies GDP data, a task is called national income accounting GDP= C + I + G + NX

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the pieces of GDP in 2010

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(C)- 71% (I)- 12% (G)- 21% NX (-4%) Total GDP-100%

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consumption

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final purchase of goods and services by households, with the exception of new housing

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durable goods

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-goods that last for a relatively long time, such as refrigerators, cars, and DVD players -subject to cyclical fluctuations

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nondurable goods

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-goods that last a short period of time, such as food, light bulbs, and sneakers

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investment

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-private spending on tools, factories, and equipment used to produce future output --new houses under investment -investment is NOT "investing" in stocks and bonds

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Government purchases

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-gov't employee salaries -gov't buildings and equipment produced -public works projects, national defense, schools, post offices DOES NOT COUNT -transfer payments, such as welfare or social security -when households spend this income, it will enter GDP as part of consumption or investment

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Net exports

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exports minus imports -if imports > exports then NX < 0 NX represents small fraction of total GDP

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Refer to sheet for calculating GDP example

answer

don't count paper for textbooks

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Real GDP: Adjusting GDP for price changes

answer

:)

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Real GDP

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-GDP measure w/ prices held constant over time

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Nominal GDP

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always assume this unless says "Real GDP" -GDP measure using current prices

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price level

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-index to measure price of goods and services in an economy

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GDP deflator

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-a measure of the price level that includes prices of final goods and services in GDP -used to "deflate" out inflation from nominal GDP so we can find real GDP

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real GDP equation

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(GDP / GDP Deflator) X 100 *real GDP (2012)= nominal GDP(2012)/price level (2012) all times 100*

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Growth rates

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-tell us how fast our economy is growing -can be calculated using a percentage change formula -a negative growth rate means the economy is contracting

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Growth rate equation

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Nominal growth within 2010= *(GDP 2010-GDP 2009)/(GDP 2009) x 100*

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shortcomings of GDP

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-nonmarket goods -underground economy -quality of the environment -leisure time

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nonmarket goods

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-only counts if something is actually sold ex: washing your own car, mowing your own lawn, stay-at-home mothers ex: Canada has less stay at home moms than U.S.

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underground economy

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-hidden, uncounted transactions -sometimes illegal (drug sales, narcotics) -size in U.S. --> estimated at 10% but up to 45% in developing countries --smaller in U.S. because of stronger economy and less corruption

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quality of the environment

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GDP does not value/measure

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leisure time

answer

free time

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Alternative measures of economic well-being

answer

a. life expectancy b. education levels c. access to healthcare d. crime rates e. environmental quality f. income equality alternative measures difficult to quantify...GDP is correlated w/ other measures

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PWYK

answer

in class

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1. GDP also measures

answer

A: a nation's income

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2. Why doesn't GDP count expenditures on intermediate goods?

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A: to avoid double counting

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3. What is the biggest component of GDP?

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A: consumption

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4. How is real GDP different from nominal GDP?

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A: Real GDP is adjusted for inflation, nominal GDP is just measured in current prices

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5. Which of the following would not be included in GDP

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A: Michael pays the neighbor kid to mow his lawn

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POYO

answer

:)

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1. During a business cycle expansion, total production ________ and total employment _________

answer

A: increases, increases

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2. Macroeconomics, as opposed to microeconomics, includes the study of

answer

A: employment in the economy

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3. In calculating GDP, the Bureau of Economic Analysis uses the sum of the market value of final goods and services produced. This means BEA

answer

A: values goods and services at their market prices, multiplies them by the quantity produced, and then adds them up

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4. Which of the following is not an example of a transfer payment

answer

A: health insurance payments to an army private

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5. Investments, as defined by economists, would include the purchase of a

answer

A: computer by an accounting firm

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6. Refer to table 7-3....GDP for this economy equals

answer

A: $1,200

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gdp deflator equation

answer

(NOMINAL GDP / Real GDP) X 100

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