ECON201, Maclachlan, Fall 20061 Comparative Advantage Chapter 2.
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Transcript of Where You Are! - University Of Marylandterpconnect.umd.edu/~jneri/Econ201/files/Chapter 4... ·...
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Where You Are!
Economics 201 – Principles of Macroeconomics
Tuesday and Thursday 2:00 to 3:15pm
1. Principles of Macroeconomics by Parkin, 12th edition,
Pearson.
1. MyEconLab for Parkin for graded homework
assignments and practice.
Course website: http://www.terpconnect.umd.edu/~jneri/Econ201
Who Am I
Dr. John Neri
Office Location: 1106D Morrill Hall
Office Hours: T and Th 3:30pm-4:30pm
Illness or Family Emergency and Exams
Steps you MUST follow:
• Pre-Notification: If you are sick or have a family
emergency and cannot take an exam, you must contact
Professor Neri before the exam. You must fill out the
Request for Excuse form found on the course web page.
• Written Verification: Illness or family emergency must be
subsequently verified in writing by a physician. If you go to the
health center and a doctor will not write you a note, that means
they consider you well enough to continue with academic
activities.
• If both steps are not followed, you will not be excused
from the exam
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Students using the DSS facility must meet
with me within the first 2 weeks of classes.
Advice!!!
• Course is cumulative.
• Important to keep up with the lectures,
homework and readings each week.
Microeconomics Examines the functioning of individual
industries and the behavior of individual decision-making
units - firms and households.
Macroeconomics Deals with the economy as a whole.
Focuses on determinants of total national income, deals
with aggregates such as aggregate consumption and
investment, and looks at the overall level of prices instead
of individual prices.
aggregate behavior The behavior of all households and
firms together.
sticky prices Prices that do not always adjust rapidly to
maintain equality between quantity supplied and quantity
demanded.
Macroeconomics vs Microeconomics
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• Growth in production • how much we produce and can we keep it
growing
• Unemployment
• High employment - Low unemployment
• Inflation and deflation
• Low stable inflation
Three Major Macroeconomic Concerns
Examples of Macroeconomic Questions • What causes inflation?
• Why is the unemployment rate sometimes high and
sometimes low?
• What might cause interest rates to be low one year
and high the next?
• How do changes in the money supply affect the
economy?
• How do changes in government spending and tax
policy affect the economy?
A couple of questions for you:
What is the current unemployment rate in the US?
What is fiscal policy?
What is the federal government budget deficit?
What is the Federal Reserve System?
What is monetary policy?
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A Little Macroeconomic History:
• 19th and early 20th century, Classical
Theory/Classical Economist
• They focused on microeconomics
• They argued that market forces drive the
economy toward full employment, possibly quickly
– markets clear.
• In Macro Speak “The economy self-corrects”
• If unemployment exist, wages would fall to
move the economy back to full employment.
A Little Macroeconomic History:
• 1929 to 1933: The Great Depression
• Worldwide economic crisis.
• Total amount of goods and services produced in the U.S. fell by more than 25%.
• Unemployment increased to 25%.
• A lot of unemployment for a long period of time.
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A Little Macroeconomic History:
• 1936: John Maynard Keynes, “The
General Theory of Employment, Interest,
and Money”
• Replaces classical theory with theory
based on:
– Aggregate (Total) Demand
– Wage and price rigidities – sticky!
– Markets don’t clear and it may take a
long time for the economy to “self-correct”
• Birth of Macroeconomics as a field
separate from microeconomics
A Little Macroeconomic History:
• Keynes believed government should
intervene in the economy to stimulate the
level of output and employment
– During periods of low private demand, the government should take action to stimulate aggregate (total) demand to lift the economy to full employment.
– Keynes was not a socialist. He was a capitalist. He simply felt capitalism could be unstable.
A Little Macroeconomic History:
• Private demand and Public demand?
• What can the government do to stimulate aggregate total demand (private and public) to lift the economy out of recession?
• Big, Big Question – does this stuff work?
• Almost 80 years later still debating this!
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Chapter 4
Part 1
MEASURING GDP AND
ECONOMIC GROWTH
Define GDP (Gross Domestic Product)
Explain why GDP equals aggregate
expenditure and aggregate income
Explain how the Bureau of Economic
Analysis measures U.S. nominal GDP and
real GDP
Explain the uses and limitations of real GDP
as a measure of economic well-being
Goals of Chapter 4:
Production and GDP
• Gross Domestic Product (GDP)
– Total value
– of all final goods and services
– produced for the marketplace
– during a given year
– within the nation’s borders
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Production and GDP
• Total value…
– GDP is measured in dollar values (P x Q)
• …of all final…
– Final goods and services: sold to their
final user
• …goods and services…
• Goods: tangibles
• Services: intangibles 19
Production and GDP
• …produced…
– Not included: land, stocks and bonds
used goods …
• …for the marketplace…
– With the intention of being sold
• …during a given period…
– Specific period of time
• …within a nation’s borders
– Regardless of who owns the resources
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Gross Domestic Product
Final Goods and Services
GDP is the value of the final goods and services produced.
A final good (or service) is an item bought by its final user
during a specified time period.
A final good contrasts with an intermediate good, which
is an item that is produced by one firm, bought by another
firm, and used as a component of a final good or service.
Excluding the value of intermediate goods and services
avoids counting the same value more than once – double
counting.
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Intermediate and Final Good
Tires taken from that pile and mounted on the wheels of
the new car before it is sold are considered intermediate
goods.
Tires taken from that pile to replace tires on your old car
are considered final goods.
If we included the value of the tires (an intermediate good)
on new cars and the value of new cars (including the tires),
we would be double counting.
The Expenditure Approach to GDP
• Expenditure approach: GDP=C+I+G+NX
– Adding the value of goods and services
purchased by each type of final user
1. Consumption goods and services (C)
purchased by households
2. Private investment goods and services (I)
purchased by businesses
3. Government goods and services (G)
purchased by government agencies
4. Net exports (NX) purchased by foreigners
The Expenditure Approach to GDP
• Consumption spending (C)
– Part of GDP purchased by households as
final users
– 70% of total production
– Not included:
• Imported consumption goods and
components
• New home construction
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The Expenditure Approach to GDP
• Consumption spending (C)
– Included - even though households don’t
actually buy them
• Total value of food products produced on
farms that are consumed by the farmers and
their families themselves
• Total value of housing services provided by
owner-occupied homes
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The Expenditure Approach to GDP
• Private investment (I)
– Business purchases of plant, equipment,
and software
– New home construction
– Changes in inventories
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The Expenditure Approach to GDP
• Private investment (I)
– Adds to the nation’s capital stock
– Ignores depreciation
• Net investment
– Investment minus depreciation
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The Expenditure Approach to GDP
• Government purchases (G )
– Spending by federal, state, and local
governments on goods and services
• Government outlays
– Government purchases + Transfer
payments
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The Expenditure Approach to GDP
• Transfer payments
– Payment that is not compensation for
supplying goods, services, or resources
– Money redistributed from one group of
citizens (taxpayers) to another (the poor,
the unemployed, the elderly)
– Included in government budgets as outlays
– Not included in the government purchases
component of GDP
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The Expenditure Approach to GDP
• Net exports (NX)
– Total exports minus total imports
• Total exports
– U.S. production that is purchased by
foreigners
• Total imports
– Americans’ purchases of goods produced
outside of the United States
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X = 2339 and M = 2877
13,100
3,140
3,330
-570
______
19,000
2017
Gross National Product (GNP)
• GNP is the value of goods and services produced
anywhere in the world by the residents of a
nation.
• Nike’s income from shoe factories in Vietnam is part of
US GNP and Vietnam’s GDP.
• Toyota’s income from car plants in the US is part of
Japan’s GNP and US GDP.
• GNP = GDP plus payments received from the
rest of the world minus income paid to the rest of
the world
Gross Domestic Product
Depreciation is the decrease in the value of a firm’s
capital that results from wear and tear and
obsolescence.
Gross investment is the total amount spent on
purchases of new capital and on replacing
depreciated capital.
Net investment is the increase in the value of the
firm’s capital.
Net investment = Gross investment Depreciation.
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Measuring U.S. GDP
The Bureau of Economic Analysis
complies the GDP data
Uses two approaches -
The expenditure approach
The income approach
Measuring U.S. GDP
The Expenditure Approach
The expenditure approach measures GDP as the
sum of consumption expenditure, business
investment expenditure, government expenditure on
goods and services, and net exports.
GDP = C + I + G + (X M)
The Income Approach to GDP • Factor payments
– Payments to the owners of resources that are
used in production
• Income Approach
GDP = sum the factor payments earned by all
households in the economy (wages and salaries,
rent, interest, and profit)
• Total output of the economy (GDP) = total
income earned in the economy
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Why does expenditure = income
In every transaction,
the buyer’s expenditure becomes the seller’s
income.
Thus, the sum of all expenditure equals
the sum of all income.
Simple Circular Flow
Incom e ($)
Labor
Goods (bread)
Expenditure ($)
Households Firms
The circular flow diagram shows
the income received and
payments made by each
sector of the economy.
Measuring U.S. GDP
The Income Approach
The sum of all factor incomes is called net domestic income
at factor cost.
Two adjustments must be made to the net domestic income
get GDP:
1. Add Indirect taxes
2. Add depreciation
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