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Module 10

Three basic economic goals:

1. Sustained long run economic growth over time.

  • Measured by GDP - Gross Domestic Product.
  • A measure of the overall value of goods and services produced.
  • The dollar value of all goods and services that are produced in US in one year. They must be made in the USA.
  • Final assembly determines where the product is made.
Nominal GDP

Using the current dollar value. i.e. with inflation.

Real GDP

Calculate using a set dollar value. i.e. without inflation.

Why Check GDP?

Compare our growth.

are our policies working

GDP is made up of 4 components:

C: Consumer spending accounts for ~70% of GDP, accumulation of all consumer spending.

I: Investment spending = spending by firms and companies on capital goods.

G: Government spending on goods and services.

Only when the government gets something in return.

Xn: Net exports/imports. Difference between our exports and imports.

Net import = negative number.

Net export = positive number.

Expenditure Approach:

Add up all the expenditures to calculate GDP.

Included in GDP:

Consumption of all final goods and services.

Investment spending --- Any new constructions. This is an economic indicator!

Government spending --- Something they get something in return.

Net exports/imports = Export - import.

We must count items not made in the US. They must, however, be excluded from GDP.

Excluded in GDP:

  • Intermediate goods <- Question on test! 
  • Good that is completely used up in the production of something else.
    • Ex. Components in a computer, tires on a car, etc.
  • Financial assets.
  • Inputs that are used up fully.
  • Any foreign produced goods.
  • Any used or second hand goods.
  • Black market operations.
  • Non-market activities.

2. Low unemployment.

  • Full employment: When the unemployment rate ~4%.
  • Below 4% can reduce GDP growth (as you need a work force pool to pull from).
  • Frictional and structural will always exist in an economy.
  • Cyclical unemployment will only occur in a recession.
  • Thus, full employment occurs when we do not have cyclical unemployment.
  • Full employment = NRU, Natural rate of unemployment.

3. Keep prices stable --- keep inflation under control.

Inflation: When prices on average increases.

Target: 2-3% per year.

National income and product accounts/national accounts

Keeps track of the flows of money amount different sectors of the economy.

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