Module 10-11

Three basicBasic economicEconomic goals:Goals

1. Sustained long run economic growth over time.

• Measured by GDP - Gross Domestic Product.

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


UsingThe value of all final goods and services given a year, using the currentprices dollarin value.the i.e.year within inflation.which the output was produced.

• Real GDP

  CalculateThe usingvalue of all final goods and services given a setyear, dollarusing value.the i.e.prices withoutof inflation.a selected base year.

• Why Check GDP?

  • Compare our growth.
    growth

    areto other countries.

  • Check if our economic policies working
    are working.

• GDP is made up of 4 components:
  

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

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

  3. G: Government spending on goods and services.
     • Only when the government gets something in return.

  4. 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.

• Accounting for Variations

  • A country can have a higher GDP by simply having a higher population.
  • Thus, we can use GDP per capita.
    • A measure of average GDP per person.
  • GDP does NOT represent quality of life.

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.

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