Module 10-11

Three Basic Economic Goals

1. Sustained long run economic growth over time.

• Measured by GDP - Gross Domestic Product

  • Nominal GDP
    

    The value of all final goods and services given a year, using the prices in the year in which the output was produced.

  • Real GDP

    The value of all final goods and services given a year, using the prices of a selected base year.

  • Why Check GDP? <- Test Question

    • Compare our growth to other countries.
    • Check if our economic policies 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. 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.
      

  • Excluded in GDP:

    • Intermediate goods <- Test Question 
    • 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.
  
• Full employment = NRU, Natural rate of unemployment = Low unemployment.
  • When there is no cyclical unemployment, only structural and frictional.

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.