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ECON1000 CH. 5.docx

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ECON 1000
Nick Rowe

Macroeconomics •The study of the economy as a whole •Textbook: Principles of Macroeconomics (Chapters 5-17) •Grading Scheme: o 2 Assignments for 10% o In Class Exam (Feb. 16) 15% o Final Macro Exam 25% •Last Day of Class: April 5 Measuring a Nation's Income: Chapter 5 Introduce two vital statistics used to monitor the macro economy •Gross Domestic Product: o Measures the total production and income in the economy •Consumer Price Index: o Measures the level of prices (and inflation) in the economy Contents: Chapter 5 •What is Gross Domestic Product (GDP) •How is GDP related to a nation's total income and spending? •What are the components of GDP? •How is GDP corrected for inflation? •Does GDP measure society's well-being? How to Judge Performance of the Economy It is the task of Gross Domestic Product •It sheds light on whether the economy is expanding, contracting or stagnant Income and Expenditure Gross Domestic Product measures two things at once: •Total income of everyone in the economy •Total expenditure on the economy's output of goods and services (i.e. total production) •For the economy as a whole, income equals expenditure The Circular Flow Diagram: There are two types of decision makers: •Households •Firms There are two types of markets: • Markets for goods and services •Markets for factor inputs (factors of production) Circular Flow Diagram shows: •Physical flows of g&s and input factors •Money flow: flow of money •Revenue = Spending (Expenditures) = Income = Wages, Rent and Profit What this Diagram Omits The government •Collects taxes •Purchases goods and services The financial system •Matches savers' supply of funds with borrowers demand for loans The foreign sector •Trades in goods and services, financial assets, and currencies with the country's residents In Practice, two ways to measure GDP Income Approach •Measures the total income in the economy (money received by the factors of production...wages, rent, profit) Expenditure Approach: •Measures total expenditures in the economy (money spent on all goods and services produced in the economy) •We will focus on the expenditure approach Gross Domestic Product (GDP) is…? The market value of all final goods and services produced within a country in a given period of time •Market value means goods are valued at their market price so o GDP measures all goods using the same units (e.g. dollars in Canada) rather than "adding apples and oranges" o Things that do not have a market valye are excluded (e.g. housework you do for yourself) •Final goods are intended for the end user o Intermediate goods are not directly included in GDP • Intermediate goods are used as components or ingredients in the production of other goods o GDP only includes Final goods as they already embody the value of the intermediate goods used in their production • GDP includes tangible goods (like DVDs and moutain bikes) and intangible services (dry cleaning, concerts, cell phone service) • GDP includes currently produced goods, not goods produced in the past • GDP measures the value of production that occurs within a country's borders • GDP measures what is produced in usually a year or a quarter (3 months) The
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