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Econ 335 Flath Chp1

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Economics (Arts)
ECON 335
John C Kurien

Chapter 1: Incomes and Welfare of Japanese Today GDP and National Income GDP (gross domestic product): -value of current market price -all final goods and services -produced by the nation -in a given year →within geographic borders GNP (gross national product): -value of current market price -all final goods and services -produced by the citizens of the country (whether or not resident within borders) -in a given year ⇒final goods and services used to avoid double counting NI (National Income): -income of all residents → GDP – (depreciation expenses + indirect tax) = NI - GDP and NI highly correlated Spending is either for consumption, investment or accumulation of foreign wealth - NI = either consumption, investment purchasing of foreign assets - Spending by business = Investment - Spending by households = Consumption - Government purchase of final goods = Investment/consumption - Japanese national account  Investment = public works eg. Purchase of buildings, roads  Consumption = National defense and compensation  National government is prevented by law from issuing bonds in excess of that needed to finance investment Investment contributes to sustainable consumption - Higher NI devoted to investment = sustain higher steady state levels of consumption - High saving rate + high investment rate = higher sustainable consumption level Consumption Level and NI - Y(National Income) = C(spending by household) + I(spending by businesses and household spending for housing) + G(government expenditure) + [X(exports) – M(imports)] - GDP = C + I + (X – M) - Purchasing Power Parity (PPP) → how much money would be needed to purchase the same good and services in 2 different countries: used to calculate exchange rate  Price of each good will be the same in all countries that trade freely with one another when exchange rates are converted  Divergence of PPP: always associated with barriers to trade (result of government interference)  Consumption activities that use land tend to have higher relatives prices within Japan → difficulty in international trade (weakness = anything to do with land) Real Income
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