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Next week we’ll have a quiz on growth based on ....
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reading assignment, lecture notes
and homework.
game, classwork activities,
Under traditional free market theory, the government has a _________ role in the economy.
(1) enforce ____________
(2) provide for _________ property rights
(3) provide ________ goods
limited
contracts
private
public
Basically, economists believed in the self-correcting nature of the market. But then on October 29, ______ we had the ....
Great Crash followed by a decade known as the Great ____________ which convinced many that we need to monitor the economy and prevent big downturns.
1929
Depression
The primary goals of a country’s macroeconomics policy makers
2. maximize employment
i.e., low unemployment
1. maximize economic growth
3. maintain stable price level
i.e., low inflation
First we’ll examine ….
maximize economic growth
To examine growth, there are several possible factors we could measure:
(a) income approach – looking at all households’, firms’ & government incomes
(con’t)
possible factors we could measure:
(b) expenditure approach – gov’t adds up all the money spent on buying this year’s output
(c) output – gov’t determines value added…the money spent on making goods (inputs) is deducted from money received from sale of goods (output).
Most countries have settled on the expenditure method where gov’t adds up all the money spent on buying this year’s output.
Primary measure:
Real GDP –
real gross domestic product
the total market value of all final goods and services produced in an economy in a one-year period
GNP – gross national product
Since 1992 we’ve used -- GDP – gross domestic product
the total market value of all final goods and services produced in an economy in a one-year period; a geographic measure
another possible measure…
aggregate final output of citizens and businesses of an economy in a one-year period; a citizenship measure
GNP GDP
(2) Donald Trump opens a new casino in Monaco near southern France
(1) a U.S. college student works in an Italian hotel for the summer
(3) Nandini, an Indian citizen, works at MicroChip in Chandler on a 2-year contract
(2) A Subway franchise on the ASU campus pulled in $300,000.
Would the value of this output be included in ….
both
GNP
both
GDP
GNP
So how shall we measure GDP?
We could use the income approach where we look at all the income coming into households, firms & government.
Or...we could use the expenditure approach where we add up all the money spent on buying this year’s output
Households
$ Firms
$ $$
$
$$
$$
$
G&SG&S
G&S
G&S
$$$$
$
$$ $ $ $
Land, Labor, Capital, Entrepreneurship
resources
resources
resources
resources
GOV.
What is represented here?
households sending resources to business
What is represented here?
businesses sending payments to households
What is represented here?
households paying for goods & services
What is represented here?
businesses sending goods & services to households
here?transfer payments
here?taxes
here?taxes
here?subsidies
Households
$ Firms
$ $$
$
$$
$$
$
G&SG&S
G&S
G&S
$$$$
$
$$ $ $ $
Land, Labor, Capital, Entrepreneurship
resources
resources
resources
resources
GOV. TaxesTransferpayments
Taxes Subsidies
Which side illustrates the expenditure approach and which the income?
expenditure approachincome approach
and these two approaches will yield equal results
consumption – payments by households for goods and services.
government purchases – payments for goods and services and investment in equipment and structures
investment – household spending on owner-occupied housing and business spending on equipment, structures, and inventories
real GDP = C GI (X-M)+ + +
C
I
G
expenditure approach
Exports bring money into our economy, but imports send money out so are excluded from GDP
real GDP = C GI (X-M)+ + +
(X-M)
expenditure approach
real GDP = C GI (X-M)+ + +
= 69%
19%16%
-4%+ + +
income approach
NI =
Emp Comp InterestRents Profits+ + +
The income approach adds up payments from firms to households also called _____________ payments.
National Income = total income earned by citizens and businesses of a country.
factor
income approach
NI =
Emp Comp InterestRents Profits+ + +
Employee Compensation – wages and salaries + benefits + gov’t taxes for Soc Sec & unemployment insurance
Rents – income from property received by households
income approach
NI =
Emp Comp InterestRents Profits+ + +
interest – income private businesses pay to households that have lent businesses money, usually through purchasing bonds
profits – amount left over after compensation, rents, and interest have been paid out
You should memorize the formula for NI, but not many details. The more common approach is the real GDP or ______________ approach.
expenditure
real GDP = C GI (X-M)+ + +
the total market value of all final goods and services produced in an economy in a one-year period
note…. “total market value”
so services or goods that never reach the market are excluded; Ryan cuts his own grass
expenditure approach
real GDP = C GI (X-M)+ + +
the total market value of all final goods and services produced in an economy in a one-year period
note…. “final goods and services”
so intermediate goods are excluded; goods that are used in the production of other goods; must exclude to avoid double counting
real GDP = C GI (X-M)+ + +
the total market value of all final goods and services produced in an economy in a one-year period
note…. “final goods and services”
so transfer payments are excluded, i.e. food stamps given to a family excluded
so purchase of stock or bond is excluded; a financial transaction does not involve the production of a good or service
real GDP = C GI (X-M)+ + +
the total market value of all final goods and services produced in an economy in a one-year period
note…. “in a one-year period”
so used goods are excluded; they must be produced within that year