MacroEconomicsGrossDomesticProductIn this chapter, look for the answers to these questions:nWhatisGrossDomesticProduct(GDP)?nHowisGDPrelatedtoanationstotalincomeandspending?nWhatarethecomponentsofGDP?nHowisGDPcorrectedforinflation?nDoesGDPmeasuresocietyswell-being?Micro vs. MacronMicroeconomics:Thestudyofhowindividualhouseholdsandfirmsmakedecisions,interactwithoneanotherinmarkets.nMacroeconomics:Thestudyoftheeconomyasawhole.nWebeginourstudyofmacroeconomicswiththecountrystotalincomeandexpenditure.Income and ExpenditurenGross Domestic Product (GDP)measurestotalincomeofeveryoneintheeconomy.nGDPalsomeasurestotalexpenditureontheeconomysoutputofg&s.For the economy as a whole, income equals expenditureincome equals expenditure, because every dollar a buyer spends is a dollar of income for the seller.The Circular-Flow DiagramnasimpledepictionofthemacroeconomynillustratesGDPasspending,revenue,factorpayments,andincomenPreliminaries:Factors of productionareinputslikelabor,land,capital,andnaturalresources.Factor paymentsarepaymentstothefactorsofproduction.(e.g.,wages,rent)FIGURE 1: The Circular-Flow DiagramHouseholds:own the factors of production, sell/rent them to firms for incomebuy and consume g&sHouseholdsFirmsFIGURE 1: The Circular-Flow DiagramHouseholdsFirmsFirms:buy/hire factors of production, use them to produce g&ssell g&sWhat This Diagram OmitsnThegovernmentcollectstaxespurchasesg&snThefinancialsystemmatchessaverssupplyoffundswithborrowersdemandforloansnTheforeignsectortradesg&s,financialassets,andcurrencieswiththecountrysresidentsthemarketvalueofallfinalgoods&servicesproducedwithinacountryinagivenperiodoftime.Gross Domestic Product (GDP) IsGoods are valued at their market prices, so:all goods measured in the same units (e.g., dollars in the U.S.)Things that dont have a market value are excluded, e.g., housework you do for yourself.themarketvalueofallfinalgoods&servicesproducedwithinacountryinagivenperiodoftime.Gross Domestic Product (GDP) IsFinal goods: intended for the end user Intermediate goods: used as components or ingredients in the production of other goods GDP only includes final goods they already embody the value of the intermediate goods used in their production.themarketvalueofallfinalgoods&servicesproducedwithinacountryinagivenperiodoftime.Gross Domestic Product (GDP) IsGDP includes tangible goods (like DVDs, mountain bikes, beer)and intangible services (dry cleaning, concerts, cell phone service).themarketvalueofallfinalgoods&servicesproducedwithinacountryinagivenperiodoftime.Gross Domestic Product (GDP) IsGDP includes currently produced goods, not goods produced in the past.themarketvalueofallfinalgoods&servicesproducedwithinacountryinagivenperiodoftime.Gross Domestic Product (GDP) IsGDP measures the value of production that occurs within a countrys borders, whether done by its own citizens or by foreigners located there. themarketvalueofallfinalgoods&servicesproducedwithinacountryinagivenperiodoftime.Gross Domestic Product (GDP) Isusually a year or a quarter (3 months) The Components of GDPnRecall:GDPistotalspending.nFourcomponents:Consumption(C)Investment(I)GovernmentPurchases(G)NetExports(NX)nThesecomponentsadduptoGDP(denotedY):Y = C + I + G + NXConsumption (C)nistotalspendingbyhouseholdsong&s.nNoteonhousingcosts:Forrenters,consumptionincludesrentpayments.Forhomeowners,consumptionincludestheimputedrentalvalueofthehouse,butnotthepurchasepriceormortgagepayments.Investment (I)nistotalspendingongoodsthatwillbeusedinthefuturetoproducemoregoods.nincludesspendingoncapitalequipment(e.g.,machines,tools)structures(factories,officebuildings,houses)inventories(goodsproducedbutnotyetsold)Note: “Investment”“Investment” does not mean the purchase of financial assets like stocks and bonds.Government Purchases (G)nisallspendingontheg&spurchasedbygovtatthefederal,state,andlocallevels.nGexcludestransfer payments,suchasSocialSecurityorunemploymentinsurancebenefits.Theyarenotpurchasesofg&s.Net Exports (NX)nNX=exportsimportsnExportsrepresentforeignspendingontheeconomysg&s.nImportsaretheportionsofC,I,andGthatarespentong&sproducedabroad.nAddingupallthecomponentsofGDPgives:Y = C + I + G + NXU.S. GDP and Its Components, 20072,3448,9057,03732,228$45,825per capita5.119.415.470.3100.0% of GDP7082,6902,1259,734$13,841billionsNXGICYA C T I V E L E A R N I N G 1: A C T I V E L E A R N I N G 1: GDP and its componentsGDP and its componentsIneachofthefollowingcases,determinehowmuchGDPandeachofitscomponentsisaffected(ifatall).A. Debbiespends$200tobuyherhusbanddinneratthefinestrestaurantinBoston.B. Sarahspends$1800onanewlaptoptouseinherpublishingbusiness.ThelaptopwasbuiltinChina.C. Janespends$1200onacomputertouseinhereditingbusiness.Shegotlastyearsmodelonsaleforagreatpricefromalocalmanufacturer.D. GeneralMotorsbuilds$500millionworthofcars,butconsumersonlybuy$470millionworthofthem.A C T I V E L E A R N I N G 1: AnswersA.Debbiespends$200tobuyherhusbanddinneratthefinestrestaurantinBoston.Consumption and GDP rise by $200. B.Sarahs