I. Review
of the Definitions of Microeconomics and Macroeconomics
A. Definition of microeconomics:.............
B. Definition of macroeconomics:
II. The
Economy’s Production, Income and Expenditure
A. To judge
whether or not an economy is doing well, it is useful to look at Gross Domestic
Product (GDP).
1. GDP measures
the total income of everyone in the economy.
2. GDP measures
total expenditure on an economy’s output of goods and services.
3. GDP measures
total production of an economy’s output of goods and services.
B. For an
economy as a whole, total income must equal total expenditure.
1. If someone
pays someone else $100 to mow a lawn, the expenditure on the lawn service ($100)
is exactly equal to the income earned from the production of the lawn service
($100).
2. We can also
use the circular-flow diagram from Chapter 2 to show why total income and total
expenditure must be equal.
III. The Measurement of
Gross Domestic Product
A. Definition of gross domestic product (GDP):................
B. “GDP Is the Market Value . . .”
C. “. . . Of
All . . .”
D. “. . . Final
. . .”
E. “. . . Goods
and Services . . .”
F. “. . .
Produced . . .”
G. “. . .
Within a Country . . .”
H. “. . . in a
Given Period of Time.”
Gross National
Product (GNP) is the total income earned by a nation’s permanent residents.
1. GNP includes
income that American citizens earn abroad.
2. GNP excludes
income that foreigners earn in the United States.
IV. The Components of
GDP
A. GDP (Y
) can be divided into four components: consumption (C
), investment (I ),
government purchases (G ),
and net exports (NX ).
B. Definition of consumption:.....
C. Definition of investment:...........
D. Definition of government purchases:.....
E. Definition of net exports:.........
V. Real Versus
Nominal GDP
A. There are
two possible reasons for total spending to rise from one year to the next.
1. The economy
may be producing a larger output of goods and services.
2. Goods and
services could be selling at higher prices.
B. When
studying GDP over time, economists would like to know if output has changed (not
prices).
C. Thus,
economists measure real GDP by valuing output using a fixed set of prices.
D. A Numerical Example
1. Two goods
are being produced: hot dogs and hamburgers.
|
Year |
Price of
Hot Dogs |
Quantity of
Hot Dogs |
Price of Hamburgers |
Quantity of Hamburgers |
|
2008 |
$1 |
100 |
$2 |
50 |
|
2009 |
$2 |
150 |
$3 |
100 |
|
2010 |
$3 |
200 |
$4 |
150 |
2. Definition
of nominal GDP: the production of
goods and services valued at current prices.
Nominal GDP for 2008 = ($1 ×
100) + ($2 × 50) = $200.
Nominal GDP for 2009 = ($2 ×
150) + ($3 × 100) = $600.
Nominal GDP for 2010 = ($3 ×
200) + ($4 × 150) = $1,200.
3. Definition
of real GDP: the production of
goods and services valued at constant prices.
Let’s assume that the base year
is 2008.
Real GDP for 2008 = ($1 × 100) +
($2 × 50) = $200.
Real GDP for 2009 = ($1 × 150) +
($2 × 100) = $350.
Real GDP for 2010 = ($1 × 200) + ($2 × 150) = $500.
E. Because real GDP is unaffected by changes in prices over time, changes in real GDP reflect changes in the amount of goods and services produced.
F. The GDP
Deflator
1. Definition of GDP deflator:.......
2. Example
Calculations
GDP Deflator for 2008 = ($200 /
$200) × 100 = 100.
GDP Deflator for 2009 = ($600 /
$350) × 100 = 171.
GDP Deflator for 2010 = ($1200 / $500) × 100 = 240.
VI. Is GDP a Good Measure of Economic Well-Being?
I. would
you rather have 55K today or 55K in 1900 and all 1900 techno
This is why we like growth
II.
Productivity: Its Role and Determinants
A. Why
Productivity Is So Important
1. Example:
Robinson Crusoe
a. Because he
is stranded alone, he must catch his own fish, grow his own vegetables, and make
his own clothes.
b. His
standard of living depends on his ability to produce goods and services.
2. Definition of productivity:......
3. Review of
Principle #8: A Country’s Standard of Living Depends on Its Ability to Produce
Goods and Services.
B. How
Productivity Is Determined
1. Physical
Capital per Worker
a. Definition of physical capital:...........
b. Example:
Crusoe will catch more fish if he has more fishing poles.
2. Human
Capital per Worker
a. Definition of human capital:............
b. Example:
Crusoe will catch more fish if he has been trained in the best fishing
techniques.
3. Natural
Resources per Worker
a. Definition of natural resources:..............
b. Example:
Crusoe will have better luck catching fish if there is a plentiful supply around
his island.
4.
Technological Knowledge
a. Definition of technological knowledge:..........
b. Example:
Crusoe will catch more fish if he has invented a better fishing lure.
C.
FYI: The Production Function
1. A production
function describes the relationship between the quantity of inputs used in
production and the quantity of output from production.
2. The
production function generally is written like this:
where Y = output,
L = quantity of labor,
K = quantity of physical capital,
H = quantity of human capital,
N = quantity of natural resources,
A reflects the available production
technology, and F () is a
function that shows how inputs are combined to produce output.
III. Economic Growth and
Public Policy
A. Saving and
Investment
B. Diminishing
Returns and the Catch-Up Effect
a. Definition of catch-up effect:
Horse race story
Globalization does not cause poverty
C. Investment
from Abroad
a. Foreign direct investment...............
b. Foreign portfolio investment.............
D. Education
E. Health and
Nutrition
F. Property
Rights and Political Stability
G. Free Trade
H. Research and
Development
I.
Population Growth