The textbook was so concise in this area and I wanted to do give you more.  This study guide is almost completely the extra parts.  I will include parts from the text, but for the most part I will omit that here and let you read the text.

 

 

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).

 

B.   For an economy as a whole, total income must equal total expenditure and they must equal total production.

 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 to show why total income and total expenditure must be equal.

 


 

a.   Households buy goods and services from firms; firms use this money to pay for resources purchased from households. 

b.   In the simple economy described by this circular-flow diagram, calculating GDP could be done by adding up the total purchases of households or summing total income earned by households. 

c.    Note that this simple diagram is somewhat unrealistic as it omits saving, taxes, government purchases, and investment purchases by firms. However, because a transaction always has a buyer and a seller, total expenditure in the economy must be equal to total income.

 

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.”

 

 

 

 

 

    FYI: Other Measures of Income

 


   Gross National Product (GNP) is the total income earned by a nation’s permanent residents.

 

 

 

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: a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100.
 
 

 

 

 


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.

 

 

 

 

I.    Would you rather have 55K today or 55K in 1900 and all 1900 technology?

This is why we like growth

 

Because of different growth rates, the ranking of countries by income per person changes over time.

a.   In the late 19th century, the United Kingdom was the richest country in the world.

b.   Today, income per person is lower in the United Kingdom than in the United States and Canada (two former colonies of the United Kingdom).

 

II.            Productivity: Its Role and Determinants

Why Productivity Is So Important?

Definition of productivity is…..

 

How Productivity Is Determined?

 

A production function describes……..

 

 

Growth Dynamics: Our Growth Model

A. Setup of the Model

1. Basic assumptions
          a. Population and work force grow at the same rate n.
          b. Closed economy and there are no government purchases of goods and services therefore

 

          c. Rewrite the equation in per capita (per worker) terms by dividing by the size of the labor force Nt Denote per worker values in lower cases

          d. kt  is the capital to labor ratio

2. The production function can also be represented in per worker terms

          a. 

          b. Can plot the per-worker production function assuming no productivity growth.

3. Steady states

          a. In the steady state the per-capita levels of output, capital and consumption will be constant over time.

 (labor force and capital grow at the same rate…)

     

sf(k) = (n + d)k

          kss is the only possible steady state capital labor ratio it is where saving is equal to the steady state level of investment.

If k does not equal kss then the economy will converge to the steady state level

if k<kss    Then saving > investment needed to keep k constant so k increases

if k>kss      Then saving < investment needed to keep k constant so k decreases

 

Higher saving rate leads to a higher capital labor ratio, higher output per worker and consumption per worker depends on the golden rule.

·        Should policy increase the saving rate?

          May lower consumption in the short run, but will increase output per worker.   Trade-off between future and present consumption

·        Population growth lowers the capital output ratio, lowers consumption per worker

·        Productivity growth

          The key factor in determining economic growth – increase the output worker for a giving level of capital labor ratio

III. Government Policy to Raise Long Run Living Standards

How can saving be increased?
How can we improve Infrastructure?
How can we build Human Capital?
How can we increase Investment from Abroad

a.   Foreign direct investment occurs when a capital investment is owned and operated by a foreign entity.

b.   Foreign portfolio investment occurs when a capital investment is financed with foreign money but operated by domestic residents.

 

 

How can we improve Health and Nutrition

      Other things being equal, healthier workers are more productive.

How does the US protect Property Rights and promote Political Stability

How can we promote Free Trade

How can we increase Research and Development