A. GDP, Economic Growth, and Business Cycles

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "A. GDP, Economic Growth, and Business Cycles"

Transcription

1 ECON 3023 Hany Fahmy FAll, 2009 Lecture Note: Introduction and Basic Concepts A. GDP, Economic Growth, and Business Cycles A.1. Gross Domestic Product (GDP) de nition and measurement The Gross Domestic Product (GDP) is a measure of aggregate economic activity. It is de ned as the dollar (market) value of all nal goods and services produced within the borders of an economy during a speci c period of time (usually one year). There are three approaches to measuring GDP: namely (1) The product approach, (2) The expenditure approach, and (3) The income approach. 1. The Product Approach (Value Added Approach) According to this approach, the GDP is the sum of all value added to goods and services in production. To calculate GDP using this approach, compute the nal value of all goods and services used in production and then, to ensure that there is no double counting, subtract the value of all intermediate goods used in production of nal goods. The value added of good i, V A i ; is the value of the output of that good, O i ; minus the value of inputs used in production of the same good, I i ; that is V A i = O i I i : Assuming that we have n goods in an economy, the GDP can be found by summing the value added over n as nx GDP = V A i : 2. The Expenditure Approach According to this approach, the GDP is the sum of all expenditures in the economy as i=1 GDP = C + I + G + X M; where C is consumption expenditure, I is spending on machines and equipment for business purposes, G is government spending, X is spending by foreigners on domestic products (exports), and M is spending by domestic residents on foreign goods (imports). 3. The Income Approach According to this approach, the GDP is calculated by adding up all incomes received by economic agents contributing to production. The incomes include: Pro ts made by rms. Compensation to employees (salaries, wages and bene ts). Net interest (interest income of consumers). Taxes by producers to government (government income). 1

2 Depreciation. GDP = W age Income + After T ax profits + interest income + T axes: A.2. GDP versus GNP Gross National Product (GNP) measures the value of output produced by domestic factors of production, whether or not the production takes place within the national boundaries. By contrast, gross domestic product (GDP) is the value of output produced inside the national boundaries. A.3. Why GDP is an inaccurate measure of economic welfare? Because: 1. GDP does not account for how income is distributed across individuals. A better measure is percapita GDP; that is GDP=population: 2. GDP does not include non-market activities such as work in the home. A.4. Why GDP is an inaccurate measure of output? Because: 1. It does not include economic activities in the underground economy. 2. There are di culties in valuing government expenditures. Problem 1 Reference: Chapter 2, problem #2 (textbook). Assume an economy with a coal producer, a steel producer, and some consumers (there is no government). In a given year, the coal producer produces 15 million tones of coal and sells it for $5 per tonne. The coal producer pays $50 millions in wages to consumers. The steel producer uses 25 million tons of coal as an input into steel production, all purchased as $5 per tonne. Of this, 15 million tones of coal comes from the domestic coal producer, and 10 million tones is imported. The steel producer produces 10 million tons of steel and sells it for $20 per tonne. Domestic consumers buy 8 million tons of steel, and 2 million tones are exported. The steel producer pays consumers $40 in wages. All pro ts made by domestic producers are distributed to domestic consumers. Find the following: (a) GDP using (i) the product approach, (ii) the expenditure approach, and (iii) the income approach (b) Determine the current account surplus (c) What is GNP in this economy? Determine GNP and GDP in the case where the coal producer is owned by foreigners, so that the pro ts of the domestic coal producer go to foreigners and are not distributed to domestic consumers? (a) GDP using the three approaches 2

3 i. Output Approach V A(Coal) = O I = (15 5) 0 = $75 V A(Steel) = O I = (10 20) (25 5) = $75 GDP = X V A = 150 ii. Expenditure Approach iii. Income Approach C = 8 20 = 160 I = 0 G = 0 X = 2 20 = 40 M = 10 5 = 50 GDP = C + I + G + X M = 150 W age Income(after tax) = ( ) 0 = 90 (b) CA = X M = = 10 After T ax profits = T R coal + T R Steel T C coal T C steel T axes interest income = 0 T axes = 0 GDP = 150 = ( ) = 60 (c) As originally formulated, GNP is equal to GDP, which is equal to $150 million. Alternatively, if foreigners receive $25 million in coal industry pro ts as income, then net factor payments from abroad are - $25 million, so GNP is equal to $125 million. B. Real GDP and the Price Level B.1. De nition and Calculations Real GDP is the value of nal goods and services produced in a given year when valued at constant prices. = Def lator Remark 2 The growth rate of real GDP, g, is found using the percentage change formula as where y t is real GDP at time t: g = y t y t 1 y t 1 100%; There are two ways to calculate real GDP: (1) The base year method and (2) The chain-weighted output index method. Both methods are illustrated in the following subsections. 3

4 i. The Base year method Choose a base year rst and then multiply the quantities produced in a given year by base year prices. ii. The chain-weighted output index method. The chain-weighted output method involves three steps: 1. Calculate real GDP ratios using prices of two adjacent years 2. Calculate the chain-weighted real GDP ratios 3. Use the chain-weighted real GDP ratio to create a chain linking the base year real GDP to the real GDP in future years. Example 3 Imagine an economy with two goods, apples and oranges. Last year (2008), 50 apples were sold for $1 each and 100 units of orange at $0.8 each. This year (2009), 80 apples were sold for $1.25 each and 120 units of orange at $1.60 each. (a) Calculate nominal GDP in 2008 and 2009 (b) Calculate real GDP in each year, and the percentage increase in real GDP from year 2008 to year 2009 using year 2008 as the base year. (c) Do the same calculation as in part (b) using year 2009 as the base year (d) Compare your answers in part (b) and (c). Why does the choice of a base year matters in calculating real GDP? (e) Explain what chain weighting is. Explain the problem in measuring the real GDP. (f) Do the same calculation as in (b) using the chain-weighting method. Answer (a) Year 2008 Apples 50 $1 Oranges 100 $0.8 Total (50 1) + (100 $0:8) = $130 Year $ $1.60 (80 1:25)+(120 1:6) = $292 (b) Year 2008 (base year) Year 2008 Apples 50 $1 $1 Oranges 100 $0.8 $0.8 Total = $130 = $130 The percentage change in real GDP is Year $1.25 $1 120 $1.60 $0.8 = $292 = (80 1)+(120 0:8) = 176 g = y t y t % = 100% = 35:4%: y t

5 (c) Year 2009 (base year) Year 2008 Apples 50 $1 $1.25 Oranges 100 $0.8 $1.60 Total = $130 (50 1:25) + (100 $1:6) = $222:5 Year $1.25 $ $1.60 $1.60 = $292 = $292 (d) Real GDP growth rates are not the same. GDP values production at market prices. Real GDP compares di erent years production at a speci c set of prices. These prices are those that prevailed in the base year. Real GDP is therefore a weighted average of individual production levels. The weights are determined according to prevailing relative prices in the base year. Because relative prices change over time, comparisons of real GDP across time can di er according to the chosen base year. (e) Chain weighting directly compares production levels only in adjacent years. The price weights are determined by averaging the prices of the individual goods and services over the two adjacent years. Real GDP is di cult to measure due to changes over time in relative prices, di culties in estimating the extent of quality changes, and how one estimates the value of newly introduced goods. (f) At year 2008 prices, the ratio of year 2009 real GDP to 2008 real GDP is g 1 = RGDP 2009 RGDP 2008 = = 1:354: At year 2009 prices, the ratio of year 2009 real GDP to 2008 real GDP is g 2 = RGDP 2009 RGDP 2008 = :5 = 1:312: The chain-weighted ratio of real GDP in the two years therefore is equal to g c = p g 1 g 2 = p 1:354 1:312 = 1:33: The percentage change chain-weighted real GDP from year 1 to year 2 is therefore approximately 33%. If we (arbitrarily) designate year 2008 as the base year, then year 2008 chainweighted GDP equals nominal GDP equals $130. Year 2009 chain-weighted real GDP is equal to (g c = 1:33 $130 = 173:29). C. Measures of the Price Level There are two commonly used measures of the price level. The implicit GDP price de ator which is obtained from the real GDP formula as Deflator = 100: and the consumer price index (CPI) which a weighted average of the prices of a set of goods and services produced in an economy over a period of time and is calculated as CP I current year = Cost of base year quantities at current prices Cost of base year quantities at base year prices 100: The In ation rate,, is the percentage change in the price level from one period to another and is calculates as t = CP I t CP I t 1 CP I t 1 100%: 5

6 D. Saving, Wealth, and Capital There are two types of savings: private savings S P and government saving S G : These can be found from the following formulas. The Private disposable income Y d Y d = Y + NF P + T R + INT T where also note that The Private Saving S P is Y = GDP N F P = net factor payments from abroad T R = government transfers to the private sector IN T = interest on government debt T = Taxes GNP = GDP + NF P S P = Y d As for the government saving S G, it is calculated as C S G = T T R INT G The government saving is the government surplus, and the government surplus is equal to the negative of the government de cit, D; i.e., D = S G Finally, national saving is the sum of government saving and private saving or, using Y = C + I + G + NX; we can write S = S P + S G = Y + NF P C G S = (C + I + G + NX) + NF P C G = I + NX + NF P {z } CA surplus The quantity NX + NF P is current account (CA) surplus E. Labour Market Measurement The employed, E;are those who worked part-time or full-time during the past week; the unemployed, UN;are those who were not employed during the past week but actively searched for work at some time during the last four weeks. The labor force, L; is L = E + UN: The total population consists of those who are in the labor force and those who are not in the labor force. The unemployment rate, U, is U = UN L 100%: and the participation rate is the labor force divided by the working age population. 6

7 F. Business Cycle Measurement F.1. De nitions Business cycle activity is represented graphically as deviations of real GDP from trend in GDP The trend is that smooth part of the GDP that can be explained by long-run growth factors Deviations are persistent in that if GDP is below (above) trend in one quarter it is most likely to stay below (above) trend the next quarter A peak is a relatively large positive deviation from trend in real GDP A trough is a relatively large negative deviation from trend in real GDP Amplitude is the maximum deviation from trend in an economic time series Frequency is the number of peaks in an economic time series that occur per year Comovement describes how aggregate economic variables move together over the business cycle Procyclical: Descirbes an economic variable that tends to be above (below) trend when real GDP is above (below) trend Countercyclical: Describes an economic variable that tends to be below (above) trend when real GDP is above (below) trend Acyclical: Describes an economic variable that is neither procyclical nor countercyclical A leading variable is a macroeconomic variable that tends to aid in predicting the future path of real GDP, whereas if real GDP helps to predict the future path of a particular macroeconomic variable, that variable is said to be a lagging variable. A coincident variable is one that neither leads nor lags real GDP The average labour productivity is measured as GDP per worker The real wage is the nominal wage rate divided by a price level Correlation coe cients do not indicate cyclicality Leading and lagging variables can have either positive or negative correlations F.2. Summary of Business Cycle Facts Variable Cyclicality Lead/Lag Variability relative to GDP Consumption Procyclical Coincident smaller Investment Procyclical Coincident larger Price Level Countercyclical Coincident larger Money Supply Procyclical leading larger Employment Procyclical lagging smaller Average Labor Productivity Procyclical? - 7

8 F.3. Short Answer Questions 1. In what ways are business cycles irregular, and in what ways are they regular? They are irregular in that economists have di culty predicting upturns and downturns. They are regular in the sense that many macroeconomic variables move together over the business cycle in predictable ways. 2. What evidence is there that the Canadian price-level deviation from trend is procyclical and what evidence is there that the Canadian price-level deviation from trend is countercyclical? The price level deviations appear countercyclical over the period in Canada and procyclical over smaller periods such as between the world wars. 3. Explain what is meant by procyclical, a countercyclical, and an acyclical variable? An economic variable is said to be procyclical if its deviations from trend are positively correlated with the deviations from trend in real GDP, countercyclical if its deviations from trend are negatively correlated with the deviations from trend in real GDP, and acyclical if it is neither procyclial nor countercyclical. 4. Why forecasting business cycle is di cult? The idea of forecasting is coming from the persistence in GDP, which implies that if GDP is below trend in one quarter, it is most likely to stay below trend the next quarter. In real life, choppy behavior of GDP, varying amplitude, and frequency uctuations indicate why long-term forecasting is di cult. 8

ECON300, Spring 2012 Intermediate Macroeconomics Professor: Hui He. Homework 1 Suggested Answer (Total points: 100)

ECON300, Spring 2012 Intermediate Macroeconomics Professor: Hui He. Homework 1 Suggested Answer (Total points: 100) ECON300, Spring 2012 Intermediate Macroeconomics Professor: Hui He Homework 1 Suggested Answer (Total points: 100) Understanding the growth rate and how to measure it Problem no. 1 on page 35. (10 points)

More information

CHAPTER 5: MEASURING GDP AND ECONOMIC GROWTH

CHAPTER 5: MEASURING GDP AND ECONOMIC GROWTH CHAPTER 5: MEASURING GDP AND ECONOMIC GROWTH Learning Goals for this Chapter: To know what we mean by GDP and to use the circular flow model to explain why GDP equals aggregate expenditure and aggregate

More information

Principles of Macroeconomics Prof. Yamin Ahmad ECON 202 Fall 2004

Principles of Macroeconomics Prof. Yamin Ahmad ECON 202 Fall 2004 Principles of Macroeconomics Prof. Yamin Ahmad ECON 202 Fall 2004 Sample Final Exam Name Id # Part B Instructions: Please answer in the space provided and circle your answer on the question paper as well.

More information

7. Which of the following is a flow variable? A) wealth B) the number unemployed C) government debt D) income

7. Which of the following is a flow variable? A) wealth B) the number unemployed C) government debt D) income Name: Date: 1. GDP is all of the following except the total: A) expenditure of everyone in the economy. B) income of everyone in the economy. C) expenditure on the economy's output of goods and services.

More information

Gross Domestic Product. Will the Canadian economy weaken through the next year and shrink, or will it remain strong and expand?

Gross Domestic Product. Will the Canadian economy weaken through the next year and shrink, or will it remain strong and expand? Will the Canadian economy weaken through the next year and shrink, or will it remain strong and expand? To assess the state of the economy and to make big decisions about business expansion, firms use

More information

Measuring GDP and Economic Growth

Measuring GDP and Economic Growth 20 Measuring GDP and Economic Growth After studying this chapter you will be able to Define GDP and explain why GDP equals aggregate expenditure and aggregate income Explain how Statistics Canada measures

More information

National Income Accounting

National Income Accounting Chapter 2 The Measurement and Structure of the Canadian Economy Economics 282 University of Alberta National Income Accounting The national income accounts is an accounting framework used in measuring

More information

6. Real GDP means the value of goods and services is measured in prices. A) current B) actual C) constant D) average

6. Real GDP means the value of goods and services is measured in prices. A) current B) actual C) constant D) average Name: Date: 1. Assume that total output consists of 4 apples and 6 oranges and that apples cost $1 each and oranges cost $0.50 each. In this case, the value of GDP is: A) 10 pieces of fruit. B) $7. C)

More information

Chapter 2. The Measurement and Structure of the National Economy Pearson Addison-Wesley. All rights reserved

Chapter 2. The Measurement and Structure of the National Economy Pearson Addison-Wesley. All rights reserved Chapter 2 The Measurement and Structure of the National Economy Chapter Outline National Income Accounting: The Measurement of Production, Income, and Expenditure Gross Domestic Product Saving and Wealth

More information

Macroeconomics: GDP, GDP Deflator, CPI, & Inflation

Macroeconomics: GDP, GDP Deflator, CPI, & Inflation HOSP 2207 (Economics) Learning Centre Macroeconomics: GDP, GDP Deflator, CPI, & Inflation Macroeconomics is the big picture view of an economy. Microeconomics looks at the market for a specific good, like

More information

Chapter Outline. Chapter 2. National Income Accounting. National Income Accounting

Chapter Outline. Chapter 2. National Income Accounting. National Income Accounting Chapter 2 The Measurement and Structure of the National Economy Chapter Outline National Income Accounting: The Measurement of Production, Income, and Expenditure Real GDP, Price Indexes, and Inflation

More information

Macroeconomics: Aggregate Demand & Aggregate Supply

Macroeconomics: Aggregate Demand & Aggregate Supply RGDP HOSP 2207 (Economics) Learning Centre Macroeconomics: Aggregate Demand & Aggregate Supply The level of real GDP attained when an economy is at full capacity is called the full capacity GDP or potential

More information

Economics 212 Principles of Macroeconomics Study Guide. David L. Kelly

Economics 212 Principles of Macroeconomics Study Guide. David L. Kelly Economics 212 Principles of Macroeconomics Study Guide David L. Kelly Department of Economics University of Miami Box 248126 Coral Gables, FL 33134 dkelly@miami.edu First Version: Spring, 2006 Current

More information

Measuring the Aggregate Economy

Measuring the Aggregate Economy CHAPTER 25 Measuring the Aggregate Economy The government is very keen on amassing statistics... They collect them, add them, raise them to the n th power, take the cube root and prepare wonderful diagrams.

More information

Big Concepts. Measuring U.S. GDP. The Expenditure Approach. Economics 202 Principles Of Macroeconomics

Big Concepts. Measuring U.S. GDP. The Expenditure Approach. Economics 202 Principles Of Macroeconomics Lecture 6 Economics 202 Principles Of Macroeconomics Measuring GDP Professor Yamin Ahmad Real GDP and the Price Level Economic Growth and Welfare Big Concepts Ways to Measure GDP Expenditure Approach Income

More information

Measuring a Nation s Income

Measuring a Nation s Income Measuring a Nation s Income I. Review of the Definitions of Microeconomics and Macroeconomics A. Definition of microeconomics: the study of how households and firms make decisions and how they interact

More information

Professor Christina Romer. LECTURE 17 MACROECONOMIC VARIABLES AND ISSUES March 17, 2016

Professor Christina Romer. LECTURE 17 MACROECONOMIC VARIABLES AND ISSUES March 17, 2016 Economics 2 Spring 2016 Professor Christina Romer Professor David Romer LECTURE 17 MACROECONOMIC VARIABLES AND ISSUES March 17, 2016 I. MACROECONOMICS VERSUS MICROECONOMICS II. REAL GDP A. Definition B.

More information

Chapter 20. The Measurement of National Income. In this chapter you will learn to. National Output and Value Added

Chapter 20. The Measurement of National Income. In this chapter you will learn to. National Output and Value Added Chapter 20 The Measurement of National Income In this chapter you will learn to 1. Use the concept of value added to solve the problem of double counting when measuring national income. 2. Describe the

More information

NATIONAL INCOME AND PRODUCT ACCOUNTING MEASURING THE MACROECONOMY

NATIONAL INCOME AND PRODUCT ACCOUNTING MEASURING THE MACROECONOMY NATIONAL INCOME AND PRODUCT ACCOUNTING MEASURING THE MACROECONOMY 1. NIPA: GNP and GDP 2. Saving and Wealth 3. Prices and Inflation 4. Unemployment 5. Problems with Measuring the Macroeconomy There are

More information

The Basics of National Income Accounting. Macroeconomics

The Basics of National Income Accounting. Macroeconomics The Basics of National Income Accounting Macroeconomics National Income Accounting A variety of measures of national income and output are used in economics to estimate total economic activity in a country

More information

GDP: Measuring Total Production and Income

GDP: Measuring Total Production and Income Chapter 7 (19) GDP: Measuring Total Production and Income Chapter Summary While microeconomics is the study of how households and firms make choices, how they interact in markets, and how the government

More information

Reference: Gregory Mankiw s Principles of Macroeconomics, 2 nd edition, Chapters 10 and 11. Gross Domestic Product

Reference: Gregory Mankiw s Principles of Macroeconomics, 2 nd edition, Chapters 10 and 11. Gross Domestic Product Macroeconomics Topic 1: Define and calculate GDP. Understand the difference between real and nominal variables (e.g., GDP, wages, interest rates) and know how to construct a price index. Reference: Gregory

More information

Name: Date: 3. Which of the following is a flow variable? A) wealth B) the number unemployed C) government debt D) income

Name: Date: 3. Which of the following is a flow variable? A) wealth B) the number unemployed C) government debt D) income Name: Date: 1. GDP is all of the following except the total: A) expenditure of everyone in the economy. B) income of everyone in the economy. C) expenditure on the economy's output of goods and services.

More information

Exam 1 Review. 3. A severe recession is called a(n): A) depression. B) deflation. C) exogenous event. D) market-clearing assumption.

Exam 1 Review. 3. A severe recession is called a(n): A) depression. B) deflation. C) exogenous event. D) market-clearing assumption. Exam 1 Review 1. Macroeconomics does not try to answer the question of: A) why do some countries experience rapid growth. B) what is the rate of return on education. C) why do some countries have high

More information

This is the on-line Multiple Choice Quiz for Chapter 4. Please do the following. Go to the special codes section on your score sheet

This is the on-line Multiple Choice Quiz for Chapter 4. Please do the following. Go to the special codes section on your score sheet Instructions: This is the on-line Multiple Choice Quiz for Chapter 4. Please do the following. Step I - Go to the special codes section on your score sheet Write your section number (1, or 4, or 5) under

More information

1. A glimpse of the real sector: GDP, inflation rate, macroeconomic identities

1. A glimpse of the real sector: GDP, inflation rate, macroeconomic identities 1. A glimpse of the real sector: GDP, inflation rate, macroeconomic identities 1. Real sector and financial sector Macroeconomics studies the aggregate effects of what people do. Most of what people do

More information

Practice Problems on NIPA and Key Prices

Practice Problems on NIPA and Key Prices Practice Problems on NIPA and Key Prices 1- What are the three approaches to measuring economic activity? Why do they give the same answer? The three approaches to national income accounting are the product

More information

MEASURING GDP AND ECONOMIC GROWTH CHAPTER

MEASURING GDP AND ECONOMIC GROWTH CHAPTER MEASURING GDP AND ECONOMIC GROWTH CHAPTER Objectives After studying this chapter, you will able to Define GDP and use the circular flow model to explain why GDP equals aggregate expenditure and aggregate

More information

ECONOMIC GROWTH* Chapter. Key Concepts

ECONOMIC GROWTH* Chapter. Key Concepts Chapter 5 MEASURING GDP AND ECONOMIC GROWTH* Key Concepts Gross Domestic Product Gross domestic product, GDP, is the market value of all the final goods and services produced within in a country in a given

More information

MEASURING GDP AND ECONOMIC GROWTH*

MEASURING GDP AND ECONOMIC GROWTH* Chapter 5 MEASURING GDP AND ECONOMIC GROWTH* Gross Domestic Product Topic: GDP 1) Gross domestic product is the total produced within a country in a given time period. A) market value of all final and

More information

Introduction to Macroeconomics

Introduction to Macroeconomics Introduction to Macroeconomics Macroeconomics the study of the economy as a whole We measure performance to track the development of the economy Why Measure Performance Helps the government develop tax

More information

Chapter 24. What will you learn in this chapter? Valuing an economy. Measuring the Wealth of Nations

Chapter 24. What will you learn in this chapter? Valuing an economy. Measuring the Wealth of Nations Chapter 24 Measuring the Wealth of Nations 2014 by McGraw-Hill Education 1 What will you learn in this chapter? How to calculate gross domestic product (GDP). Why each component of GDP is important. What

More information

Unit 4: Measuring GDP and Prices

Unit 4: Measuring GDP and Prices Unit 4: Measuring GDP and Prices ECO 120 Global Macroeconomics 1 1.1 Reading Reading Module 10 - pages 106-110 Module 11 1.2 Goals Goals Specific Goals: Understand how to measure a country s output. Learn

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Suvey of Macroeconomics, MBA 641 Fall 2006, Final Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Modern macroeconomics emerged from

More information

At the end of Chapter 10, you will be able to answer the following:

At the end of Chapter 10, you will be able to answer the following: 1 Objectives for Chapter 10 The Circular Flow Model At the end of Chapter 10, you will be able to answer the following: 1. Explain the basic circular flow model. 2. Define "consumption" and "saving" 3.

More information

Chapter 12: Gross Domestic Product and Growth Section 1

Chapter 12: Gross Domestic Product and Growth Section 1 Chapter 12: Gross Domestic Product and Growth Section 1 Key Terms national income accounting: a system economists use to collect and organize macroeconomic statistics on production, income, investment,

More information

Tracking the Macroeconomy

Tracking the Macroeconomy chapter 7(23) Tracking the Macroeconomy Chapter Objectives Students will learn in this chapter: How economists use aggregate measures to track the performance of the economy. What gross domestic product,

More information

Exam 1 Review. Page 1

Exam 1 Review. Page 1 Exam 1 Review 1. When a firm sells a product out of inventory, GDP: A) increases. B) decreases. C) is not changed. D) increases or decreases, depending on the year the product was produced. 2. An economy's

More information

Introduction to Macroeconomics. TOPIC 1: Introduction, definition, measures

Introduction to Macroeconomics. TOPIC 1: Introduction, definition, measures TOPIC 1: Introduction, definitions, measures Annaïg Morin CBS - Department of Economics August 2013 What is macroeconomics about? Understanding the behavior of an economy as a whole. studying aggregated

More information

Chapter 2 The Measurement and Structure of the National Economy

Chapter 2 The Measurement and Structure of the National Economy Chapter 2 The Measurement and Structure of the National Economy Multiple Choice Questions 1. The three approaches to measuring economic activity are the (a) cost, income, and expenditure approaches. (b)

More information

Name (Please print) Assigned Seat. ECO202: PRINCIPLES OF MACROECONOMICS FIRST MIDTERM EXAM SPRING 2011 Prof. Bill Even FORM 1.

Name (Please print) Assigned Seat. ECO202: PRINCIPLES OF MACROECONOMICS FIRST MIDTERM EXAM SPRING 2011 Prof. Bill Even FORM 1. Name (Please print) Assigned Seat ECO202: PRINCIPLES OF MACROECONOMICS FIRST MIDTERM EXAM SPRING 2011 Prof. Bill Even FORM 1 Directions 1. Fill in your scantron with your unique id and form number. Doing

More information

Economic Output. Economic Output. GDP: Definition. GDP: Definition. GDP: Definition. GDP: Definition. Agenda. Gross Domestic Product (GDP)

Economic Output. Economic Output. GDP: Definition. GDP: Definition. GDP: Definition. GDP: Definition. Agenda. Gross Domestic Product (GDP) Economic Output Economic Output Agenda Defining GDP Measuring Real GDP The Expenditure Side The Income Side Economic Output Gross Domestic Product (GDP) The official measure of a country s economic output.

More information

Chapter 20. The Measurement of National Income

Chapter 20. The Measurement of National Income Chapter 20 The Measurement of National Income National Output and Value Added -many production processes involve multiple stages, only some which are done within the same firm -this raises an important

More information

Measuring National Output and National Income

Measuring National Output and National Income Measuring National Output and National Income 6 C H A P T E R O U T L I N E Gross Domestic Product Final Goods and Services Exclusion of Used Goods and Paper Transactions Exclusion of Output Produced Abroad

More information

I. Measuring Output: GDP

I. Measuring Output: GDP University of California-Davis Economics 1B-Intro to Macro Handout 3 TA: Jason Lee Email: jawlee@ucdavis.edu I. Measuring Output: GDP As was mentioned earlier, the ability to estimate the amount of production

More information

The Data of Macroeconomics

The Data of Macroeconomics CHAPTER 2 The Data of Macroeconomics Modified for ECON 2204 by Bob Murphy 2016 Worth Publishers, all rights reserved IN THIS CHAPTER, YOU WILL LEARN:... the meaning and measurement of the most important

More information

The level of price and inflation Real GDP: the values of goods and services measured using a constant set of prices

The level of price and inflation Real GDP: the values of goods and services measured using a constant set of prices Chapter 2: Key Macroeconomics Variables ECON2 (Spring 20) 2 & 4.3.20 (Tutorial ) National income accounting Gross domestic product (GDP): The market value of all final goods and services produced within

More information

Chapter 24 Measuring Domestic Output and National Income QUESTIONS. 1. In what ways are national income statistics useful? LO1

Chapter 24 Measuring Domestic Output and National Income QUESTIONS. 1. In what ways are national income statistics useful? LO1 Chapter 24 Measuring Domestic Output and National Income QUESTIONS 1. In what ways are national income statistics useful? LO1 Answer: National income accounting does for the economy as a whole what private

More information

Chapter 12 Gross Domestic Product and Growth

Chapter 12 Gross Domestic Product and Growth Chapter 12 Gross Domestic Product and Growth 1. Gross Domestic Product 2. Business Cycles 3. Economic Growth How do we know if the economy is healthy... Economists measure Gross Domestic and Gross National

More information

Measuring Economic Performance. Chapter 2

Measuring Economic Performance. Chapter 2 Measuring Economic Performance Chapter 2 Outline Gross Domestic Product Measuring GDP Through Spending Measuring GDP Through Production Measuring GDP Through Income Saving and Investment Transactions with

More information

The Circular Flow 1/15/2013. Gross Domestic Product: Expenditure and Income

The Circular Flow 1/15/2013. Gross Domestic Product: Expenditure and Income IN THIS CHAPTER, YOU WILL LEARN: ECON 3010 Intermediate Macroeconomics Chapter 2 The Data of Macroeconomics the meaning and measurement of the most important macroeconomic statistics: gross domestic product

More information

VANCOUVER ISLAND UNIVERSITY. ECON212: PRINCIPLES OF MACROECONOMICS, Spring 2013 SAMPLE MIDTERM EXAM. Name (Last, First): ID #: Signature:

VANCOUVER ISLAND UNIVERSITY. ECON212: PRINCIPLES OF MACROECONOMICS, Spring 2013 SAMPLE MIDTERM EXAM. Name (Last, First): ID #: Signature: Important: Please remember it is a sample exam. Number of questions in each section and structure of questions in section b and c would vary as discussed in class VANCOUVER ISLAND UNIVERSITY ECON212: PRINCIPLES

More information

ECON 1010 Principles of Macroeconomics Practice Test 2 Solutions

ECON 1010 Principles of Macroeconomics Practice Test 2 Solutions ECON 1010 Principles of Macroeconomics Practice Test 2 Solutions Section A: Multiple Choice Questions. (40 points; 2 pts each) 1. The unemployment rate is the ratio of all of the people: A) out of work

More information

Exam 1 ECON 2105 Dr. Susan Laury. Thurs. Feb. 6, :00 p.m. Form B. There are 40 multiple choice questions, worth 2.

Exam 1 ECON 2105 Dr. Susan Laury. Thurs. Feb. 6, :00 p.m. Form B. There are 40 multiple choice questions, worth 2. Exam 1 ECON 2105 Dr. Susan Laury Thurs. Feb. 6, 2003 1:00 p.m. Form B There are 40 multiple choice questions, worth 2.5 points each Please follow these instructions carefully! Feel free to write on this

More information

Chapter 11: Activity

Chapter 11: Activity Economics for Managers by Paul Farnham Chapter 11: Measuring Macroeconomic Activity 11.1 Measuring Gross Domestic Product (GDP) GDP: the market value of all currently yproduced final goods and services

More information

MEASURING A NATION S INCOME

MEASURING A NATION S INCOME 10 MEASURING A NATION S INCOME WHAT S NEW IN THE FIFTH EDITION: There is more clarification on the GDP deflator. The Case Study on Who Wins at the Olympics? is now an FYI box. LEARNING OBJECTIVES: By the

More information

Households Wages, profit, interest, rent = $750. Factor markets. Wages, profit, interest, rent = $750

Households Wages, profit, interest, rent = $750. Factor markets. Wages, profit, interest, rent = $750 KrugmanMacro_SM_Ch07.qxp 11/9/05 4:47 PM Page 87 Tracking the Macroeconomy 1. Below is a simplified circular-flow diagram for the economy of Micronia. a. What is the value of GDP in Micronia? b. What is

More information

11.1 Estimating Gross Domestic Product (GDP) Objectives

11.1 Estimating Gross Domestic Product (GDP) Objectives 11.1 Estimating Gross Domestic Product (GDP) Objectives Describe what the gross domestic product measures. Learn two ways to calculate the gross domestic product, and explain why they are equivalent. 11.1

More information

Econ 202 Section 4 Final Exam

Econ 202 Section 4 Final Exam Douglas, Fall 2009 December 15, 2009 A: Special Code 00004 PLEDGE: I have neither given nor received unauthorized help on this exam. SIGNED: PRINT NAME: Econ 202 Section 4 Final Exam 1. Oceania buys $40

More information

These are some practice questions for CHAPTER 19. Each question should have a single answer. But be careful. There may be errors in the answer key!

These are some practice questions for CHAPTER 19. Each question should have a single answer. But be careful. There may be errors in the answer key! These are some practice questions for CHAPTER 19. Each question should have a single answer. But be careful. There may be errors in the answer key! 1. Real national income is also known as a. nominal national

More information

Macroeconomics Instructor Miller GDP Practice Problems

Macroeconomics Instructor Miller GDP Practice Problems Macroeconomics Instructor Miller GDP Practice Problems 1. Gross domestic product in the economy is measured by the A) total number of goods and services produced in the economy. B) dollar value of all

More information

ANSWERS TO END-OF-CHAPTER QUESTIONS

ANSWERS TO END-OF-CHAPTER QUESTIONS ANSWERS TO END-OF-CHAPTER QUESTIONS 7-1 In what ways are national income statistics useful? National income accounting does for the economy as a whole what private accounting does for businesses. Firms

More information

EC201 Intermediate Macroeconomics. EC201 Intermediate Macroeconomics Problem Set 1 Solution

EC201 Intermediate Macroeconomics. EC201 Intermediate Macroeconomics Problem Set 1 Solution EC201 Intermediate Macroeconomics EC201 Intermediate Macroeconomics Problem Set 1 Solution 1) Given the difference between Gross Domestic Product and Gross National Product for a given economy: a) Provide

More information

Chapter 15: Spending, Income and GDP

Chapter 15: Spending, Income and GDP Chapter 15: Spending, Income and GDP By the end of this chapter, you will be able to: Define GDP Calculate GDP by: adding up value added of production. adding up expenditure. adding up income. Distinguish

More information

National Income Accounting. Courtesy : www. carlprosper4nugs.yolasite.com

National Income Accounting. Courtesy : www. carlprosper4nugs.yolasite.com National Income Accounting Courtesy : www. Introduction to Economy of Ghana Measuring the Economy - National Income Accounting Structure of the Economy and Sectoral Outlook Economic History of Ghana: preindependence,

More information

Lecture 3: National Income Accounting Reference - Chapter 5. 3) The Income Approach

Lecture 3: National Income Accounting Reference - Chapter 5. 3) The Income Approach Lecture 3: National Income Accounting Reference - Chapter 5 3) The Income Approach The income approach defines GDP in terms of the income derived or created from producing final goods and services. Net

More information

Chapter 8. GDP : Measuring Total Production and Income

Chapter 8. GDP : Measuring Total Production and Income Chapter 8. GDP : Measuring Total Production and Income Instructor: JINKOOK LEE Department of Economics / Texas A&M University ECON 203 502 Principles of Macroeconomics Related Economic Terms Macroeconomics:

More information

Solutions to Week 3 Tutorial Questions (Ch2)

Solutions to Week 3 Tutorial Questions (Ch2) Chapter 2: Q1: Macroeconomics P.51 Review Questions #1 Q2: Macroeconomics P.51 Review Questions #5 Q3: Macroeconomics P.52 Numerical Problems #5 Q4: Macroeconomics P.52 Numerical Problems #6 Q5: Macroeconomics

More information

Week 4 Tutorial Question Solutions (Ch2 & 3)

Week 4 Tutorial Question Solutions (Ch2 & 3) Chapter 2: Q1: Macroeconomics P.52 Numerical Problems #3 part (a) Q2: Macroeconomics P.52 Numerical Problems #5 Chapter 3: Q3: Macroeconomics P.101 Numerical Problems #5 Q4: Macroeconomics P102 Analytical

More information

Econ 202 Final Exam. Douglas, Spring 2006 PLEDGE: I have neither given nor received unauthorized help on this exam.

Econ 202 Final Exam. Douglas, Spring 2006 PLEDGE: I have neither given nor received unauthorized help on this exam. , Spring 2006 PLEDGE: I have neither given nor received unauthorized help on this exam. SIGNED: PRINT NAME: Econ 202 Final Exam 1. When the government spends more, the initial effect is that a. aggregate

More information

UNIT I NATIONAL INCOME AND MACROECONOMICS

UNIT I NATIONAL INCOME AND MACROECONOMICS UNIT I NATIONAL INCOME AND MACROECONOMICS 1 National Income National Income is defined as the sum total of all the goods and services produced in a country, in a particular period of time. Normally this

More information

Politics, Surpluses, Deficits, and Debt

Politics, Surpluses, Deficits, and Debt Defining Surpluses and Debt Politics, Surpluses,, and Debt Chapter 11 A surplus is an excess of revenues over payments. A deficit is a shortfall of revenues relative to payments. 2 Introduction After having

More information

Measuring a Nation s Income THE MEASUREMENT OF GROSS DOMESTIC PRODUCT. In this chapter, look for the answers to these questions:

Measuring a Nation s Income THE MEASUREMENT OF GROSS DOMESTIC PRODUCT. In this chapter, look for the answers to these questions: In this chapter, look for the answers to these questions: What is Gross Domestic Product (GDP)? 5 How is GDP related to a nation s total income and spending? What are the components of GDP? How is GDP

More information

Why expenditure = income. The Circular Flow. Circular flow. Gross Domestic Product

Why expenditure = income. The Circular Flow. Circular flow. Gross Domestic Product Gross Domestic Product Why expenditure = income Two definitions: 1. Total expenditure on final goods and services 2. Total income earned by factors of production In In every transaction, the the buyer

More information

National Income and Balance of Payments Accounting. Chapter 13

National Income and Balance of Payments Accounting. Chapter 13 National Income and Balance of Payments Accounting Chapter 13 Outline GNP Government budget National saving National wealth Balance of payments accounting Gross National Product (GNP) Product Approach

More information

Econ 202 Final Exam. Table 3-1 Labor Hours Needed to Make 1 Pound of: Meat Potatoes Farmer 8 2 Rancher 4 5

Econ 202 Final Exam. Table 3-1 Labor Hours Needed to Make 1 Pound of: Meat Potatoes Farmer 8 2 Rancher 4 5 Econ 202 Final Exam 1. If inflation expectations rise, the short-run Phillips curve shifts a. right, so that at any inflation rate unemployment is higher. b. left, so that at any inflation rate unemployment

More information

12/03/2012. Currencies and Exchange Rates

12/03/2012. Currencies and Exchange Rates The Canadian dollar is one of 100s of different monies. The three big monies: the U.S. dollar, yen, and euro. In February 2007, one Canadian dollar bought 85 U.S. cents. By November 2007, the Canadian

More information

Chapter 8 Business Cycles

Chapter 8 Business Cycles Chapter 8 Business Cycles Multiple Choice Questions 1. One of the first organizations to investigate the business cycle was (a) the Federal Reserve System. (b) the National Bureau of Economic Research.

More information

EC2105, Professor Laury EXAM 2, FORM A (3/13/02)

EC2105, Professor Laury EXAM 2, FORM A (3/13/02) EC2105, Professor Laury EXAM 2, FORM A (3/13/02) Print Your Name: ID Number: Multiple Choice (32 questions, 2.5 points each; 80 points total). Clearly indicate (by circling) the ONE BEST response to each

More information

7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Aggregate Supply

7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Aggregate Supply Chapter 7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Aggregate Supply Topic: Aggregate Supply/Aggregate Demand Model 1) The aggregate supply/aggregate demand model is used to help understand all of the following

More information

Exchange Rates. Betty C. Daniel. University at Albany. Daniel (University at Albany) Exchange rates 1 / 17

Exchange Rates. Betty C. Daniel. University at Albany. Daniel (University at Albany) Exchange rates 1 / 17 Exchange Rates Betty C. Daniel University at Albany Daniel (University at Albany) Exchange rates 1 / 17 What is an exchange rate? Domestic-currency price of foreign currency Dollar price of euro is $1.46

More information

GDP M A C R O E C O N O M I C S

GDP M A C R O E C O N O M I C S GDP M A C R O E C O N O M I C S Gross Domestic Product GDP The market value of all final goods and services produced within a country during a given period of time. Breaking down the definition: 1. Market

More information

Chapter 12. National Income Accounting and the Balance of Payments. Slides prepared by Thomas Bishop

Chapter 12. National Income Accounting and the Balance of Payments. Slides prepared by Thomas Bishop Chapter 12 National Income Accounting and the Balance of Payments Slides prepared by Thomas Bishop Preview National income accounts measures of national income measures of value of production measures

More information

TRADE AND INVESTMENT IN THE NATIONAL ACCOUNTS This text accompanies the material covered in class.

TRADE AND INVESTMENT IN THE NATIONAL ACCOUNTS This text accompanies the material covered in class. TRADE AND INVESTMENT IN THE NATIONAL ACCOUNTS This text accompanies the material covered in class. 1 Definition of some core variables Imports (flow): Q t Exports (flow): X t Net exports (or Trade balance)

More information

Summer 2014 Week 3 Tutorial Questions (Ch2) Solutions

Summer 2014 Week 3 Tutorial Questions (Ch2) Solutions Chapter 2: Q1: Macroeconomics P.52 Numerical Problems #3 Q2: Macroeconomics P.52 Numerical Problems #6 Q3: Macroeconomics P.53 Numerical Problems #7 Q4: Macroeconomics P.53 Numerical Problems #9 Q5: Macroeconomics

More information

Chapter 6: Measuring National Output and Income

Chapter 6: Measuring National Output and Income Week 2 Presenter: Jan 25, 2012 Table of Contents 1 Calculating GDP 2 3 Questions Calculating GDP What is the definition of GDP?(2011Mid1 M11; 2011Mid1 M13) What would be included in GDP? intermediate goods?

More information

CHAPTER 20 GROSS DOMESTIC PRODUCT ACCOUNTING

CHAPTER 20 GROSS DOMESTIC PRODUCT ACCOUNTING CHAPTER 20 GROSS DOMESTIC PRODUCT ACCOUNTING Chapter in a Nutshell Gross domestic product was introduced in the previous chapter as a basic measure of macroeconomic performance. This chapter identifies

More information

The session previously discussed important variables such as inflation, unemployment and GDP. We also alluded to factors that cause economic growth

The session previously discussed important variables such as inflation, unemployment and GDP. We also alluded to factors that cause economic growth The session previously discussed important variables such as inflation, unemployment and GDP. We also alluded to factors that cause economic growth enabling us to produce more and more to achieve higher

More information

Name: Date: 3. Variables that a model tries to explain are called: A. endogenous. B. exogenous. C. market clearing. D. fixed.

Name: Date: 3. Variables that a model tries to explain are called: A. endogenous. B. exogenous. C. market clearing. D. fixed. Name: Date: 1 A measure of how fast prices are rising is called the: A growth rate of real GDP B inflation rate C unemployment rate D market-clearing rate 2 Compared with a recession, real GDP during a

More information

Agenda. Business Cycles. What Is a Business Cycle? What Is a Business Cycle? What is a Business Cycle? Business Cycle Facts.

Agenda. Business Cycles. What Is a Business Cycle? What Is a Business Cycle? What is a Business Cycle? Business Cycle Facts. Agenda What is a Business Cycle? Business Cycles.. 11-1 11-2 Business cycles are the short-run fluctuations in aggregate economic activity around its long-run growth path. Y Time 11-3 11-4 1 Components

More information

Chapter 5 Measuring Economic Activity: GDP and Unemployment

Chapter 5 Measuring Economic Activity: GDP and Unemployment Chapter 5 Measuring Economic Activity: GDP and Unemployment Overview This chapter looks in detail at how economists measure two major macroeconomic variables: gross domestic product (GDP) and the unemployment

More information

A layperson s guide to economic jargon

A layperson s guide to economic jargon 2000/3 14 March 2000 A layperson s guide to economic jargon Technical economic words are becoming more frequently used, not only in economic analyses and policy documents, but also in the general news

More information

Econ 202 Final Exam. Douglas, Spring 2010 May 6, 2010 PLEDGE: I have neither given nor received unauthorized help on this exam.

Econ 202 Final Exam. Douglas, Spring 2010 May 6, 2010 PLEDGE: I have neither given nor received unauthorized help on this exam. , Spring 2010 May 6, 2010 PLEDGE: I have neither given nor received unauthorized help on this exam. SIGNED: PRINT NAME: Econ 202 Final Exam Multiple Choice. 2 points each. 1. According to the long-run

More information

The Cyclical Behavior of Debt and Equity Finance Web Appendix

The Cyclical Behavior of Debt and Equity Finance Web Appendix The Cyclical Behavior of Debt and Equity Finance Web ppendix Francisco B. Covas and Wouter J. Den Haan December 15, 2009 bstract This appendix gives details regarding the construction of the data set and

More information

4. In the G of the GDP formula why do we not count Welfare and Social Security payments?

4. In the G of the GDP formula why do we not count Welfare and Social Security payments? DUE DATE: NAME: ECONOMIC HEALTH INDICATORS: GDP AND CPI WORKSHEET CHAPTER 11 USE THE ATTACHED NOTES OR THE POWERPOINTS TO ANSWER THE FOLLOWING QUESTIONS.!!!KEEP THE ATTACHED NOTES. DO NOT TURN IN THE NOTES!!!!

More information

Chapter 5: National Income Accounting John Petroff

Chapter 5: National Income Accounting John Petroff Chapter 5: National Income Accounting John Petroff INTRODUCTION The purpose of this topic is to study how the gross national product is measuring the economic activity of a nation. The concept is defined

More information

Macroeconomia Capitolo 7. Seguire l andamento della macroeconomia. What you will learn in this chapter:

Macroeconomia Capitolo 7. Seguire l andamento della macroeconomia. What you will learn in this chapter: Macroeconomia Capitolo 7 Seguire l andamento della macroeconomia PowerPoint Slides by Can Erbil 2006 Worth Publishers, all rights reserved What you will learn in this chapter: How economists use aggregate

More information

FISCAL POLICY* Chapter. The Federal Budget. goods and services. goods and services, the value of transfer payments,

FISCAL POLICY* Chapter. The Federal Budget. goods and services. goods and services, the value of transfer payments, Chapter 15 FISCAL POLICY* The Federal Budget Topic: The Federal Budget 1) Which of the following is considered a purpose of the federal budget? I. To help the economy achieve full employment. II. To finance

More information

Practice Exam. Name: Date: 1. When workers and employers correctly anticipate an increase in inflation caused by an increase in aggregate demand,

Practice Exam. Name: Date: 1. When workers and employers correctly anticipate an increase in inflation caused by an increase in aggregate demand, Practice Exam Name: Date: 1. When workers and employers correctly anticipate an increase in inflation caused by an increase in aggregate demand, workers will underestimate the real wage rate workers will

More information

Review for the Midterm Exam.

Review for the Midterm Exam. Review for the Midterm Exam. 1. Chapter 1 The principles of decision making are: o People face tradeoffs. o The cost of any action is measured in terms of foregone opportunities. o Rational people make

More information