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AP Macroeconomics Part II. Measuring Domestic Output and National Income: GDP, Growth, and Instability Objective: Student will be able to understand basic categories to assess the Economy’s performance. Topic 1 “The National Economic Accounts” Objective: SWBAT Understand how GDP is defined and measured. Explain why economists focus on GDP, inflation, and unemployment when assessing the health of an entire economy. Comprehend the relationship among GDP, net domestic product, national income, and disposable income. Recognize the different between nominal GDP and real GDP Understand why savings and investment are key factors in promoting rising living standards. Main Concepts 1. Gross Domestic Product (GDP) i. A Monetary Measure ii. Avoiding Multiple Counting iii. Two Ways of Looking for GDP: Spending and Income. 2. The Expenditure Approach 3. The Income Approach 4. Other Nation Accounts i. Net Domestic Product ii. National Income iii. Gross National Product (GNP) iv. Personal Income v. Disposable Income 5. Nominal GDP vs. Real GDP Class Work Copy vocabulary. See chapter 14, page 203, AP Practice Book. Be sure you understand every term. Work on Qs 3,8, and 12, page 128-129, from the BLUE BOOK Answer essential questions Essential Questions: 1. Explain the difference between Nominal GDP and Real GDP. What is GDP per capita? 2. Suppose that production and prices rise from one year to the next, but the population stays constant. Will each of the three statistics above rise, fall, or remain unchanged? 3. In what type of situation is GDP per capita more appropriate than nominal or real GDP? 4. Is GDP an under-or overestimate? Explain. Class notes Macroeconomics studies long-run economic growth and short-run economic fluctuations in output and unemployment. To assess the health and development of an economy, macroeconomists focus their attention on three key economic statistics: real Gross Domestic Product (GDP), Unemployment and Inflation. o The GDP or gross domestic product measures the value of final goods and services produced within (inside) the borders of a given country during a given period of time, typically a year. o Unemployment is the state a person is in if he or she cannot get a job despite being willing to work and actively seeking work. The unemployment rate measures the percentage of all workers who are not able to find paid employment despite being willing and able to work at currently available wages. High rates of unemployment are undesirable (adverse) because they indicate that the nation is not using a large fraction of its most important resource (people’s talents and skills). o Inflation is an increase in the overall level of prices. Inflation rate measures the extent (degree) to which the overall level of prices is rising in the economy. Macroeconomics strategies (policies) attempt (try) to maximize growth while minimizing unemployment and inflation. National Economic Accounts (NEA) or the Bureau of Economic Analysis (BEA) measures the economy’s overall performance by using a group of statistics. The Bureau of Economic Analysis (BEA), as an agency of the Commerce Department, compiles the National Income and Product Accounts for the U.S. economy. The BEA enables economist and policymakers to: Assess the health of the economy by comparing levels of production at regular intervals. Track the long-run course of the economy to see whether it has grown, been constant, or decline. Formulate policies that will safeguard and improve the economy’s health. The primary measure of the economy’s performance is its annual total output of goods and services (AGGREGATE OUTPUT). It is important the different between nominal (at current prices) GDP and real GDP (corrects for price changes). The GDP is a monetary measure. The BEA provides estimates of GDP for each quarter about 30 days after the quarter ends. This estimation is subject to revision. To avoid multiple counting, The GDP includes only the market value of final goods and ignores intermediate goods altogether (Intermediate goods are goods and services that are purchased for resale or for future processing) . The GDP excludes Nonproduction transaction such as purely financial transactions or secondhand sales. Both contribute nothing to current production and for that reason are excluded from GDP. o Purely financial transactions are public transfer payments, private transfer payments, and stock market transactions. o Secondhand Sales Two ways of looking for GDP: Spending (expenditures or output) approach and Income approach. The Spending (expenditures or output) approach (on the expenditure side): GDP as the sum of all the spending on final goods and services that has taken place throughout the year. The type of spending are listed below: o Consumption Expenditures by households (C) o Investment Expenditures by business (Ig) / all final purchases of machinery, equipment, and tools by business enterprises; all construction; changes in inventories o Government Purchases of goods and services (G)/ expenditures for goods and services that government consumes in providing public services and expenditures for capital such as schools and highways which have long lifetime. o Expenditures by foreigners (Xn) / net exports. It includes all international trade transaction Exports – Imports Putting all together C + Ig + G + X - M = GDP The Income approach (on the income side): GDP as the sum of the income derived or created from producing it. The components of income are listed below: o Wages / Compensation of Employees o Rents / income received by the households and business that supply property resources o Interest / Money paid by private business to the suppliers of loans used to purchase capital. o Profits / Proprietor’s income o Statistical adjustments Other Nation Accounts Net Domestic Product (NDP) NDP = GDP – consumption of fixed capital (depreciation) The NDP is the GDP adjusted for depreciation. As a measure of total output, GDP does not make allowances for replacing the capital goods used up in each year’s production. The NDP tell us how much new output is available for consumption and additions to the capital. National income (NI) is all income earned through the use of American-owned resources, whether located at home or abroad (in a foreign country) NI = NDP – statistical discrepancy + net foreign factor income Disposable Income (DI) is all income received by households minus personal taxes DI = Consumption + Saving Personal Income (PI) is all income received by households, whether earned or not. Gross National Product (GNP) Nominal GDP vs. Real GDP Essential Questions 1. Explain the difference between Nominal GDP and Real GDP. What is GDP per capita? 2. Suppose that production and prices rise from one year to the next, but the population stays constant. Will each of the three statistics above rise, fall, or remain unchanged? 3. In what type of situation is GDP per capita more appropriate than nominal or real GDP? 4. Is GDP an under-or overestimate? Explain.