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An Open Economy
Framework
Gross Domestic Product
• Economist track the overall or aggregate
amount of economic activity using gross
domestic product (GDP)
• GDP is the market value of all final goods
and services produced within an economy
during a given time period.
Daniels and VanHoose
An Open Economy Framework
2
Nominal versus Real
• Nominal GDP measures the current market
value of all final goods and services
produced within an economy during a given
time period.
• Real GDP, in contrast, in a price-adjusted
measure of aggregate output.
• Real GDP is calculated by dividing nominal
GDP by the GDP price deflator.
Daniels and VanHoose
An Open Economy Framework
3
Price Measures
• The GDP price deflator is a measure of the overall
price level of an economy.
• The consumer price index (CPI) is a weighted sum
of prices of goods and services that the
government determines a typical consumer
purchases each year.
• The producer price index (PPI) is a weighted
average of the prices of goods and services that
the government determines a typical business
receives from selling its products during a given
year.
Daniels and VanHoose
An Open Economy Framework
4
The Circular Flow of Expenditures
Saving, Imports and Consumption
Changes in Desired Investment
Government Spending and Net Taxes
Exports
Deriving the Aggregate Expenditures
Schedule
Two Approaches to Determining
Equilibrium Real Income
The Derivation of the IS Schedule
The Money Demand Schedule
Attaining Equilibrium in the Market for
Real Money Balances
The Derivation of the L-M Schedule
Changes in the Real Money Supply
IS-LM Equilibrium and Disequilibrium
The BP Schedule
IS-LM Equilibrium and the BP Schedule