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Macro McEachern 2011 ECON 7 2010- CHAPTER Tracking the Designed by Amy McGuire, B-books, Ltd. Chapter 7 U.S. Economy Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved National Income Accounts GDP Market value All final goods and services Produced during a year By resources located in US One person’s spending Another person’s income LO1 Chapter 7 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved GDP: Expenditure Approach Consumption, C Personal consumption expenditures Households Services Nondurable goods Durable goods 2/3rds of GDP LO1 Chapter 7 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved GDP: Expenditure Approach Investment, I Gross private domestic investment New capital goods Physical capital New residential construction Net additions to inventories Current production not used for current consumption Inventories Goods in process Finished goods 1/6th of GDP LO1 Chapter 7 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved GDP: Expenditure Approach Government purchases, G Government consumption and gross investment Goods and services Not included: Transfer payments 1/5th of GDP LO1 Chapter 7 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved GDP: Expenditure Approach Net exports, X-M Exports (X) minus imports (M) Physical items Invisibles (intangibles) Negative Imports > Exports 2% of GDP for last decade 5-6% of GDP recently C+I+G+(X-M)=Aggregate expenditure=GDP LO1 Chapter 7 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved GDP: Income Approach Aggregate income Sum of income from production Earned by resource suppliers Wages Interest Rent Profit Aggregate expenditure = GDP = Aggregate income LO1 Chapter 7 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved LO1 Exhibit 1 Computation of Value Added for a New Desk Stage of Production Logger Miller Manufacturer Retailer (1) Sale Value (2) Cost of Intermediate Goods (3) Value Added $20 50 120 200 $20 50 120 $20 30 70 80 Market value of final good $200 The value added at each stage of production is the sale price at that stage minus the cost of intermediate goods, or column (1) minus column (2). The value added at each stage sum to the market value of the final good. Chapter 7 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Exhibit 2 LO2 Chapter 7 Circular Flow of Income and Expenditure 1: GDP=aggregate income 2: Taxes leak 3: Transfer payments enter Net taxes: NT = taxes – transfers 4: Disposable income flows to households DI = aggregate income – NT 5: Households spend or save DI Consumption enters Savings leak 6: Investment enter 7: Government purchases enter 8: Imports leak 9: Exports enter 10: Consumption + Investment + Government purchases + Net export = Aggregate expenditure Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Circular Flow: Income and Expenditure LO2 Chapter 7 Expenditure flow DI = C + S Consumption, C Savings, S – to financial markets Investments, I (borrowed) Firms – on capital Households – residential construction Government spending, G Net exports = X-M C+I+G+(X-M) = GDP Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Leakages = Injections C+I+G+(X-M)=DI+NT C+I+G+(X-M)=C+S+NT I+G+X=S+NT+M Injections I, G, X Leakages S, NT, M LO2 Chapter 7 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Accounting for Price Changes Nominal GDP Prices in same year Price index In base year = 100 (Price in current year / Price in base year)*100 LO4 Chapter 7 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved LO4 Exhibit 3 Hypothetical Example of a Price Index (base Year = 2008) The price index equals the price in the current year divided by the price in the base year, all multiplied by 100. Chapter 7 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Accounting for Price Changes Consumer price index, CPI Market basket (Cost of basket in current year / Cost in base year)*100 Overstates inflation, 1% per year Quality bias Substitution Discount stores Widely used products LO4 Chapter 7 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved
