Download Chapter 2

Chapter 2

The measure of aggregate output in the national income
accounts is called the GDP. GDP has three equivalent
definitions:
1. From the production side, GDP is the value of final goods
and services produced in the economy during a given
period,
2. From the production side, GDP is the sum of value added
during a given period. The value added by a firm is the
value of its production minus the value of the
intermediate goods used in the production.
3. From the income side, GDP is the sum of labor and capital
income and indirect taxes. Indirect taxes are the revenues
paied to the government in the form of sales taxes.
2-2
© 2013 Pearson Education, Inc. All rights reserved.
Steel Company (Firm 1)
Revenues from sales
$100
Expenses
$80
Wages
$80
Profit
$20
Car Company (Firm 1)
Revenues from sales
$200
Expenses
$170
Wages
$70
Steel purchases
$100
Profit
2-3
© 2013 Pearson Education, Inc. All rights reserved.
$30

Nominal GDP is the sum of the quantities of
final goods multiplied by their current prices.
Nominal GDP increases over time because
◦ The production of most goods increase over time
◦ The prices of most goods increase over time

2-4
Real GDP is constructed as the sum of the
quantities of the final goods by constant
prices.
© 2013 Pearson Education, Inc. All rights reserved.
2-5
Year
Quantity of
Cars
Price of Cars
Nominal GDP Real GDP (in
2000 dollars)
1999
10
$20,000
$200,000
$240,000
2000
12
$24,000
$288,000
$288,000
2001
13
$26,000
$338,000
$338,000
© 2013 Pearson Education, Inc. All rights reserved.



2-6
GDP per capita is the ratio of real GDP to the
population of the country. It shows average
standard of living.
The growth rate of real (nominal) GDP is the
rate of change of real (nominal) GDP.
Periods of positive GDP growth are called
expansions; periods of negative growth,
recessions.
© 2013 Pearson Education, Inc. All rights reserved.
Three limitations on GDP as a welfare measure.
1. GDP values goods and services at market
prices. However, some valuable things are not
sold on markets such as government services
and owner-occupied housing.
2. Some goods and services not traded in markets
such as the value of leisure and the value of
services performed in the household are not
included in GDP
3. Depletion of natural and environmental
resources is omitted.

2-7
© 2013 Pearson Education, Inc. All rights reserved.
7

2-8
© 2013 Pearson Education, Inc. All rights reserved.



2-9
Those persons of working age who do not
have a job and are not looking for one are
classified as out of the labor force.
The participation rate is the ratio of the labor
force to the size of the working age
population.
When unemployment is high, some of the
unemployed give up looking for a job and no
longer counted as unemployed. These are
discouraged workers.
© 2013 Pearson Education, Inc. All rights reserved.


2-10
First, unemployed suffer financially and
psychologically. Ethnic minorities, the young,
and the less skilled tend to be more
susceptible to unemployment and to remain
unemployed much longer than average.
Second, the unemployment rate helps
policymakers assess how well the economy is
utilizing its resources. A high rate of
unemployment rate means that labor
resources are idle.
© 2013 Pearson Education, Inc. All rights reserved.



2-11
Inflation is a sustained increase in the general
level of prices.
The inflation rate is the growth rate of the
aggregate price level.
Macroeconomists use two measures of the
pricel level, two prices indexes:
1. The GDP deflator
2. The consumer price index
© 2013 Pearson Education, Inc. All rights reserved.

2-12
© 2013 Pearson Education, Inc. All rights reserved.



2-13
The CPI measures the price of representative
basket of private consumption.
Inflation calculated from the CPI provides a
measure of the percentage change in the
price of the domestic consumption basket.
Domestic consumption includes goods
imported from abroad, and domestic
production includes final goods used for
purposes other than domestic consumption.
© 2013 Pearson Education, Inc. All rights reserved.





2-14
A faster but proportional increase in all prices
and wages is called pure inflation. There is no
such thing as pure inflation.
İnflation affects income distribution as not all
prices and wages rise proportionately.
Inflation leads to variations in relative prices and
produce uncertanity.
Deflation would create many of the same
problems as high inflation. Moreover, deflation
limits the ability of monetary policy to affect
output.
Best rate of inflation is between 0% and 3%.
© 2013 Pearson Education, Inc. All rights reserved.
14



2-15
. In the short run (a time frame of a few
years), output is determined primarily by
demand.
In the medium run (a time frame of a decade
or so), output is determined by the level of
technology and the size of capital stock, both
of which are more or less fixed.
In the long run (a time frame of a half century
or more), output is determined by
technological progress and capital
accumulation.
© 2013 Pearson Education, Inc. All rights reserved.
15
2-16
© 2013 Pearson Education, Inc. All rights reserved.
1,400
1,200
1,000
800
600
400
200
0
1998
1999
2000
2001
2002
Nominal GDP
2-17
© 2013 Pearson Education, Inc. All rights reserved.
2003
2004
2005
2006
2007
2008
2009
2010
Real GDP (billions of 1998 TLs)
17
2-18
© 2013 Pearson Education, Inc. All rights reserved.
12.0
10.0
8.0
6.0
Percent
4.0
2.0
0.0
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-2.0
-4.0
-6.0
-8.0
2-19
© 2013 Pearson Education, Inc. All rights reserved.
19
2-20
© 2013 Pearson Education, Inc. All rights reserved.
16.0
14.0
12.0
Percent
10.0
8.0
6.0
4.0
2.0
0.0
2-21
© 2013 Pearson Education, Inc. All rights reserved.
21
2-22
© 2013 Pearson Education, Inc. All rights reserved.
2-23
© 2013 Pearson Education, Inc. All rights reserved.
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
Percent
120
100
80
60
40
20
0
23
Figure 2-5 Changes in
the unemployment rate
versus output growth in
the United States, 1960–
2010
2-24
© 2013 Pearson Education, Inc. All rights reserved.
Figure 2-6 Changes in
the inflation rate versus
the unemployment rate
in the United States,
1960–2010
2-25
© 2013 Pearson Education, Inc. All rights reserved.
Figure 2-7 The organization of the book
2-26
© 2013 Pearson Education, Inc. All rights reserved.