Download Households

Macroeconomics – Unit 2
WARNING
WARNING
Next week we’ll have a quiz on
growth based on ....
reading assignment, lecture notes
game, classwork activities,
and homework.
WARNING
WARNING
Under traditional free market
theory, the government has a
limited role in the economy.
_________
contracts
(1) enforce ____________
private
(2) provide for _________
property rights
public goods
(3) provide ________
Basically, economists believed in
the self-correcting nature of the
market. But then on October 29,
1929 we had the ....
______
Great Crash followed by
a decade known as the
Depression which
Great ____________
convinced many that we
need to monitor the
economy and prevent big
downturns.
The primary goals of a country’s
macroeconomics policy makers
1. maximize economic growth
2. maximize employment
i.e., low unemployment
3. maintain stable price level
i.e., low inflation
First we’ll examine ….
maximize economic growth
To examine growth, there are several
possible factors we could measure:
(a) income approach –
looking at all households’,
firms’ & government incomes
(con’t)
possible factors we could measure:
(b) expenditure approach – gov’t
adds up all the money spent on
buying this year’s output
(c) output – gov’t determines
value added…the money spent on
making goods (inputs) is deducted
from money received from sale of
goods (output).
Most countries have settled on the
expenditure method where gov’t adds
up all the money spent on buying this
year’s output.
Primary measure:
Real GDP –
real gross domestic product
the total market value of all final
goods and services produced in an
economy in a one-year period
Since 1992 we’ve used -- GDP – gross
domestic product
the total market value of all final
goods and services produced in an
economy in a one-year period; a
geographic measure
another possible measure…
GNP – gross national product
aggregate final output of citizens and
businesses of an economy in a one-year
period; a citizenship measure
Would the value of this GDP
both
output be included in ….
GNP
(1) a U.S. college student works in an
Italian hotel for the summer GNP
(2) A Subway franchise on the ASU
campus pulled in $300,000.
both
(3) Nandini, an Indian citizen, works at
MicroChip in Chandler on a 2-year contract
GDP
(2) Donald Trump opens a new casino in
Monaco near southern France GNP
So how shall we measure GDP?
We could use the income approach
where we look at all the income
coming into households, firms &
government.
Or...we could use the expenditure
approach where we add up all the
money spent on buying this year’s
output
businesses
What
sendingisgoods
&
services to
represented
households
here?
households
What is
sending
represented
resources to
here?
business
$
$ $
$
$
transfer
here?
payments
Households $
GOV.
taxes
here?
$
$ $
Land, Labor, Capital,
Entrepreneurship
businesses
What is
sending
represented
payments
here? to
households
$ $
$ $
$
here?
taxes
here?
subsidies
Firms
$
$$
$
$
$
G&S
What is
households
represented
paying
for
here?&
goods
services
income approach
$
$ $
$
$
Transfer
payments
expenditure approach
Households $
GOV.
Taxes
$
$ $
Land, Labor, Capital,
Entrepreneurship
$ $
$ $
$
Taxes
Subsidies
Firms
$
$$
$
$
$
G&S
and these
Which
sidetwo
illustrates
approaches
the expenditure
will yield
approach
equal
results
and which the income?
expenditure approach
real GDP = C + I + G + (X-M)
consumption – payments by
C households for goods and services.
I
G
investment – household spending
on owner-occupied housing and
business spending on equipment,
structures, and inventories
government purchases – payments
for goods and services and
investment in equipment and
structures
expenditure approach
real GDP = C + I + G + (X-M)
(X-M)
Exports bring money into
our economy, but imports
send money out so are
excluded from GDP
real GDP = C + I + G + (X-M)
=
69% + 16% + 19% + -4%
income approach
The income approach adds up
payments from firms to households
factor
also called _____________
payments.
National Income = total income earned
by citizens and businesses of a
country.
NI = Emp Comp + Rents + Interest + Profits
income approach
NI = Emp Comp + Rents + Interest + Profits
Employee Compensation – wages and
salaries + benefits + gov’t taxes for Soc Sec
& unemployment insurance
Rents – income from property received by
households
income approach
NI = Emp Comp + Rents + Interest + Profits
interest – income private businesses pay to
households that have lent businesses
money, usually through purchasing bonds
profits – amount left over after
compensation, rents, and interest have
been paid out
You should memorize the formula for NI,
but not many details. The more common
expenditure
approach is the real GDP or ______________
approach.
expenditure approach
real GDP = C + I + G + (X-M)
the total market value of all final
goods and services produced in an
economy in a one-year period
note…. “total market value”
so services or goods that never
reach the market are excluded;
Ryan cuts his own grass
real GDP = C + I + G + (X-M)
the total market value of all final
goods and services produced in an
economy in a one-year period
note…. “final goods and services”
so intermediate goods are excluded;
goods that are used in the
production of other goods; must
exclude to avoid double counting
real GDP = C + I + G + (X-M)
the total market value of all final
goods and services produced in an
economy in a one-year period
note…. “final goods and services”
so transfer payments are excluded, i.e. food
stamps given to a family excluded
so purchase of stock or bond is excluded; a
financial transaction does not involve the
production of a good or service
real GDP = C + I + G + (X-M)
the total market value of all final
goods and services produced in an
economy in a one-year period
note…. “in a one-year period”
so used goods are excluded; they
must be produced within that year
AP Workbook, Act. 12 p. 71-73 with
partner
20 min
the end