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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