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MICROECONOMICS • The part of economics concerned with individual decisions made by households and businesses, as well as individual markets MACROECONOMICS • The part of economics that is concerned with the economy as a whole • National Economic measurements – Gross Domestic Product (GDP) – Inflation – Unemployment – Business Cycle GROSS DOMESTIC PRODUCT • The primary measure of the overall output of the U.S. economy • The total market value of all final goods and services produced in a given year within the United States • Includes U.S. and foreign owned firms GROSS DOMESTIC PRODUCT • GDP is a monetary measure • U.S. Department of Commerce – Bureau of Economic Analysis • • • • • 1929 – $103.6 Billion 1930 - $91.2 Billion 1931 - $76.5 Billion 1932 - $58.7 Billion 1945 - $223.1 Billion GROSS DOMESTIC PRODUCT • • • • • • 1955 - $414.8 Billion 1965 - $719.1 Billion 1975 - $1.64 Trillion 1985 - $4.22 Trillion 1995 - $7.40 Trillion 2000 - $9.82 Trillion GROSS DOMESTIC PRODUCT • • • • • • • • 2001 - $10.13 Trillion 2002 - $10.47 Trillion 2003 - $10.96 Trillion 2004 - $11.69 Trillion 2005 - $12.42 Trillion 2006 - $13.18 Trillion 2007 - $13.81 Trillion 2008 - $14.26 Trillion GROSS DOMESTIC PRODUCT • GDP only measures final goods and services in order to avoid multiple counting • In other words, we only count the final value of the Ford automobile, not the tires, brakes, stereo equipment, etc… GROSS DOMESTIC PRODUCT • Once again, GDP is a measure of productive output • The following do NOT count toward GDP because they do not involve the output of final goods and services GROSS DOMESTIC PRODUCT • Purely Financial Transactions –Social Security payments –Welfare payments –Veterans payments GROSS DOMESTIC PRODUCT • Private Transfer Payments – Cash gifts from your parents/relatives • Stock Market Transactions – Buying and selling of securities – ***Paying for the service of a stock broker IS counted GROSS DOMESTIC PRODUCT • Secondhand Sales –Used car sales –Garage sales GROSS DOMESTIC PRODUCT • There are two different ways to calculate GDP • We can look at the sum of all money spent in buying the output – Expenditures Approach • Or, we can look at the income derived from producing the output – Income Approach EXPENDITURES APPROACH • C + I + G + Xn •Consumer spending • Business Investment •Government purchases • Exports (Net) Two Approaches to GDP Expenditure Approach Income Approach Consumption by Households Wages Investment by Businesses Rents + + Government Purchases + Net Exports (Exports Minus Imports) G = D= P + + + Interest Profits C - Consumption • Consumer purchases of goods and services • Aka – Personal Consumption Expenditures I g– Gross Private Domestic Investment • All final purchases of machinery, equipment, and tools by businesses • All construction, including household construction – Why? It could be used to provide goods or services • Changes in business inventories – Increases are unused output G – Government Purchases • Government purchases of goods and services • Government spending on infrastructure (roads, schools, etc…) • Does NOT include transfer payments like social security payments or unemployment insurance payments X – Net Exports n • Exports – Imports • This tends to be a negative number. • C + Ig + G + Xn • What is the largest component, by far?