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Summary Chapter 2: Data Of Macroeconomics

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  • March 18, 2021
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CHAPTER 2: THE DATA OF MACROECONOMICS

GROSS DOMESTIC PRODUCT: EXPENDITURE AND INCOME

- To understand the meaning fully, we turn to national income accounting, the system used to
measure GDP and many related statistics
- GDP measures the flow of money and can be calculated by:
o Total income from production
o Total expenditure from production
- Total expenditure on domestically produced final goods and services
- Total income earned by domestically located factors of production
- Expenditure = income
- Ever rand spent becomes income for another



Circular flow expresses the
inflow/outflow between
firms and households




- A more precise definition of GDP:
Gross domestic product (GDP) is the market value of all final goods and services produced
within an economy in a given period of time

VALUE ADDED
- Value added is the value of output minus the value of the immediate goods used to produce
that output
- The production of goods has multiple stages, and each stage should be accounted for when
working out the value added to the production
- GDP = value of final goods and services = sum of value added at all stages of production
- The value of the final good already includes the value of the immediate goods
- By including immediate goods again -> Double Counting

EXPENDITURE COMPONENT OF GDP

- There are four expenditure components of GDP:
o Consumption (C)
o Investment (I)
o Government spending (G)
o Net exports (NX)

Y = C + I + G + NX

, - (Y) is the value of total output
- (C+I+G+NX) is the aggregate expenditure
- The equation is an identity – an equation that must hold because of the way the variables
are defined
- It is called the national income accounts identity

CONSUMPTION (C)

- The value of goods and services bought by households
- These include:
o Durable goods – goods that last a long time
 Cars, home appliances
o Nondurable goods – goods that last a short time
 Food, clothing
o Services – intangible items purchased by consumers
 Dry cleaning, air travel

INVESTMENT (I)

- Spending on capital, a physical asset used in future production
- Includes:
o Business fixed investment – spending on plant and equipment
o Residential fixed investment – spending by consumers and landlords on housing
units
o Inventory investment – the change in the value of all firms’ inventories

GOVERNMENT SPENDING (G)

- Includes all government spending on goods and services
- Includes such items as military equipment, highways, and the services provided by
government workers

NET EXPORTS (NX)

- NX = exports – imports
- Exports: the value of goods and services sold to other countries
- Imports: the value of goods and services purchased from other countries
- Thus, NX = net spending from abroad on our goods and services

REAL GDP VS NOMINAL GDP

- Economists call the value of goods and services measured at current prices nominal GDP
- Nominal GDP can increase either because prices rise or because quantities rise
- Real GDP is the value of goods and services measured using a constant set of prices and
shows what would have happened to expenditure on output if quantities had changed but
process had not

Nominal GDP = Current year QTY x Current year price

Real GDP = Current year QTY x Base year price

REAL GDP CONTROLS FOR INFLATION

- Changes in nominal GDP can be due to:

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