Chapter 5

Capital goods

man-made durable inputs used, but not used up in production of final goods. Examples include machines, tools, instruments like computers.

Who are the final users in the expenditure approach

Households, businesses, governments, foreign countries

All private construction

Includes factories, rental property, single family homes. Note that houses provide housing service for years, so it is an investment and not consumption.

Expenditure Approach Ex

Measures value of GDP by adding value of goods and services purchased by each type of final user. Ex: Buy a soda from the vending machine for $1.50, you are the final user, so that is the price of the soda. Market value of output determined only when purchased. As a result, the dollar value of quantity supplied by producers must equal dollar value of quantity demanded by houses, business, government, foreign countries.

Who officially dates business cycles

National Bureau of Economic Research, not government

Components of 2011 GDP

Notice net exports are negative, this means USA imported more than they exported.

Employment Act

Passed in 1946 Goal was to provide full employment to all Americans who are willing and able to work.

Humphrey- Hawkins Act

Passed in 1978 Directs the government to pursue policies designed to stimulate economic growth, reduce inflation, and promote full employment.

Four phases of business cycle

Peak Recession Trough Expansion

Personal consumption expenditures by households (C)

Refers to purchases of goods and services by households for their own use. These include durable goods (car), non-durable goods (food, newspaper), services (insurance, haircuts), and rental expenditures on housing. Consumption accounts for over 2/3 of all U.S.expenditures.

Government purchases (G)

Refers to spending on goods and services by all three levels of government: federal, state, and local.

Income approach

Sum of income earned in the economy. GDP calculated by adding together all incomes earned in economy. Expenditures by consumers and producers end up flowing back to households as income through resource market.

Some problems with measuring GDP

- Underground economy not accounted for in measuring GDP (illegal drugs, unaccounted tip money) - Some outputs not traded in market (household production such as cutting grass) - Difficult to account for improvements in quality - Some activities use resources to avoid or contain "bads" (negative value to consumer)

National Income and Product Accounts

-Measures our nation's economic performance -Compares American income and output to that of other nations -Tracks economy's condition throughout business cycle

When do firms add to inventory

-Produce a good in one year and sell it in another -Want to protect themselves from interruption in production -Overestimate demand for good

Gross Domestic Product

-The total market value of all final goods and services produced by resources in a country in a time period. - Many items need to be added to determine output society produces.

Wages represent approximately what percent of gross domestic product (GDP)?

Between 40 and 60%

GDP formula

C + I + G + NX

Circular Flow Model

C, I, G, NX are expenditures on goods and services. S and NT are flows of money like taxes. Y is income. When households receive incomes, they pay some in taxes and save some. These are not expenditures, just flows of money. The red flows show the four expenditure flows: consumption expenditure from households to firms, gov. expenditures from government to firms, and net exports from rest of world to firms. Investment flows from financial markets, where firms borrow, to firms that produce capital goods. The value of production equal income equals expenditure

Private investment expenditures (I)

Three categories: -Spending on capital goods such as tools, instruments, machines -All private construction - Changes in business inventories

U.S. firms sell some of what they produce to households, firms and governments in foreign countries, because these goods and services are produced domestically, spending on these exports are...

added to GDP

Some of what households, businesses, or government purchase is not produced domestically. Since these goods are not produced domestically, spending on these imports ....

are subtracted from GDP

Everything else the same, if investment expenditures rise by $300 billion and imports increase by $300 billion, then GDP

does not change

Net exports =

exports - imports

Which of the following events did not do much to shape the macroeconomic analysis we study today? -the Great Depression -globalization and the impact of multinational corporations -episodes of hyperinflation in Germany in the 1920s and many South American countries in the recent past -large swings in budget deficits

globalization and the impact of multinational corporations

If exports exceed imports... If imports exceed exports...

net exports are positive and expenditure on US produced goods and services increases. net exports are negative and expenditure on U.S. produced goods and services decreases.

Transfer payments Example

payments made to groups or individuals when no good or service is produced for it. Examples: unemployment, welfare

Changes in business inventory, define inventory

stock of goods that a firm produces but does not sell in same time period. For example, mercedes produces a car in 2015, the inventory goes up, the car is sold in 2016, it goes toward consumption. If the car is produced in the time period but not sold, its is investment.