GDP and Macroeconomics PDF

1\. Final Product - Good or service that is produced and sold for consumption or 2\. Real GDP - GDP evaluated at a set of constant prices. 3\. Nominal GDP - GDP evaluated at the actual market prices of the current year. 4\. Intermediate Good - Good used to produce other goods. 5\. Net Exports -...

1\. Final Product - Good or service that is produced and sold for consumption or 2\. Real GDP - GDP evaluated at a set of constant prices. 3\. Nominal GDP - GDP evaluated at the actual market prices of the current year. 4\. Intermediate Good - Good used to produce other goods. 5\. Net Exports - Exports minus imports of goods and services. 6\. Government Transfer Payments - Government payments to individuals that are not made in exchange for goods and services. 7\. Disposable Income - Household income minus personal taxes. 8\. Net Investment - Gross investment minus capital depreciation. 9\. National Income - Total factor incomes received by labor, capital, and land Nominal gdp vs real gdp: 1\. Nominal GDP evaluates the quantity of production considering changing prices (inflation) 2\. Real GDP represents changes in the volume of total output after inflation is removed Figure 3: Nominal GDP Versus Real GDP In the figure above, we can appreciate the growth of nominal GDP since 1929, expressed in actual dollars and prices for each historical year. 4  As compared to real GDP which is based on 2000 prices, much of the increase in nominal GDP over the last decades was due to the increase in price levels.  In other words, Figure 5 illustrates that nominal GDP tends to grow faster than real GDP due to price inflation.  Nominal GDP inflates the increase in output.  In order to measure accurately the real output, we must correct GDP for price changes. Intermediate goods: Note that Figure 1 is divided between two loops, the upper (a) and lower (b) loops. Through this way we can observe that GDP (a macroeconomic tool) can be measured as a flow of final products or a flow of income. This diagram shows the earning and product approach which are finally the same. Upper:  Consumers purchase final goods and services in which the total dollar flow of their annual spending becomes part of the GDP. Lower:  This area measures the annual flow of input costs which are derived from business earnings.  Input costs are labor, capital wages, etc. Since profits is present in the two loops as products (worth of goods and services) and income (worth of wages and profits). 2 Remember that!! GDP does not include intermediate goods to avoid double-counting  Bread excluding flour  Computer excluding computer chips These final products (bread and computers) will appear in the flow of products but not their inputs (flour and computer chips). Intermediate goods are used to produce final goods and services for consumers. B. Added Value Figure 2: GDP sums up Value Added at each Production Stage Using as an example the stages of bread production, Figure 2 shows how the sum of all added values integrated in all stages enables to subtraction of purchases of intermediate goods from income statements. Note that if we do not subtract the costs of materials and intermediate products bought from other businesses from total sales, GDP would be overestimated by 186 cents per loaf. In other words, the total added value is obtained by: Added values III\. Factors that Influence Demand and Supply Curves A. Some factors that affect the demand of goods and services given other things equal (ceteris paribus) are: 1\. Changes in the price of the good or service (P) 2\. Changes in consumers' income spent on goods and services (I) 3\. Changes in the tastes and preferences of consumers for goods/services (TP) 4\. Changes in the prices of related goods and services (substitutes and complements) (Prg) 5\. Changes in the number of consumers in a market (NC) 6\. Expectations of consumers about future income (EFI) 7\. Changes in taxes imposed on goods and services sold (T) QD = f(P, I , TP, Prg, NC, EFI, T) B. Some factors that affect the supply of goods and services given other things equal (ceteris paribus) are: 1\. Changes in the price of a good or service (P) 2\. Changes in technology of firms (Te) 3\. Changes in the costs of inputs for production (labor, capital etc.) (CI) 4\. Changes in the number of suppliers in the industry (NS) 5\. Changes in the prices of other goods and services (Prg) 6\. Expectations of firms about future prices (EFP) 7\. Changes in taxes imposed on goods and services used for production (T) QS = f(P, Te, CI , NS, Prg, EFP, T) 3 C. Substitutes and Complements Complements An increase in the price of a complement causes to a decrease in the demand of the other good. For instance, pasta and pasta sauce. If the price of pasta raises, the demand of pasta sauce declines. Substitutes An increase on the price of a substitute causes an increase in the demand of the other good or service. For example, if the price of Coca-cola increases (a substitute), the demand of Pepsi-cola increases. D. Substitution and Income Effect Quantity demanded tends to decline as price increases due to: a\. Substitution effect occurs when price of good or service becomes expensive due to an increase in price. This effect takes place when the price of a good rises and it is substituted by another good. For instance, as the price of fish increases, I consume more beef. b\. Income effect takes place since consumers feel poorer than before since price goes up. In other words, consumers would have less income. Price Elasticity of Demand is defined as the percentage change in quantity demanded divided by the percentage change in price. When the price elasticity of a good is high, the good has elastic demand. This means that quantity demanded responds greatly to price changes.