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Welcome to Day 12. Principles of Macroeconomics. Chapter 6 Measuring Total Output and Income. 1. MEASURING TOTAL OUTPUT. Learning Objectives Define gross domestic product and its four major spending components and illustrate the various flows using the circular flow model.

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Welcome to Day 12


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    1. Welcome to Day 12 Principles of Macroeconomics

    2. Chapter 6 Measuring Total Output and Income

    3. 1. MEASURING TOTAL OUTPUT Learning Objectives • Define gross domestic product and its four major spending components and illustrate the various flows using the circular flow model. • Distinguish between measuring GDP as the sum of the values of final goods and services and as the sum of values added at each stage of production. • Distinguish between gross domestic product and gross national product.

    4. 1.1 The Components of GDP GDP = consumption (C) + private investment (I) + government purchases (G) + net exports (Xn) Or GDP = C + I + G + Xn • A flow variable is a variable that is measured over a specific period of time. • A stock variable is a variable that is independent of time.

    5. 1.1 The Components of GDP • Personal consumption is a flow variable that measures the value of goods and services purchased by households during a time period. Personal consumption Consumer goods and services Households Firms Factors of production (labor, capital, and natural resources) Factor incomes (wages, interest, profit, and rent)

    6. 1.1 The Components of GDP • Gross private domestic investment is the value of all goods produced during a period for use in the production of other goods and services. Personal consumption Private investment Households Firms Factor incomes

    7. 1.1 The Components of GDP • Government purchases are the sum of purchases of goods and services from firms by government agencies plus the total value of output produced by government agencies themselves during a time period. • Transfer payments are payments that do not require the recipient to produce a good or service in order to receive them.

    8. 1.1 The Components of GDP Personal consumption Private investment Firms Households Government purchases Factor incomes Government agencies

    9. 1.1 The Components of GDP • Exports are the sales of a country’s goods and services to buyers in the rest of the world during a particular time period. • Imports are purchases of foreign-produces goods and services by a country’s residents during a period. • Net Exports are exports minus imports.Exports (X) – imports (M) = net exports (Xn) • A trade deficit occurs when there are negative net exports. • A trade surplus occurs when there are positive net exports.

    10. 1.1 The Components of GDP Personal consumption Private investment Firms Households Net Exports Government purchases Factor incomes Government agencies Rest of the world

    11. 1.1 The Components of GDP

    12. 3. GDP AND ECONOMIC WELL-BEING Learning Objectives • Discuss and give examples of measurement and conceptual problems in using real GDP as a measure of economic performance and of economic well-being. • Explain the use of per capita real GNP or GDP to compare economic performance across countries and discuss its limitations.

    13. 3.2 Conceptual Problems with Real GDP • A second set of limitation or real GDP stems from problems inherent in the indicator itself. • Household Production • Underground and Illegal Production • Leisure • The GDP Accounts Ignore “Bads”(e.g. crime spending, negative externalities, environmental pollution) • More GDP cannot necessarily be equated with more human happiness.

    14. 3.3 International Comparisons of Real GDP and GNP • Per capita real GNP or GDP is a country’s real GNP or GDP divided by its population. • Comparing one country’s output to another presents additional challenges. That said, when the data suggest huge disparities in levels of GNP per capita, for example, we observe real differences in living standards.

    15. Welcome to Day 13 Principles of Macroeconomics

    16. Quiz today? Magic 8 ball says ….

    17. Chapter 7 Aggregate Demand and Aggregate Supply

    18. Output or Real GDP • Potential output is the level of output an economy can achieve when labor is employed at its natural level. – the natural level of real GDP

    19. Welcome to Day 14 Principles of Macroeconomics

    20. Quiz today? Magic 8 ball says ….

    21. 1. AGGREGATE DEMAND Learning Objectives • Define potential output, also called the natural level of GDP. • Define aggregate demand, represent it using a hypothetical aggregate demand curve, and identify and explain the three effects that cause this curve to slope downward. • Distinguish between a change in the aggregate quantity of goods and services demanded and a change in aggregate demand. • Use examples to explain how each component of aggregate demand can be a possible aggregate demand shifter. • Explain what a multiplier is and tell how to calculate it.

    22. 1.1 The Slope of the Aggregate Demand Curve • Aggregate demand is the relationship between the total quantity of goods and services demanded (from all the four sources of demand) and the price level, all other determinants of spending unchanged. • The aggregate demand curve is a graphical representation of aggregate demand. • The wealth effect is the tendency for a change in the price level to affect real wealth and thus alter consumption. • The interest rate effect is the tendency for a change in the price level to affect the interest rate and thus to affect the quantity of investment demanded. • The international trade effect is the tendency for a change in the price level to affect net exports. • The change in the aggregate quantity of goods and services demanded refers to a movement along an aggregate demand curve.

    23. Aggregate Demand

    24. 1.2 Changes in Aggregate Demand • A Change in aggregate demand is a change in the aggregate quantity of goods and services demanded at every price level. This can be caused by changes in… • Consumption, • Investment, • Government purchases, • Net exports.

    25. 1.2 Changes in Aggregate Demand

    26. The Multiplier • The multiplier is the ratio of the change in the quantity of real GDP demanded at each price level to the initial change in one or more components of aggregate demand that produced it. EQUATION 1.1 Multiplier = Δ (real GDP demanded at each price level) initial Δ (component of AD) EQUATION 1.2 Δ (real GDP demanded at each price level) = Multiplier × initial Δ (component of AD)

    27. The Multiplier Effect of initial increase in net exports without multiplier effect AD2 AD1

    28. The Multiplier Effect of initial decrease in net exports without multiplier effect AD2 AD1

    29. 2. AGGREGATE DEMAND AND AGGREGATE SUPPLY: THE LONG RUN AND THE SHORT RUN Learning Objectives • Distinguish between the short run and the long run, as these terms are used in macroeconomics. • Draw a hypothetical long-run aggregate supply curve and explain what it shows about the natural levels of employment and output at various price levels, given changes in aggregate demand. • Draw a hypothetical short-run aggregate supply curve, explain why it slopes upward, and explain why it may shift; that is, distinguish between a change in the aggregate quantity of goods and services supplied and a change in short-run aggregate supply. • Discuss various explanations for wage and price stickiness. • Explain and illustrate what is meant by equilibrium in the short run and relate the equilibrium to potential output.

    30. 2. AGGREGATE DEMAND AND AGGREGATE SUPPLY: THE LONG RUN AND THE SHORT RUN • The short run in macroeconomic analysis, is a period in which wages and some other prices are sticky and do not respond to changes in economic conditions. • A sticky price is a price that is slow to adjust to its equilibrium level, creating sustained periods of shortage or surplus. • The long run in macroeconomic analysis, is a period in which wages and prices are flexible.

    31. 2.1 The Long Run • The long run aggregate supply (LRAS) curve is a graphical representation that relates the level of output produced by firms to the price level in the long run.

    32. Long-Run Equilibrium

    33. Why is the long-run aggregate supply curve (LRAS) straight up and down?Let’s believe that the more profitable something is, the more of it will be made. How do rising prices affect profits?

    34. Price of car Cost of making car$20,000 Labor $8,000 Steel $8,000 Glass $4,000Total Cost of Making Car = $20,000Profit is $0. Now double the sales price and all the costs.

    35. Price of car Cost of making car$40,000 Labor $16,000 Steel $16,000 Glass $8,000Total Cost of Making Car = $40,000Profit is $0. How many more cars are being made at double the sales price?

    36. Price of car Cost of making car$22,000 Labor $8,000 Steel $8,000 Glass $4,000Total Cost of Making Car = $20,000Profit is $2,000. Now double the sales price and all the costs.

    37. Price of car Cost of making car$44,000 Labor $16,000 Steel $16,000 Glass $8,000Total Cost of Making Car = $40,000Profit is $4,000. Is it actually more profitable to make cars now?

    38. Welcome to Day 15 Principles of Macroeconomics

    39. Quiz today? Magic 8 ball says ….

    40. 1) Take out a piece of paper.2) Write your name, the day and time of the class.3) Write Econ 2 Quiz 5

    41. Fill in the blanks for the following equation. Use only the domestic parts of GDP You may use the common one letter abbreviations.1) GDP = ___ + ___ + ___2) Write out what one of the abbreviations stands for.

    42. 2.2 The Short Run • The short run aggregate supply (SRAS) curve is a graphical representation of the relationship between production and the price level in the short run. • A change in the aggregate quantity of goods and services supplied is characterized by movement along the short-run aggregate supply curve. • A change in short-run aggregate supply is characterized by a change in the aggregate quantity of goods and services supplied at every price level in the short-run.

    43. Price of car Cost of making car$20,000 Labor $8,000 Steel $8,000 Glass $4,000Total Cost of Making Car = $20,000Profit is $0. Now double the sales price and all the costs.

    44. Price of car Cost of making car$40,000 Labor $8,000 Steel $16,000 Glass $8,000Total Cost of Making Car = $32,000Profit is $8,000. How many more cars are being made at double the sales price?

    45. Deriving the Short-Run Aggregate Supply Curve

    46. Things that raise the cost of production shift the SRAS curve left. Things that lower the of production shift the SRAS curve right. For example, changes in:1) Resource prices2) Wages3) Cost of employer paid health insurance

    47. Changes in Short-Run Aggregate Supply Shift caused by increase in price of natural resources. SRAS3 SRAS1 SRAS2 Shift caused by decrease in price of natural resources.