It is what the level of output would be had the prices not changed since the base year.
calculates GDP by adding up the dollars flowing into the firm from buyers.
Income Approach: calculates GDP by adding up the income earned by the factors of production.
Gross Domestic Product is the total market value of all final goods and services produced within a country in a given period of time.
GDP measures output, not employment, sales, or the nation's welfare.
When a firm buys parts from suppliers, it is called an intermediate sale.
These are not counted in GDP because their value is part of the value of the final sale.
1) Gifts and transfer payments (nothing is produced)
2) Financial transactions like loans (nothing is produced)
3) Secondhand sales (nothing is produced)
4) Production of illegal goods (too difficult to measure)
5) Home–produced goods including homemaker services (too difficult to measure) 6) Underground economy: unreported production (too difficult to measure)
Net Investment = Gross Investment – Depreciation
This is good for economic expansion because it means the economy has more capacity. The production possibility curve shifts out as a result.
But net investment is negative when depreciation is greater than gross investment. In this case, the capital stock shrinks.
is spending on new equipment. It cannot be negative.
is the change in inventories (not the level) and may be positive or negative.
Inventory Investment is unusual because it does not represent a final sale. It is output that the firm produced during the year that it did not sell by the end of the year. We include inventory investment in GDP because it represents output produced during the year (even though it is not sold).
Even if these buildings are built for households, they do not count toward consumption.
this is not counted toward GDP
C=Consumption I=Imports G=Government Spending NX=Net Exports
NI=NNP-Indirect Business Tax
1. Y = C + I + G + NX
2. Yd = Y–T = C+S
3. Final Sales = Y – Inventory Investment
4. Net Investment = I – Depreciation Net Exports = Exports – --Imports Growth Rate = 100 Xt - Xt-1
5. GDP Per Capita = Real GDP Population
6. GDP Price Deflator = P = 100 Nominal GDP Real GDP
level of prices on the bundle of goods and services purchased by the average consumer
P92=125 / 125 (x 100)
P98=300 / 125 (x 100)
Inflation = πt = Pt - Pt-1 / Pt-1
Real Wage Rate = Nominal Wage Rate (CPI/100)
(this formula converts the nominal
wage rate to base year values)
Real Interest Rate = Nominal Interest Rate – Inflation Rate
a. increases in the quantity or quality of physical capital available to workers.
b. increases in the worker's talents or abilities (human capital).
c. increases in the quantity of natural resources (renewable and non–renewable). d. increased technological knowledge.
Y = quantity of output
L = quantity of labor input
K = quantity of physical capital (structures and equipment) H = quantity of human capital
N = quantity of natural resources
A = level of technology
Ex: Banks bring lenders and borrowers together.
FUTURE VALUE = PRESENT VALUE(1+r)n
PRESENT VALUE =FutureValue/ (1+ r)n
Labor Force = Number of Employed + Number of Unemployed
Unemployment Rate = Number Unemployed / Labor force (x 100 )
Labor–Force Participation Rate = Labor Force / Adult Population (x 100)
Money is most liquid
a dollar costs about .035 dollars to make and lasts 18 months
a gold coin costs about .12 dollars to produce and last about 30 years
M1 = Narrowly Defined Money Supply =
Currency + Demand Deposits + Traveler's Checks + Other Checkable Deposits
M2 = M1 + Savings Deposits + Small Time Deposits (< $100,000) + Money Market Mutual Funds + a couple of minor things
Reserve Ratio = r = Reserves / Deposits
Money Multiplier = 1/r