ECN 212 Chapter 17, Spring 2007

1 Introduction to Macroeconomics Aggregate Output (GDP)  The dollar value of all final goods and services produced in a country in a year Produced: output which is not sold in a year is yet produced Produced: output which is not sold in a year is yet produced Final good: a product which is ready to be used by consumers Final good: a product which is ready to be used by consumers Dollar value: sum of selling price times quantity of all outputs Dollar value: sum of selling price times quantity of all outputs 2 3 T F National income accounting measures the economic well-being of a nation. TRUE T F GDP is a social account of a business firm. FALSE Each firm’s value added is: a. The value of its own output b. The value of its own output minus profits c. The value of its own output minus • purchases of inputs from other firms d. Total sales revenue at market prices The correct answer is “c” 4 T F Intermediate goods are not counted in GDP. TRUE Measuring Welfare 1. Level of GDP 1. Gross level 2. Per capita level 2. Growth rate of GDP Percentage change in GDP over time 5 Fluctuations in GDP  GDP rises and falls over short spans of time  At any point in time, it may be above or below its long run trend  These fluctuations define the business cycle 66 The Economic Roller coaster: What is it? 7 Peak Trough Recession (slump) Expansion (boom) Parts of the Business Cycle Aggregate Output time 8 Recession  Growth rate of GDP falls  Firms decrease production  Unemployment rises GDP Unemploy- ment 9 Expansion GDP growth rate rises Firms increase production Unemployment falls GDP Unemploy- ment 10 Unemployment  Unemployment rate: the percentage of people in the labor force who can’t find a job Labor Force: people Labor Force: people who are actively seeking who are actively seeking or are currently holding or are currently holding a job a job Labor Force: people Labor Force: people who are actively seeking who are actively seeking or are currently holding or are currently holding a job a job 11 Global Issues  Net Exports = Exports - Imports – Exports: goods produced in Lebanon and sold overseas – Imports: goods produced overseas and sold in Lebanon  Exchange rate: price of one currency in terms of another 12 Introduction to Macroeconomics The Circular Flow 13 Consume (C) Save (S) Work (N) Pay taxes (T) Households 14 Produce (GDP) Invest (I) Buy inputs (N) Pay taxes (T) Firms 15 Financial Institutions Intermediates between savers and investors 16 Government 17 Rest of the World Exports (X) Imports (IM) 18 19 Firms Households 20 Purchases of Goods and Services 21 Purchases of Goods and Services Wages, Interest, Dividends, and rent 22 Government 23 Purchases of Goods and Services Taxes 24 Purchases of Goods and Services Wages, Interest, Transfer Payments Taxes Taxes 25 Rest of the World 26 Exports Imports 27 The Circular Flow Lesson 28 The Circular Flow Lesson Expenditures = Receipts! Expenditures = Receipts! 29 30 30 Three Market Arenas  Goods and services market  Labor market  Money (financial) market 31 Goods and Services Market Household, Firms and Government purchase goods and services Firms supply goods and services 32 Labor Market Firms and Government demand labor Households supply labor 33 Financial Markets Households, Firms and Government demand funds Households supply funds 34 GDP vs. GNP 35 Measuring National Output and National Income Calculating GDP 36 EXCLUSIONS FROM THE GDP  NON-PRODUCTIVE TRANSACTIONS  SECOND HAND SALES 37 NON-PRODUCTIVE TRANSACTIONS  SECURITY TRANSACTIONS  TRANSFER PAYMENTS 38 Which of the following is not part of national income? a. Unemployment benefits b. Rental income c. Salaries d. Net interest The correct answer is “a”, since it is a non-productive public transfer payment. 39 T F Business transfer payments are excluded from GNP. “FALSE” 40 Expenditure Approach 41 GDP = C + I + G + (EX - IM) 42 Consumption  Durable goods: goods that last a relatively long time  Nondurable goods: goods which are perishable  Services: goods which do not involve the production of physical things 43 Investment  Nonresidential: expenditures by firms on machines, factories, tools, etc.  Residential: expenditures by households on new houses and apartment buildings  Business inventories: goods that firms produce now with the intent to sell later 44 All of the following expenditures are included in investment expenditures except: a. Business purchase of a fleet of cars b. Household purchase of a new house c. Business purchase of the stock of another company d. A retail store’s purchase of shoes to add to inventory The correct answer is “c” 45 Which of the following are counted as personal consumption expenditures in the national product accounts? a. Housing rents b. Housing purchase c. Both a and b d. Neither a nor b The correct answer is “a” 46 NET INVESTMENT GROSS INVESTMENT - DEPRECIATION  EXPANDING ECONOMY  DECLINING ECONOMY  STATIC ECONOMY 47 What does a negative net investment mean in terms of depreciation?  Depreciation exceeds gross investment. 48  Knowing that gross investment is known as birth of capital, what is birth of capital less death of capital? NET INVESTMENT 49 Which of the following statements concerning investment and investment goods is false? a. An accumulation of inventories counts as current investment. b. Total amount of capital goods in a country is called the capital stock. c. Net investment is equal to gross investment minus depreciation. d. The capital consumption allowance refers to funds for investment to increase the economy’s total stock of capital. The correct answer is “d” 50 What types of economies there might be in terms of gross investment, net investment, and growth? Explain each. If Ig > CCA  In = +ve  Expanding economy If Ig < CCA  In = -ve  Declining economy If Ig = CCA  In = 0  Static economy 51 Government Purchases  Expenditures by the governments on final goods  Does not include transfer payments (social security, unemployment benefits, etc.) 52 What does the “G” represent in the gross national product? Wrong answer: Gross Correct answer: Government expenditures 53 Net Exports  Exports: sales to foreigners of goods produced in Lebanon  Imports: purchases by Lebanese citizens of foreign produced goods  Net Exports = Exports - Imports 54 Income Approach 55 National Income  Compensation of employees: wages, salaries, etc., paid to households  Proprietors’ income: income of unincorporated businesses  Corporate profits: income of corporations  Net interest: interest paid by businesses  Rental income: income received by property owners 56 Depreciation  The decline in value of capital assets as they wear out or become obsolete 57  Indirect Taxes: sales taxes, custom duties, license fees, etc. 58 Indirect Taxes Business Grants  Business Grants: donations made by business firms. 59 NATIONAL INCOME ACCOUNTS GNP NNP NI PI DI 60