Aggregate Output, Prices & Economic Growth Flashcards
Includes only new purchases of goods and services
Gross Domestic Product (GDP)
GDP is calculated by summing the amounts spent on goods and services produced during that period
Expenditure Approach
GDP is calculated by summing the amounts earned by households and companies during the period, including wage income, interest income and business profits.
Income Approach
Expenditure Approach is also known as
Value-of-Final-Output method
Summing the additions to value created at each stage of production and distribution
Sum-of-the-Value Approach
*The total value added is the price at the final stage of production
Calculation for Nominal GDP
SUM( Pi,t * Qi,t)
*inflation increases Nominal GDP
Type of GDP that measures output using prices from the base year, removing the effect of changes in price, such as inflation.
Real GDP
A price index that can be used to convert nominal GDP into real GDP
GDP deflator = [nominal GDP / (value of year t output at year t)] *100
Real GDP divided by the population
Per capita Real GDP
GDP = C + I + G + (X-M)
Expenditure Approach
GDP = national income + capital consumption allowance + statistical discrepancy
Income Approach
Compensation of employees + Corporate and Gov’t enterprise profit before taxes + interest income + unincorporated business net income + rent + indirect business taxes - Subsidies
National Income
Unit measures that depreciation of goods and services over a period of time
Capital Consumption Allowance (CCA)
A measure of the pretax income received by households and is one determinant of consumer purchasing power and consumption
Personal Income
National income + transfer payments to households - indirect business taxes - corporate income taxes - undistributed corporate profits ==
Personal Income
Personal Income - Personal Taxes
Personal Disposable Income (PDI)
GDP = C + S + T
- C = Consumption Spending
- *S = Household and Business Savings
- **T = Net Taxes ( Taxes paid - transfer payments)
Fundamental Relationship between saving, investment and the fiscal balance and trade balance
GDP = C + S + T = C + I + G + (X - M)
S + T = I + G + X - M
S = I + (G - T) + (X-M)
- (G-T) = Fiscal Balance
- (X-M) == Trade Balance
The proportion of additional income spent on consumptions
Marginal Propensity to Consume
IS Curve uses
(S-I) = (G-T) + (X-M)
- interest Rate vs. Aggregate Income(GDP Output)
- As r ^, Aggregate Income Decreases
- Higher aggregate income, causes fiscal deficit to decrease, because taxes increase with income.
- Higher aggregate income causes a trade surplus (X-M) to decrease, because imports increase with income increasing.
As the interest rate, r, increases the aggregate income decreases.
Inverse relationship between real interest rate and income.
** What IS curve is representing
The IS curve plots the combinations of real income and real interest rates for which aggregate output and income equally planned expenditures
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The LM curve shows the combinations of GDP or real income (Y) and real interest rate (r) that keep the quantity of real money demanded equal to the quantity of real money supplied
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(M / P) = (1/V) * Y * M = Money Supply P = Price level V = Velocity of money in transactions Y = Real GDP
Function representing LM Curve
Curve that shows the relationship between quantity of real output demanded(which equals real income) and the price level.
* Income(Output) vs. Price Level
Aggregate Demand
- As Income increases, prices increase
- As real output demanded increases, price increases
Describes the relationship between the price level and the quantity of real GDP supplied when all other factors are held constant.
*Real GDP Supplied vs. Price Level
Aggregate Supply Curve
*The amount of output at differing price levels
Very Short Run Supply Curve
Assume wages, input costs and prices are fixed so that producers can increase or decrease output without affecting price. (perfectly elastic, horizontal)
Long Run Aggregate Supply Curve
Perfectly Inelastic (Vertical)
Short Run Supply Curve
Output prices change proportionally to the price level but at least some input prices are sticky
A change in the price levels are represented as a movement along the Aggregate Demand Curve
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Factors that increase Aggregate Demand
- Increase in Consumers Wealth – C Increases
- Business Expectations – I increases
- Consumer Expectation of Future Money – C Increases
- High Capacity Utilization – I Increases
- Expansionary Monetary Policy – C and I Increases (because interest rates decrease)
- Expansionary Fiscal Policy – C Increases for tax cut, G Increases for Spending
- Exchange Rates – X Increases, M Decreases
- Global Economic Growth – X Increases
**Opposites decrease Aggregate Demand
SRAS curve reflects the relationship between output and the price level when wages and other input prices are held constant.
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Factors that increase Aggregate Supply
- Labor Productivity – ^ in productivity makes cost per unit cheaper, letting producers ^ output
- Input Prices – If input prices decrease, production ^
- Expectations of Future Output Prices – When business expect price to ^, they produce more.
- Taxes and Gov’t Subsidies – Decrease in business taxes, or ^ in gov’t subsidies makes cost per unit cheaper, letting producers produce more.
- Exchange Rates – Appreciation of currency will decrease cost of imports, so producers buy more inputs, ^ production.
Long Run Aggregate Supply
Vertical at full employment level of real GDP
Factors that shift LRAS
- Increase in Supply and Quality of Labor – An ^ in labor force, ^ output, ^ LRAS
- Increase in the supply of natural resources – An ^ in available inputs, ^ real GDP, ^ LRAS
- Increase in stock of physical output
- Technology – ^ labor productivity, ^ real output, ^ LRAS
Long Run Equilibrium is at intersection of LRAS and AD
- Excess demand == inflationary gap
* * Excess Supply == recessionary gap
Five important sources of economic growth
1`. Labor Supply
- Human Capital – More educated
- Physical Capital Stock - ^ in Investment rate
- Technology – Efficiency
- Natural Resources– More natural resources, likely to grow faster.
Growth in potential GDP == growth in labor force + growth in labor productivity
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Describes the relationship between the output and labor, the capital stock and productivity
Production Function
Y = A * f(K,L)
Y == aggregate economic output
A == total factor productivity
K = Amount of Capital Available
L = Size of labor force
A multiplier that quantifies the amount of output growth that cannot be explained by increases of labor and capital. (i.e. technological advances.)
Total Factor Productivity
Y/L = A * f(K/L)
Y/L = output per worker K/L = physical capital per worker A = Total Factor Productivity
- Assume production function have diminishing marginal productivity
Solow Model
GDPgrowth = A + Wl (labor growth) + Wc(Capital Growth)
GDPgrowth per capita = A/L + Wc/L
