Chapter 10 - Agg output, price econ growth Flashcards
Expenditure Approach to Calculate GDP
Sum the amounts spent on goods and services produced during the period.
Income approach to Calculate GDP
Sum the amounts earned by households and companies during period (wage income, interest income, business profits)
Value of final output method ( expenditure approach)
Sum values of all final goods and services produced
Sum of value added method of calculating GDP
Sum the additions to value created at each stage of production and distribution.
Nominal GDP
expenditure approach - total value of all goods and services produced by an economy, valued at current market prices. Inflation increases nominal GDP, even if physical good output stays the same.
Real GDP
Measures the output of the economy using prices from a base year. Current year output.
GDP deflator
Converts nominal GDP into real GDP. Nominal GDP in year t /value of year t output at base year prices * 100
GDP deflator
Nominal GDP/Real GDP * 100
GDP =
C + I + G + (X-M) . Consumption spend, business investment, gov purchases, exports, imports.
GDI
National income + capital consumption allowance (depreciation on productivity goods) + statistical discrepancy ( adjusts for Income GDP and expenditure GDP since there’s different data).
National Income
Sum of income received by all factors of production. National income = compensation of employees +corp and gov profit before taxes + interest income + business owners’ incomes + rent + (indirect business taxes - subsidies).
Personal income
Pretax income earned by households, includes gov transfer payments
household disposable income
perosnal income after taxes
GDP =, Total Income =
C+S+T (consumption spenindg, household/business savings/net taxes)
Equality of Total income = total expenditures
C+I+G+ (X-M)=C+S+T
G-T
Fiscal balance
X-M
Trade Balance
AD curve
illustrates inverse relationship between price level and level of real output. Two conditions: goods market is in equilibirium and money market is in equibilrium.
Three effects that explain why AD curve slopes downward. W.I.R.
WIR 1. Wealth effect. ^ price, people feel poorer and buy less. 2. Interest rate effect. Affects demand for money. Price increase, people need more money to buy, only high interest rates cause people to invest vs spend. 3. Real exchange Rate effect. Domestic price ^ relative to foreign price, real price increases for foreigners so demand for exports goes down.
SRAS Curve
Relationhip between price levela nd quantity of real GDP supplied. Upward sloping bc some input prices change as production is increased/decreased. Output prices will increase (profits), but input prices stay the same in short run.
LRAS
All input prices are flexible, so the curve is perfectly inelastic (verticle). LRAS represents potential GDP, full employment of all the things.
VSRAS
Firms adjust output without changing price by changing labor hours and intensity of use of plant/equipment in response to changes in demand.
Things that Increase Agg Demand
Increase in consumers wealth, business expectations being positive, consumer expectations of higher future income, high capacity utilization, expansionary monetary policy, expansionary fiscal policy,
Exchange rates will increase agg demand when
decrease in relative value of country’s currency increases exports and decreases imports
Global economic growth
GDP growth in foreign economies increases quantity of imports and foreign demand
Cause SRAS curve to shift to the right
Labor productivity increases, input prices decrease, exp[ectations of future output prices to increase, taxes and gov subsidies increase, exchange rates make my currency go up, my foreign production inputs get cheaper.
Factors that shift the LRAS curve
Increase in the supply and quality of labor increasing potential output, increase in supply of natural resources increases potential REAL GDP, increase in the stock of physical capital, technology
Movements long vs shift
Reflect the impact of a change in the price level on quantity demanded and supply
Recessionary Gap
Real GDP is less than full employment
Inflationary GAp
Difference between GDP1 and full employment GDP (increase in avg demand curve caused upward pressure on price)
Stagflation
Declining economic output and higher prices
Increase in AD
Decrease in AD
Increase in AS
Decrease in AS
Real GDP, Unemployment, Price level
1. Increase, decrease, increase
2. Decrease,increase, decrease
3. Increase, decrease, decrease
4. Decrease, increase, increase
Sources of economic growth
Labor supply - over 16 working or available, human capital - skilled and educated peeps, physical capital stock - high rate of I increases this, technology, natural resources.
Potential GDP
Growth in labor force * growth in labor productivity
Production Function
Relationship of output to the size of the labor force, capital stock, productivity
Y = A x f(L,K)
Agg Econ output = total factor productivity * f( size of labor force, amount of capital available)
Total factor productivity - A
Quantifies amount of output growth not explained by increases in the size of labor force and capital
Diminishing marginal capital
Long term growth cannot be sustained by capital deepening investment
Solow Model
Growth in potential GDP = growth in tech + WL (growth in labor) + Wc (growth in capital)
WL - labors % share of national income
Wc - capitals % share of national income
