Reading 17: Aggregate Output, Prices, and Economic Growth Flashcards
GDP Equation
Aggregate Output, Prices and Economic Growth
17.1
C = Consumer spending on final goods and wervices
I = Gross private domestic investment, which includes business investment in capital goods (e.g. plant and equipment) and changes in inventory (inventory investment)
G = Government spending on final goods and services
X = Exports
M = Imports
Domestic Private Saving
Aggregate Output, Prices and Economic Growth
17.2
C = Consumer spending on final goods and wervices
I = Gross private domestic investment, which includes business investment in capital goods (e.g. plant and equipment) and changes in inventory (inventory investment)
G = Government spending on final goods and services
X = Exports
M = Imports
Domestic private saving is used or absorbed in one of three ways: investment spending, financing government deficits, and building up financial claims against overseas economies [positive trade blance, (X-M > 0)].
If there is a trade deficit, then domestic private saving is being supplemented by inflows of foreign saving and overseas economies are building up financial claims against the domestic economy.
Nominal GDP
Aggregate Output, Prices and Economic Growth
17.x
Also,
Real GDPt = PB x Qt
where:
PB = Prices in the base year
GDP Deflator
Aggregate Output, Prices and Economic Growth
17.x
Quantity Theory of Money
Aggregate Output, Prices and Economic Growth
17.x
M = nominal money supply
P = the price level
V = velocity of money
Y = real income/ expenditure
If velocity is assumed to be constant, then the quantity theory of money equation implies that the money supply determines the nominal value of output (PY).
Can be rewritten as:
M/P = (M/P)D = kY
Equilibrium in Money Market
Aggregate Output, Prices and Economic Growth
17.x
Classical Model of Aggregate Supply
Aggregate Output, Prices and Economic Growth
17.x
Where K bar is the fixed amount of captial and L bar is the available labor supply.
Basic Production Function
Aggregate Output, Prices and Economic Growth
17.x
A represents techological knowledge (scale factor).
Y = aggregate output
L = Quantity of labor
K = capital
Growth in Potential GDP
Aggregate Output, Prices and Economic Growth
17.x
The rate of growth of potential output equals growth in technology plus the weighted average growth rate of labor and capital.
WL and WC are the relative shares of capital and labor in national income. The capital share is the sum of corporate profits, net interest income, net rental income, and depreciation divided by GDP.
Growth in Per Capita Potential GDP
Aggregate Output, Prices and Economic Growth
17.x
TFP Growth
(Total Factor Productivity)
Aggregate Output, Prices and Economic Growth
17.x
Labor Productivity
Aggregate Output, Prices and Economic Growth
17.x
Productivity From Production Function
Aggregate Output, Prices and Economic Growth
17.x
Divide production function by 1/L
Potential GDP and Potential Growth Rate
Aggregate Output, Prices and Economic Growth
17.x
