Week 1: GDP and the macroeconomy Flashcards
How does INCOME differ in microeconomics and macro?
micro looks at your individual income
macro looks at the total income in the whole country
How does OUTPUT differ in microeconomics and macro?
micro looks at the output your business produces
macro looks at the total output produced by all businesses in a country
How does SPENDING differ in microeconomics and macro?
micro looks at YOUR spending, or the spending of your family/company
macro looks at the total spending across all people, businesses and the gov in a country
What 3 things are equal in macroeconomics that are different in micro?
in macro, total income, total output and total spending are equal
Describe the circular flow of income
Businesses and households interact in the markets for both inputs and outputs.
All flows of resources are matched by a flow of money.
Total income, total output, and total spending are all equal.
Their value is the economy’s GDP.
What is GDP?
the market value of all financial goods and services produced within a country in a year
the market value of all financial goods and services produced within a country in a year
What are the 3 perspective of GDP?
1) GDP measures total spending
2) GDP measures total output
3) GDP measures total income
Explain perspective 1 - GDP measures total spending:
GDP equals total spending on final goods
It focuses on the final good bc its price embodies the productive efforts of the earlier stages of production
What are new inventories?
goods that have been produced but not yet sold
Why is it important to count new inventories as part of GDP?
bc GDP is a measure of production, it counts goods in the year they’re made, regardless of the year in which they’re sold
When unsold goods sit in warehouses, they’re included in GDP bc they’ve been produced
when sold, there’s a reduction in inventories (decrease in GDP) and an increase in final sales (increases GDP)
thus it ensures that GDP equals final sales
What is the impact of inventories being sold?
- a reduction in inventories = a decrease in GDP
- an increase in final sales = an increase in GDP
therefore, GDP = final sales
(GDP MEASURES TOTAL SPENDING PERSPECTIVE)
What is GDP the sum of?
consumption, investment, government purchases and net exports
(the sum of each type of spending)
What is the equation for GDP?
GDP = Consumption + Investment + Gov purchases + Net exports
Y = C + I + G + NX
where:
Y = GDP
C = Consumption
I = Investment
G = Gov purchases
NX = Net exports
What is “GDP equals total output” measured as?
the sum of value added at each stage
Explain perspective 2 - GDP measures total output
GPD is the sum of value added at each stage of production
GPD can be measured by adding up the total output across all businesses
Value added is the amount by which your company increases the value of an item
value added = total sales - cost of intermediate goods and services
