Inflation and Price Level

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Calculation (expenditure approach)

–The spending by households on goods and services, with the exception of purchases of new housing. •Investment (I):
–The spending on capital equipment, inventories and structures, including household purchases of new housing. •Government purchases (G):
–The spending on goods and services by local, state and federal governments. –Does notinclude transfer payments because they are not made in exchange for currently produced goods or services. •Net exports (NX):

–Exports minus imports.
Y= C+ I+ G+ NX
GDP= C+ I+ G + (X–M)

What is included and not included in GDP

•Personal (household) Consumption Expenditure (C)
–Durable consumer goods
–Non-durable consumer goods

•Gross Private (Domestic) Investment (I)
•Final purchases of machinery, equipment and tools
•All building and construction
•Private—Not government
•Domestic—Not foreign
•Does not include financial investment or transfer of paper assets, e.g. buying of shares

Gross Private (Domestic) Investment (I)
•Two components:
•Fixed investment expenditures for newly produced capital goods •Changes in private-sector inventories: net change in value of unsold finished products, unfinished products, and raw materials purchased by firms but as yet unused in production. Government spends on ‘current’goods –the salaries of its workers and the inputs it consumes in government departments. •It also spends on investment goods (often called infrastructure) such as highways, buildings and bridges. •GDP does notinclude transfer paymentsfrom one level of government to another.

Net exports is the difference between the value of exports (X) and imports (M) (i.e. X-M), or NX •Exports(X) are expenditures by foreigners on domestically produced goodsand services. •Imports(M) are the dollar amount of a nation’s purchases from producers in other countries

Nominal GDP vs. Real GDP, convert using GDP deflator.

The GDP deflator is calculated as follows:

• Converting nominal GDP to real GDP
– Nominal GDP is converted to real GDP as follows:

Problem when using GDP to measure wellbeing

GDP has a number of shortcomingsas a measure of economic welfare: –Non-market transactions
–Distribution, kind and quality of products
–Neglect of leisure time
–The underground economy
–Economic bads(overusing resources, polution…).
•It is a quantitative, rather than qualitative, measure of output.

Economic growth

What determines productivity and economic growth?

Productivity refers to the amount of goods and services produced for each hour of a worker’s time.

Physical capital
–is a produced factor of production.
•It is an input into the production process that in the past was an output from the production process. •is the stock of equipment and structures that are used to produce goods and services. •Tools used to build or repair automobiles.

•Tools used to build furniture.
•Office buildings, schools, etc.

Human capital
–the economist’s term for the knowledge and skills that workers acquire through education, training and experience. •Like physical capital, human capital raises a nation’s ability to produce goods and services

Natural resources
–inputs used in production that are provided by nature, such as land, rivers and mineral deposits. •Renewable resources include trees and forests.
•Nonrenewable resources include petroleum and coal.
•can be important but are not necessary for an economy to be highly productive in producing goods and services.

Technological knowledge
–society’s understanding of the best ways to produce goods and services. –Human capital refers to the resources expended transmitting this understanding to the labourforce.

Economic Growth:
Governments can do many things to raise productivity and living standards. •Government policies that raise productivity and living standards –encourage saving and investment....
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