lecture2

3
GDP: Gross Domestic Product
The total market value of all final goods and services produced within a country in a given period of time.
4
Market Value
5
Final Goods and Services
• A final good (or service), is an item bought by its final user during a specified time period. • A final good contrasts with an intermediate good, which is an item that is produced by one firm, bought by another firm, and used as a component of a final good or service.
19
The red and blue flows are the circular flow of expenditure and income. The green flows are borrowing and lending.
20
The sum of the red flows equals the blue flow.
GDP is the market value of all final goods produced within a certain interval Which also equals values added in every step of production
29
GDP accounting: expenditure method
15
Firms buy capital goods from other firms. The red flow I represents this investment expenditure by firms.
16
Governments buy goods and services, G, and borrow or repay debt if spending exceeds or is less than taxes
• Total expenditure = C + I + G + (X – M).
23
Aggregate Income
• Aggregate income earned from production of final goods, Y, equals the total paid out for the use of resources, wages, interest, rent, and profit.
• Antiques, used products • Inventories
8
Discussions
• How will GDP change if a laid-off worker who lived on government subsidy gets employed? • What if you marry your tutor and she continues to tutor you after marriage?
11
These transactions take place in factor markets, goods markets, and financial markets.
12
Firms hire factors of production from households. The blue flow, Y, shows total income paid by firms to households.
The spending on capital equipment, inventories, and structures, including new housing.
9
GDP and the Circular Flow of Expenditure and Income
• GDP measures the value of production, which also equals total expenditure on final goods and total income earned by all factors of production.
13
Households buy consumer goods and services. The red flow, C, shows consumption expenditures.
14
Households save, S, and pay taxes, T. Firms borrow some of what households save to finance their investment.
17
The rest of the world buys goods and services from us, X and sells us goods and services, M; net exports are X - M
18
And the rest of the world borrows from us or lends to us depending on whether net exports are positive or negative.
26
Investment and Saving
I=S+(T-G)+(M-X) S is private saving (T-G) is public saving National saving is private saving + public saving
Reinterpretation: S=I+(G-T)+(X-M)
21
That is: Y = C + I + G + X - M
22
Aggregate expenditure
• The circular flow demonstrates how GDP can be measured in two ways. • Total expenditure on final goods and services, equals the value of output of final goods and services, which is GDP.
• Excluding intermediate goods and services avoids double counting.
6
Produced within a country
• GDP measures production within a country— domestic production. • Difference between GDP and GNP
27
Stocks and Flows
A flow is a quantity per unit of time; a stock is the quantity that exists at a point in time.
flow stock
28
GDP accounting: value added method
2
National Income Accounting
• Why do we need that?
– To measure aggregate economic activity
• Created by Simon Kuznets and Richard Stone
• Core concept: GDP and GNP • The US started publishing GDP in 1947
– Chinese workers tapping oil in Darfur – Oversea students make money by tutoring Chinese students English
7
In a given period of time
• GDP measures the value of production that takes place within a specific interval of time, usually a year or a quarter (three months).
• Y = C + I + G + (X – M).
30
Consumption
The spending by households on goods and services, with the exception of purchases of new housing.
31
Investment
• GDP is a market value—goods and services are valued at their market prices. • Non-market activities are not counted as part of GDP!
– Household work – Underground economy; illegal economy
Lecture 2: Measuring Income and Wealth
Se Yan Guanghua School of Management Peking University Spring 2011