CHAPTER8GDP: Measuring TotalProduction and IncomeChapterOutlineandLearningObjectives8.1GrossDomesticProductMeasuresTotal Production8.2Does GDP Measure WhatWeWant it to Measure?8.3Real GDPversusNominalGDP8.4OtherMeasuresof TotalProduction andTotalIncome
1 Chapter Outline and Learning Objectives 8.1 Gross Domestic Product Measures Total Production 8.2 Does GDP Measure What We Want it to Measure? 8.3 Real GDP versus Nominal GDP 8.4 Other Measures of Total Production and Total Income CHAPTER 8 CHAPTER GDP: Measuring Total Production and Income
Microeconomicsand MacroeconomicsMicroeconomics isthe study of how households and firmsmakechoices, how they interact in markets, and how the governmentattempts to influence their choices.In contrast, macroeconomics is the study of the economy as awhole, including topics such as inflation, unemployment, andeconomic growth.Whenwe want to studythe overall economy-level actions ofpeople and governments, the models and tools ofmacroeconomics become very useful.@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 2 Microeconomics and Macroeconomics Microeconomics is the study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices. In contrast, macroeconomics is the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth. • When we want to study the overall economy-level actions of people and governments, the models and tools of macroeconomics become very useful
SomeImportant TermsinMacroeconomicsBusiness cycle:Alternating periods of economic expansion andeconomicrecession.Expansion: The period of a business cycle during which the totalproduction and total employment are increasing.Recession: The period of a business cycle during which totalproduction and total employment are decreasing.Economic growth: The ability of an economy to produce increasingquantities of goods and services.Inflationrate:Thepercentage increaseinthepricelevelfromoneyear to the next.@2015PearsonEducation,Inc.3
© 2015 Pearson Education, Inc. 3 Some Important Terms in Macroeconomics Business cycle: Alternating periods of economic expansion and economic recession. Expansion: The period of a business cycle during which the total production and total employment are increasing. Recession: The period of a business cycle during which total production and total employment are decreasing. Economic growth: The ability of an economy to produce increasing quantities of goods and services. Inflation rate: The percentage increase in the price level from one year to the next
Goal ofThisChapterOver the coming chapters, we will explore many aspects of theeconomy, including how all of the elements on the previous sliderelate to one another.For this chapter, we have a less lofty goal: to figure out how tomeasure the total output of an economy.Being able to measure total output is incredibly important, sincemuch of macroeconomics depends on our ability to measure andpredict aggregate economic activity.@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 4 Goal of This Chapter Over the coming chapters, we will explore many aspects of the economy, including how all of the elements on the previous slide relate to one another. For this chapter, we have a less lofty goal: to figure out how to measure the total output of an economy. Being able to measure total output is incredibly important, since much of macroeconomics depends on our ability to measure and predict aggregate economic activity
GrossDomesticProductMeasuresTotalProduction8.1LEARNINGOBJECTIVEExplainhowtotalproductionismeasured@2015PearsonEducafion,lnc
LEARNING OBJECTIVE © 2015 Pearson Education, Inc. 5 Gross Domestic Product Measures Total Production 8.1 Explain how total production is measured
Measuring Total Production:Gross Domestic ProductThemostcommonmeasureusedbyeconomistsofoverall economicactivity in an economy is Gross domestic product, or GDP.Gross domestic product: the market value of all final goods andservices produced in a country during a period of time, typically oneyear.Wewill examine each of the parts of this definition in turn@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 6 Measuring Total Production: Gross Domestic Product The most common measure used by economists of overall economic activity in an economy is Gross domestic product, or GDP. Gross domestic product: the market value of all final goods and services produced in a country during a period of time, typically one year. We will examine each of the parts of this definition in turn
“"MarketValuesGross domestic product: the market value of all final goods andservices produced in a country during a period of time, typically oneyear.We cannot add together the number of cars, melons, haircuts, and allother goods and services without agreeing on a common way tomeasurethem.The best practical way is to value each good and service in monetaryterms; and the best measure of this that we have is the price thateach good orservice is soldfor.@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 7 “Market Values” Gross domestic product: the market value of all final goods and services produced in a country during a period of time, typically one year. We cannot add together the number of cars, melons, haircuts, and all other goods and services without agreeing on a common way to measure them. The best practical way is to value each good and service in monetary terms; and the best measure of this that we have is the price that each good or service is sold for
“FinalGoodsandServicesGross domesticproduct:the market value of all finalgoods andservices produced in a country during a period of time, typically oneyear.A finalgood or serviceisagood or servicepurchasedby afinaluser. These are what are used to calculate GDP.. Why? If we counted intermediate goods and services as well,ones that were inputs into another good or service, such as a tireon a truck, then we would end up double-countingExample: if we counted the value of the ice cream bought by a storeandalso counted the value ofthat ice cream when it wassoldto aconsumer,we wouldbedouble-countingthewholesalevalueoftheicecream.2015PearsonEducation,Inc.8
© 2015 Pearson Education, Inc. 8 “Final Goods and Services” Gross domestic product: the market value of all final goods and services produced in a country during a period of time, typically one year. A final good or service is a good or service purchased by a final user. These are what are used to calculate GDP. • Why? If we counted intermediate goods and services as well, ones that were inputs into another good or service, such as a tire on a truck, then we would end up double-counting. Example: if we counted the value of the ice cream bought by a store, and also counted the value of that ice cream when it was sold to a consumer, we would be double-counting the wholesale value of the ice cream
“During a Period of Time"Gross domestic product: the market value of all final goods andservices produced in a country during a period of time, typically oneyear.To measure total output in a given year, we measure the goods andservices produced only in that given year.. Again, this avoids double-counting: if you buy a DvD in 2011, thatDVD counts in 2011's GDP. If you resell it in 2012, it will not countagain in 2012.So GDP counts only new goods and services. Used items werepreviously produced and counted, so don't need to be countedagain.@2015PearsonEducation,Inc.O
© 2015 Pearson Education, Inc. 9 “During a Period of Time” Gross domestic product: the market value of all final goods and services produced in a country during a period of time, typically one year. To measure total output in a given year, we measure the goods and services produced only in that given year. • Again, this avoids double-counting: if you buy a DVD in 2011, that DVD counts in 2011’s GDP. If you resell it in 2012, it will not count again in 2012. • So GDP counts only new goods and services. Used items were previously produced and counted, so don’t need to be counted again
ProductionandIncomeThere are two main conceptual ways to measure the total economicactivity in an economy: total production or total income.When we measure one, we are also measuring the other.Why? Everything that is produced and sold constitutes income forsomeone; so we have the choice of measuringthe value ofproducts produced and sold, or the value of incomes, and each isavalidwayofmeasuringeconomicactivity10@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 10 Production and Income There are two main conceptual ways to measure the total economic activity in an economy: total production or total income. When we measure one, we are also measuring the other. • Why? Everything that is produced and sold constitutes income for someone; so we have the choice of measuring the value of products produced and sold, or the value of incomes, and each is a valid way of measuring economic activity