Chapter+10-Measuring+a+Nation's+Income-SSJJ

=Chapter 10: Measuring the Cost of Living=

//**THE STUDY OF ECONOMICS AS A WHOLE!**// All of these stats are about MACROECONOMICS. They tell us something about the entire economy rather than a household or firm. GDP: the total income of everyone in the economy Inflation: the rate at which average prices are rising Unemployment: the percentage of the labor force that is out of work Retail sales: total spending at stores Trade deficit: imbalance of trade between the United States and the rest of the world. Gross Domestic Product (GDP): it is closely watched because it is thought to be the best measure of societies well-being. It is used to judge if an economy is doing well or poorly. It measures TWO things at once: For an economy as a whole, income must equal expenditure. This is true because in every transaction, there are two parties, the buyer and the seller. Every dollar spent, is another dollar income for someone else. The circular-flow diagram: GDP measures this flow of money.
 * 1) the total income of everyone in the economy
 * 2) total expenditure on the economy’s output of goods and services
 * Sometime these two numbers might not match up and this is due to statistical discrepancy.

MEASUREMENT OF GROSS DOMESTIC PRODUCT

 * 1. market prices measure the price that people are willing to pay for those foods, therefore measuring the value of those goods. If the price of an apple is twice the price of orange, than the apple contributes twice as much to the GDP.
 * 2. GDP includes all items produced by the economy and sold legally in markets. Even housing is included in the GDP, by assuming that the owner is renting the house. The person renting pays the rent, while the owner gets paid the rent. In the case where the owner owns the house, the rental value is estimated.
 * 3. GDP EXCLUDES some things because measuring them would be too difficult. Such things would be the production and selling of illicit drugs, and items produced at home (because they never enter the market place). Marriage causes GDP to fail (Karen and Doug, moving lawns).
 * 4. GDP only includes the value of final goods. This is because intermediate goods are included in the final good, so counting them both would be “double counting”. (An intermediate good would be the paper, and a hallmark card would be the final good.)
 * 5. GDP includes tangible and intangible services. (Food, clothing, cars, AND haircuts, house cleaning, doctor visits).
 * 6. GDP includes items that are currently produced. When General Motors produces a new car, it is counted in the GDP, but when it is sold as a used car, it is not included).
 * 7. GDP measures the value of production within the country. Items are included in the GDP, if they are produced domestically regardless of the nationality of the producer.
 * 8. GDP measures the value of production that takes place within a specific interval of time. When measured quarterly, it is seasonally adjusted, meaning that the seasonal cycle is taken out. (Some seasons produce more, like Christmas)

THE COMPONENTS OF GDP
GDP includes all various forms of spending on domestically produced goods and services. To understand how the economy is using it’s scarce resources. To do this GDP is divided up into FOUR components:

Y = C + I + G + NX

 * 1. Consumption- spending my households on goods and services. Goods include durable goods, non durable goods, and services that are intangible.
 * 2. Investment- the purchase of goods that will be used in the future to produce more goods and services. It is the sum of purchases of capital equipment, inventories, and structures.
 * 3. Government purchases- spending on goods and services by local, state, and federal governments. This includes the salaries of government workers and the spending on public works.
 * 4. Net exports- purchases of domestically produced goods by foreigners minus the domestic purchases of foreign goods and services. (IMPORTS ㅡ EXPORTS). Thus, when a domestic household buys a good or service from abroad, the purchase reduces net exports-but because it also raises consumption, investment, or government purchases, it does not affect GDP.

REAL VS. NOMINAL GDP
If total spending rises from one year to the next, then one of two things must be true: Economists want the measure of total quantity of goods and services that the economy is producing that is not affected by the changes in price. In order to do this…. A measure called REAL GDP IS USED. Current production is evaluated using prices that are fixed at past levels. This shows how the GDP has changed over time. NOMINAL GDP is the production of goods and services valued at current price. GDP DEFLATOR: reflects the prices of goods and services but not the quantities produced. Measures the current level of prices relative to the level of prices in the base year. GDP DEFLATOR = __NOMINAL GDP__ X 100 REAL GDP Monitors the average level of prices in the economy thus measuring the rate of inflation.
 * 1. the economy is producing a larger output of goods and services
 * 2. goods and services are being sold at a higher price

GDP is a good measure of economic well-being because people prefer higher to lower incomes. It is important to keep in mind what it includes and what it leaves out. For example:
 * 1. Leisure- If everyone took their free time and spent it working, then GDP would rise but well-being or quality of life wouldn’t necessarily get better.
 * 2. Value of all activity outside the market- When a chef cooks at his restaurant it is included in the GDP, but the value he puts into raw materials when booking a meal for his family at home is not included.
 * 3. Quality of the environment- If all pollution laws were stopped, production would increase raising GDP, but overall well-being wouldn’t get better.