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Macro 1b (Thursday) GDP = output = expenditure Components of GDP (types of expenditure) 1. Consumption a. Durable b. Non durable c.


2. investment a. production of physical capital (factor machines, housing) 3. Government purchases a. ARE NOT INCLUDED IN GDP Transfer payments (not actually purchasing goods and services) i. Food stamps ii. Welfare services 4. Net export a. Account for interactions with the rest of the world. Produced in united states, but consumed out of country b. Net exports = exports imports i. Imports are subtracted from GDP because these goods and services are not produced in US c. consumption by $50, imports by $50 , net export by $50 (no change in GDP) GDP GDP = output = expenditure = income

Macro 1b (Thursday)

Components of GDP (types of income) income approach wages corporate profits rents other categories Nominal GDP = 15 trillion Real GDP = nominal GDP / P (aggregate price level how big of share they are in an economy) P= weighted average price of all goods and services
real GDP, which is the value of goods and services measured using a constant set of prices.

consumer price index (CPI) GDP deflator o

Nominal GDP: measures the current dollar value of the output of the economy Real GDP: measures output valued at constant prices GDP deflator: measures the price of output relative to price in the base year

Chain Weighted Measures of Real GDP Inflation rate = = % change in P Headline inflation

Macro 1b (Thursday) Core inflation

Most common definition Inflation excluding food and energy prices (causes ups and downs) Imagine a world that produces the same amount of goods and services in year 1 and 2. However, the prices changes. Nominal GDP reflects 20% change. However, must account for inflation to reflect real GDP. Price level will also rise 20%, numerator and denominator cancel out, production stays the same. Real GDP = nominal GDP / P Wages W= normal wages Real wage = W/p Interest Nominal interest rate = i Real interest rate r = i - (1st order taylor approx) Macro Theories how the economy is impacted Prices Short run (2-3 years) Long run (5-10) Very long run (25+) fixed Flexibe/adjust Flexible/adjust Resources & technology (capital stock, labor force) fixed Fixed Flexible/ adjust

Macro 1b (Thursday) government spending: SR Y LR: no effect on Y VLR: Y because less money was spent in investment Short run Long run Very long run [Chapter 3] LR Level of Y (output, real gdp) Distribution of Y into types of income (labor, capital) Distribution into types of expenditure (C, I, G, NX)