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Los 17.b Los 17.c Nominal GDP: Los 17.d Consumption (C) National Income: NI = ∑
Los 17.b Los 17.c Nominal GDP: Los 17.d Consumption (C) National Income: NI = ∑
Los 17.b Los 17.c Nominal GDP: Los 17.d Consumption (C) National Income: NI = ∑
Los 17.b Los 17.c Nominal GDP: Los 17.d Consumption (C) National Income: NI = ∑
Los 17.b Los 17.c Nominal GDP: Los 17.d Consumption (C) National Income: NI = ∑
Los 17.b Los 17.c Nominal GDP: Los 17.d Consumption (C) National Income: NI = ∑

Los 17.b

Los 17.c

Nominal GDP:

Los 17.d

Consumption (C)

National Income:

NI = Income received by factors of production used in the production of final output.

of production used in the production of final output. 2015, Study Session # 5, Reading #

2015, Study Session # 5, Reading # 17

of final output. 2015, Study Session # 5, Reading # 17 “AGGREGATE OUTPUT, PRICE AND ECONOMIC

“AGGREGATE OUTPUT, PRICE AND ECONOMIC GROWTH”

# 17 “AGGREGATE OUTPUT, PRICE AND ECONOMIC GROWTH” Net Exports (X-M) Los 17.a GDP = ∑
# 17 “AGGREGATE OUTPUT, PRICE AND ECONOMIC GROWTH” Net Exports (X-M) Los 17.a GDP = ∑
# 17 “AGGREGATE OUTPUT, PRICE AND ECONOMIC GROWTH” Net Exports (X-M) Los 17.a GDP = ∑

Net Exports (X-M)

Los 17.a GDP = ∑ MV (final goods & services) produced during a period within
Los 17.a
GDP = ∑ MV (final goods & services) produced
during a period within the country.
Approach to GDP
Income Approach:
Expenditure Approach
Value-of-final output:
GDP
Real GDP:
Per capita real GDP =
Components of GDP
Investment (I)
Government spending (G)
Income
Personal Income:
PI = Pre-tax income received by
households.
Expenditure Approach: GDP = ∑ expenditure (cost) on goods & services produced in the country
Expenditure Approach:
GDP = ∑ expenditure (cost) on goods &
services produced in the country within
a specific period.
GDP = ∑ income earned by households
& businesses in the country during a
period.
Sum-of-value added: GDP =∑ value created at each stage of production & distribution during a
Sum-of-value added:
GDP =∑ value created at each stage of
production & distribution during a
period.
GDP = ∑ value of final goods & services
produced during the period.
GDP = ∑ Measure goods & services at their current cost. = ∑ Measure current
GDP = ∑
Measure goods & services at their
current cost.
= ∑
Measure current year output using
base prices.
GDP deflator: Price index which is
use to convert nominal GDP to real
GDP.
Personal Disposable Income: Personal income × (1-tax rate).
Personal Disposable Income: Personal income × (1-tax rate).
Personal Disposable Income:
Personal income × (1-tax rate).
index which is use to convert nominal GDP to real GDP. Personal Disposable Income: Personal income
index which is use to convert nominal GDP to real GDP. Personal Disposable Income: Personal income
index which is use to convert nominal GDP to real GDP. Personal Disposable Income: Personal income

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2015, Study Session # 5, Reading # 17 Los 17.e (G-T) = (S-I) – (X-M)
2015, Study Session # 5, Reading # 17
Los 17.e
(G-T) = (S-I) – (X-M)
where,
G-T = fiscal balance.
X-M = Trade balance
Thus If;
G-T > 0
⇒X-M < 0 (Trade deficit), or
⇒S-I > 0 (Excess private savings).
Los 17.f
IS
curve:
(S-I) = (G-T) + (X-M)
It shows the –ve relationship at each level of real interest rate b/w
real
interest rate and levels of aggregate income.
LM
Curve:
According to quantity theory of money:
MV
= PY
where,
M
= Nominal money supply
V
= Velocity of money
P
= Price level
Y
= Real income/expenditure
⇒ M/P = Y × (1/V)
It shows the +ve relationship between real interest rate & level of
real
income, for a given level of real Ms, at which real M D = real Ms.
Aggregate demand curve is combination of points where IS & LM
curves intersect each other for different levels of real Ms, keeping
nominal Ms Constant.
Los 17.g
Aggregate Supply Curve:
It shows the relationship b/w price level and quantity of real GDP
supplied, keeping all other factors constant.
SRAS curve is upward sloping.
VRAS curve is perfectly elastic.
LRAS curve is perfectly inelastic (vertical).
LRAS shows potential GDP.
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Stagflation: Los 17.j Labor Supply Technology 2015, Study Session # 5, Reading # 17 Aggregate
Stagflation: Los 17.j Labor Supply Technology 2015, Study Session # 5, Reading # 17 Aggregate
Stagflation: Los 17.j Labor Supply Technology
Stagflation:
Los 17.j
Labor Supply
Technology
Stagflation: Los 17.j Labor Supply Technology 2015, Study Session # 5, Reading # 17 Aggregate Demand

2015, Study Session # 5, Reading # 17

Aggregate Demand Curve Aggregate Supply Curve Shifts in AS curve: Short-Run: Gaps Sources of Economic
Aggregate Demand Curve
Aggregate Supply Curve
Shifts in AS curve:
Short-Run:
Gaps
Sources of Economic Growth
Human Capital
Short-Run: Gaps Sources of Economic Growth Human Capital Physical Capital Stock Natural Resources Los 17.h
Short-Run: Gaps Sources of Economic Growth Human Capital Physical Capital Stock Natural Resources Los 17.h

Physical Capital Stock

Natural Resources

Los 17.h Movement: ∆ in price level causes movement along the curve. Shift in AD
Los 17.h
Movement: ∆ in price level causes
movement along the curve.
Shift in AD curve:
∆ In household wealth.
∆ In consumer & business expectations.
Capacity utilization.
Fiscal & Monetary policy.
Currency exchange rate.
Global economic growth rates.
Movement: ∆ in price level cause movement along the curve. ∆ In nominal wages or
Movement: ∆ in price level cause
movement along the curve.
∆ In nominal wages or other input prices.
Expectations about future prices.
Business taxes & subsidies.
Currency exchange rates.
Factors affecting LRAS.
Long-Run:
∆ In labor supply & quality of labor.
∆ In physical capital supply.
Availability of natural resources.
Level of technology.
Los 17.i Recessionary Gap: real GDP < potential GDP ⇒ input prices. Inflationary Gap: real
Los 17.i
Recessionary Gap: real GDP <
potential GDP ⇒ input prices.
Inflationary Gap: real GDP > potential
GDP ⇒ input prices.

High unemployment and increasing inflation. (Or) weak economic growth + high inflation (may be caused by sudden in short-run AS). Fixed income investments. Investment in equities. Investment in commodities.

by sudden in short-run AS). Fixed income investments. Investment in equities. Investment in commodities.

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2015, Study Session # 5, Reading # 17 Los 17.j Potential GDP = Agg. Hours
2015, Study Session # 5, Reading # 17
Los 17.j
Potential GDP = Agg. Hours worked × labor
productivity (or)
growth in potential GDP = growth in labor-force +
growth in labor-productivity.
Sustainable rate of economic growth
= f (rate of in labor force, rate of in labor
productivity).
Los 17.k
Production function:
It shows the relationship between:
Output & labor,
Capital stock.
Productivity
Total factor productivity ⇒ advances in
technology.
Los 17.L
Growth in potential GDP = Growth in technology + (growth in
labor) + (growth in capital)
where,
= Labor’s % share of national income.
= Capital % share of national income.
Growth in per-capital potential GDP = growth in technology +
(growth in capital-to-labor ratio)
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