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PRINCIPLES OF MACROECONOMICS (MANKIW)

PRINCIPLES OF MACROECONOMICS (MANKIW). CHAPTER 10: National Output Dr. Widad Soufi. Gross Domestic Product. Need for a measure of society’s well-being GDP: market value of all final goods and services produced within a country in a given period of time

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PRINCIPLES OF MACROECONOMICS (MANKIW)

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  1. PRINCIPLES OF MACROECONOMICS (MANKIW) CHAPTER 10: National Output Dr. Widad Soufi

  2. Gross Domestic Product • Need for a measure of society’swell-being • GDP: market value of allfinal goods and services produced within a country in a given period of time • Market value: marketprice • All: everythinglegallyproduced and sold in markets • Includingrental value of owner-occupiedhousing • Illegalgoods and services are excluded • Most home-produced items are excluded • Final: intermediategoods and services are excluded to avoid double counting • GDP = Σadded values ateach production stage • If intermediate good not used as input but stored to belatersold or used, thenintermediate good is final good, added to inventory, and included in GDP • Produced: onlyvalue of current production isincluded • If used item issold, then value not included in GDP, but transaction costsincluded • Country: everythingproducedwithin the boundaries of the country, regardless of nationality • Period of time: usually the year

  3. GDP as Income and Expenditures • Circular Flow Diagram: • Householdsector • Business sector • International sector • Public sector Total production = Total Income = Total Expenditure • Total expenditure = C + I + G + NE • C: excludeshouseholds’ purchases of new housing • I: includeshouseholds’ purchasesof new housing • G: excludestransferpayments • NE = Exp – Imp • Total income = National income

  4. Alternative Measures of GDP • GNP = GDP + Net factor incomesfromabroad • NNP = GNP – Depreciation • NI= NNP – Indirect business taxes + business subsidies – Statisticaldiscrepancy • PI = NI – Corporate profits – Corporateincome taxes • DPI = PI – Personal taxes

  5. Real vs. Nominal GDP • Nominal GDP: Evaluation of GDP atcurrentmarketprices • Real GDP: Evaluation of GDP at constant base yearprices • Example (Mankiw, page 213) • Real GDP data: • U.S.: seetextbook • Morocco: seehomework • Measure of economicwell-being • Short termups(expansions) and downs (recessions) in the business cycle • Long termgrowth: on average

  6. GDP as a Measure of Well-being? • Yes, but GDP does not measure: • The value of leisure • Most of the activitiesthat do not take place in a market • Environmentalquality

  7. Quiz (Mankiw, P. 221) • Explain why an economy’s income must equal its expenditure. • A farmer sells wheat to a baker for $2. The baker uses the wheat to make bread, which is sold for $3. What is the total contribution of these transactions to GDP? • Many years ago Peggy paid $500 to put together a record collection. Today she sold her albums at a garage sale for $100. How does this sale affect current GDP? • Why do economists use real GDP rather than nominal GDP to gauge economic well-being?

  8. HOMEWORK (Mankiw, P. 221-222) • Solve the followingproblems: 5, 9

  9. REFERENCES • Mankiw, Gregory. Principles of Macroeconomics. Thirdedition.

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