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Chapter 2 – A Tour of the book

Chapter 2 – A Tour of the book. Small recap of the concepts learned in ECO 2302 Concepts we will cover in the next chapters. GDP – Output – Aggregate Income/Production. Gross Domestic Product: Market value of all final goods & services produced in a period in a country.

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Chapter 2 – A Tour of the book

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  1. Chapter 2 – A Tour of the book • Small recap of the concepts learned in ECO 2302 • Concepts we will cover in the next chapters

  2. GDP – Output – Aggregate Income/Production • Gross Domestic Product: Market value of all final goods & services produced in a period in a country

  3. GDP – Output – Aggregate Income/Production • Three approaches to calculate GDP: • Expenditure approach: GDP = C + I + G + Ex – Im • Income approach: Since expenditure of one side is the income of the other side, we can also use this approach • Value added approach: Add value added at each production stage

  4. GDP – Output – Aggregate Income/Production • Does GDP really tell us anything about the standard of living? • Look at GDP per capita for standard of living • US GDP (2012): $15.685 trillion • Population: 316,384,000 • GDP per capita: $15.685 trillion/316,384,000 ≈ $50,000 • Ethiopia (2012): $40.5 billion • Population: 91,195,675 • GDP per capita: $40.5 billion /91,195,675 ≈ $500

  5. GDP – Output – Aggregate Income/Production Real vs. Nominal GDP Nominal GDP uses current prices: Real GDP fixes prices and uses a base year

  6. UNEMPLOYMENT • Unemployed: 16 or older, not institutionalized, does not have a job but is actively looking for one. • Unemployment rate = U/LF • Labor Force Participation Rate = LF/Pop. • Real numbers (in thousands - July 2013): • UR = 11514/155798 = 0.074 = 7.4% • LFPR = 155798 /245756 =0.63 = 63%

  7. INFLATION • Inflation: a sustained increase in the price level • We consider two price levels: • GDP Deflator = 100*Nom. GDP/R.GDP • CPI = Consumer Price Index • How to calculate inflation? • Pt: Price level in year t • Inflation = (Pt – Pt-1)/Pt-1

  8. INFLATION (CPI vs. Deflator)

  9. Okun’s Law Higher output growth decreases unemployment  For the US, output growth of about 3% is needed to keep the unemployment rate in check

  10. Phillips curve There is a trade-off between unemployment and inflation  Below 6% of unemployment, the economy “heats up” and inflation increases whereas above, inflation decreases.

  11. Next chapters • Analyze the macroeconomy within three intervals: • Short run: IS-LM model • Medium run: AS-AD model • Long run: Solow model and economic growth

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