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II. Unit II A. Measuring Domestic Output, National Income, and the Price Level 1. Important facts about the GDP figure 2. Three accounting identities a.

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Presentation on theme: "II. Unit II A. Measuring Domestic Output, National Income, and the Price Level 1. Important facts about the GDP figure 2. Three accounting identities a."— Presentation transcript:

1 II. Unit II A. Measuring Domestic Output, National Income, and the Price Level 1. Important facts about the GDP figure 2. Three accounting identities a. The expenditures approach to GDP b. The income approach to GDP c. The leakages/injections identity B. Macroeconomic Instability: Unemployment and Inflation 1. Types of unemployment 2. Economic and noneconomic costs of unemployment 3. Full employment... the goal defined 4. Redistributive and output effects of inflation

2 EXPENDITURES(NO GOV. OR INT'L TRADE) GDP - - C + ACTUAL I

3 EXPENDITURES(NO GOV. OR INT'L TRADE) GDP - - C + ACTUAL I CONSUMPTION... includes expenditures by households on...

4 GDP - - C + ACTUAL I CONSUMPTION... includes expenditures by households on... CONSUMPTIONoccurs when output goes to households. EXPENDITURES(NO GOV. OR INT'L TRADE)

5 ) GDP - - C + ACTUAL I INVESTMENT (GROSS PRIVATE DOMESTIC INVESTMENT) I G 1. All final purchases of machinery, equipment, and tools by business enterprises 2. All construction (nongovernmental) 3. Changes in inventories EXPENDITURES(NO GOV. OR INT'L TRADE)

6 GDP - - C + ACTUAL I INVESTMENT occurs when output is retained by the business community (or sector). EXPENDITURES(NO GOV. OR INT'L TRADE)

7 GDP - - C + ACTUAL I INVESTMENT occurs when output is retained by the business community (or sector). Investment is the PHYSICAL creation of capital. EXPENDITURES(NO GOV. OR INT'L TRADE)

8 ) GDP - - C + ACTUAL I CONSUMPTIONoccurs when output goes to households. INVESTMENT occurs when output is retained by the business community (or sector). EXPENDITURES(NO GOV. OR INT'L TRADE)

9 GDP - - C + ACTUAL I STUFF PRODUCED BY THE ECONOMY DURING THE YEAR EXPENDITURES(NO GOV. OR INT'L TRADE)

10 GDP - - C + ACTUAL I STUFF PRODUCED BY THE ECONOMY DURING THE YEAR STUFF WHICH GOES TO HOUSEHOLDS DURING THE YEAR EXPENDITURES(NO GOV. OR INT'L TRADE)

11 ) GDP - - C + ACTUAL I STUFF PRODUCED BY THE ECONOMY DURING THE YEAR STUFF WHICH GOES TO HOUSEHOLDS DURING THE YEAR STUFF RETAINED BY BUSINESS SECTOR DURING THE YEAR EXPENDITURES(NO GOV. OR INT'L TRADE)

12 GDP - - C + ACTUAL I STUFF PRODUCED BY THE ECONOMY DURING THE YEAR STUFF WHICH GOES TO HOUSEHOLDS DURING THE YEAR STUFF RETAINED BY BUSINESS SECTOR DURING THE YEAR THE STUFF MUST GO SOMEWHERE.. EXPENDITURES(NO GOV. OR INT'L TRADE)

13 GDP - - C + ACTUAL I STUFF PRODUCED BY THE ECONOMY DURING THE YEAR STUFF WHICH GOES TO HOUSEHOLDS DURING THE YEAR STUFF RETAINED BY BUSINESS SECTOR DURING THE YEAR THE STUFF MUST GO SOMEWHERE.. AND THERE ARE ONLY TWO PLACES FOR IT TO GO!!! EXPENDITURES(NO GOV. OR INT'L TRADE)

14 ) GDP - - C + ACTUAL I INVESTMENT (GROSS PRIVATE DOMESTIC INVESTMENT) I G 1. All final purchases of machinery, equipment, and tools by business enterprises 2. All construction (nongovernmental) 3. Changes in inventories EXPENDITURES(NO GOV. OR INT'L TRADE)

15 GDP - - C + ACTUAL I INVESTMENT occurs when output is retained by the business community (or sector). EXPENDITURES(NO GOV. OR INT'L TRADE)

16

17 GDP - - C + ACTUAL I INVESTMENT (GROSS PRIVATE DOMESTIC INVESTMENT) I G 1. All final purchases of machinery, equipment, and tools by business enterprises 2. All construction (nongovernmental) 3. Changes in inventories EXPENDITURES(NO GOV. OR INT'L TRADE)

18

19

20 GDP - - C + ACTUAL I INVESTMENT occurs when output is retained by the business community (or sector). EXPENDITURES(NO GOV. OR INT'L TRADE)

21

22

23

24 GDP - - C + ACTUAL I INVESTMENT (GROSS PRIVATE DOMESTIC INVESTMENT) I G 1. All final purchases of machinery, equipment, and tools by business enterprises 2. All construction (nongovernmental) 3. Changes in inventories EXPENDITURES(NO GOV. OR INT'L TRADE)

25 ASSUME: STANDARDIZED BOXES OF FINAL GOODS EACH PRICED AT $40

26 BUSINESS HOUSEHOLDS BOX WAREHOUSE

27 GDP C + ACTUAL I - - 4 BOXES $160

28 BUSINESS HOUSEHOLDS BOX WAREHOUSE

29 GDP C + ACTUAL I - - 4 BOXES 2 BOXES $80 $160

30 BUSINESS HOUSEHOLDS BOX WAREHOUSE

31 GDP C + ACTUAL I - - 4 BOXES 2 BOXES $80 $160 2 BOXES $80

32 BUSINESS HOUSEHOLDS BOX WAREHOUSE

33 GDP C + ACTUAL I - - 4 BOXES $160

34 BUSINESS HOUSEHOLDS BOX WAREHOUSE

35 GDP C + ACTUAL I - - 4 BOXES $160 6 BOXES $240

36 BUSINESS HOUSEHOLDS BOX WAREHOUSE

37 BUSINESS HOUSEHOLDS BOX WAREHOUSE

38 BUSINESS HOUSEHOLDS BOX WAREHOUSE

39 BUSINESS HOUSEHOLDS BOX WAREHOUSE

40 GDP - - C + ACTUAL I --------------------------- INVESTMENT (GROSS PRIVATE DOMESTIC INVESTMENT) I G 1. All final purchases of machinery, equipment, and tools by business enterprises 2. All construction (nongovernmental) 3. Changes in inventories EXPENDITURES(NO GOV. OR INT'L TRADE)

41 BUSINESS HOUSEHOLDS BOX WAREHOUSE

42 BUSINESS HOUSEHOLDS BOX WAREHOUSE

43 GDP C + ACTUAL I - - 4 BOXES $160 6 BOXES $240 -2 BOXES -$80

44 BUSINESS HOUSEHOLDS BOX WAREHOUSE

45 BUSINESS HOUSEHOLDS BOX WAREHOUSE

46 BUSINESS HOUSEHOLDS BOX WAREHOUSE

47 BUSINESS HOUSEHOLDS BOX WAREHOUSE

48 BUSINESS HOUSEHOLDS BOX WAREHOUSE $40 SKYSCRAPER

49 BUSINESS HOUSEHOLDS BOX WAREHOUSE $40 SKYSCRAPER

50 BUSINESS HOUSEHOLDS BOX WAREHOUSE

51 GDP C + ACTUAL I - - 4 BOXES $160

52 BUSINESS HOUSEHOLDS BOX WAREHOUSE

53 GDP C + ACTUAL I - - 4 BOXES $160 4 BOXES $160

54 BUSINESS HOUSEHOLDS BOX WAREHOUSE

55 GDP C + ACTUAL I - - 4 BOXES $160 4 BOXES $160 0 BOXES $0

56

57 GDP C + ACTUAL I - - 4 BOXES $160 WHY "ACTUAL"?

58 Suppose producer wishes to increase the inventories he is carrying by 2 boxes during the year. Suppose he that he can sell 4 boxes during the year. He will therefore produce 6 boxes. believes EXPENDITURES(NO GOV. OR INT'L TRADE)

59 Suppose producer wishes to increase the inventories he is carrying by 2 boxes during the year. He will therefore produce 6 boxes. Suppose he sells only 2 boxes. actually Suppose he that he can sell 4 boxes during the year. believes

60 Suppose producer wishes to increase the inventories he is carrying by 2 boxes during the year. He will therefore produce 6 boxes. ACTUAL I IS 4 BOXES. PLANNED I IS ONLY 2 BOXES. Suppose he that he can sell 4 boxes during the year. believes Suppose he sells only 2 boxes. actually

61 Suppose producer wishes to increase the inventories he is carrying by 2 boxes during the year. Suppose he believes that he can sell 4 boxes during the year. He will therefore produce 6 boxes. believes Suppose he actually sells only 2 boxes. actually ACTUAL I IS 4 BOXES. PLANNED I IS ONLY 2 BOXES. HE "ACCIDENTALLY" BUYS 2 EXTRA BOXES

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