1. CHAPTER 10: National Output Dr. Widad Soufi

2.  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  Market value: market price  All: everything legally produced and sold in markets  Including rental value of owner-occupied housing  Illegal goods and services are excluded  Most home-produced items are excluded  Final: intermediate goods and services are excluded to avoid double counting  GDP = Σ added values at each production stage  If intermediate good not used as input but stored to be later sold or used, then intermediate good is final good, added to inventory, and included in GDP  Produced: only value of current production is included  If used item is sold, then value not included in GDP, but transaction costs included  Country: everything produced within the boundaries of the country, regardless of nationality  Period of time: usually the year

3.  Circular Flow Diagram:  Household sector  Business sector  International sector  Public sector Total production = Total Income = Total Expenditure  Total expenditure = C + I + G + NE  C: excludes households’ purchases of new housing  I: includes households’ purchases of new housing  G: excludes transfer payments  NE = Exp – Imp  Total income = National income

4.  GNP = GDP + Net factor incomes from abroad  NNP = GNP – Depreciation  NI= NNP – Indirect business taxes + business subsidies – Statistical discrepancy  PI = NI – Corporate profits – Corporate income taxes  DPI = PI – Personal taxes

5.  Nominal GDP: Evaluation of GDP at current market prices  Real GDP: Evaluation of GDP at constant base year prices  Example (Mankiw, page 213)  Real GDP data:  U.S.: see textbook  Morocco: see homework  Measure of economic well-being  Short term ups (expansions) and downs (recessions) in the business cycle  Long term growth: on average

6.  Yes, but GDP does not measure:  The value of leisure  Most of the activities that do not take place in a market  Environmental quality

7. 1. Explain why an economy’s income must equal its expenditure. 2. 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? 3. 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? 4. Why do economists use real GDP rather than nominal GDP to gauge economic well-being?

8.  Solve the following problems: 5, 9

9.  Mankiw, Gregory. Principles of Macroeconomics. Third edition.