topic 2

topic 2

MEASURING THE MACROECONOMY

Gross domestic product:
the market value of all final goods and services produced in a country over a certain time

Alternative approachs to measuring GDP are the expenditure and income methods

production = expenditure = income
(for a closed economy)

Economic profits:
zero economic profit is the profit earned in perfect competition sufficient that firms do not enter or leave an industry ("normal profit")

The expenditure approach to GDP

Y = C + I + G + NX

NX is also called the "trade balance"

Since 1950 C has increased as a percentage of GDP, leading to a negative trade balance

1939-45 was exceptional because of war spending

Capital

GDP is limited as a measure because it does a poor job ofmeasuring improvements in quality (like the quality of health care)

Nominal and real GDP

GDP deflator
CPI

There are alternative methods of calculating indexes of inflation:

Laspeyres index uses initial prices
Paasche index uses final prices
Chain weighting (the Fisher index) is intermediate between the other two

Comparing economic performance between countries is difficult