EC140 Lecture Notes - Lecture 8: Real Gross Domestic Product, Output Gap, Expenditure Function

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23 Jan 2017

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Three equivalent concepts: expenditure on output produced this year, production of output this year, income from output produced this year. Nominal gross domestic product is the value of current output calculated at current prices. Real gross domestic product is the value of current output calculated at base year prices. Outcome variables relating to the business cycle: potential gdp and the output gap, unemployment or employment rates, inflation and the price level. Variables that affect desired aggregate expenditure: interest rates, exchange rates. Total value of goods and services produced. Value added method avoids double counting of intermediate goods. Consumption: durable, semi durable, and non-durable, services. Investment: plant and equipment, residential structures, inventories. Indirect taxes paid to government net of subsidies paid by government. Defines total planning spending in the economy at any level of income. Consumption function: autonomous and induced expenditure. Net exports: exports are autonomous expenditure, imports are induced expenditure.

Related Questions

What is the market for factors of production?

What is the market for factors of production?
1. The market for factors of production is where households and firms interact to trade factors of production for factor payments. For example this is where people provide firms with labor and firms pay them with wages.
What is the money market?
1. The money market is where households, firms, and the government may save and/or invest their money to earn interests. Money market includes banks, stock market, bonds market, and other financial institutions where economic actors can buy and sell financial assets to earn interests and/or dividends.
Who are the three economic actors in the circular flow model?
1. In a circular flow model, the three main economic actors are the households, firms, and the government. Households include the typical individual consumers. Firms include businesses and similar producers in the economy. Finally, the government refers to the whole government system from federal to local level.
How is the national income of an economy determined?
1. The national income of an economy is determined by measuring the total value of the output produced in an economy or the total income earned by the actors in the economy. In a circular flow model, we can see that the value of total output produced should equal the total value of income generated and earned in the economy. This is because every dollar spent by someone in the economy is received by another person in the economy as income.
What is GDP?
1. The gross domestic product or GDP represents the sum total of the value of the final goods and services produced within the economy for a given year. It is the most commonly used measure of its economy’s productivity and income.

1. Gross national product measures the current market value of final output produced within a country by both domestic and foreign resources.

True or False

2.An increase in business inventories would be included in the investment component of GDP.

True or False

3.Critics of supply-side economics claim that it

a.favors the wealthy

b.increases federal debt

c.can be inflationary

d.all of the above

4.According to the classical economists, demand creates its own supply

True or False

5.Aggregate demand curves tend to be very flat

True or False

6.The Keynesian AS curve is

a. flat because of unemployed resources

b.vertical because of full employment

c.upward sloping

d.downward sloping

7.The Keynesian analysis assumes that ample resources will be available to increase production if planned investment increases when the economy is at less than full employment.

True or False

8.If planned injections increase by $100 per day and the MPC is four-fifths,

a. the multiplier will be 5

b. total daily spending will ultimately increase by $150

c.the MPS will be $25

d.all of the above

9.The consumption function shows the relationship between the income received by the economyâs households and the

a. amount they plan to spend on currently produced final output

b.amount of government spending

c.amount businesses plans to spend on investment

d.level of taxes on personal income

10.Prior to Keynes, the prevailing viewpoint concerning equilibrium in the economy was that of

a.supply-side economics

b.monetarism

c.classical economics

d.depression economics

1. What component of GDP (if any) will each of the following transactions affect? Explain.
a) A family buys a new refrigerator.
b) Aunty Jane buys a new house.
c) Kina Pharma sells drugs from its inventory.
d) Emmanuel buys a pizza.
e) The government builds a new Motorway from Accrato Kumasi
f) You buy a bottle of California wine.
g) Samsung build an assembly plant in Ghana.

2. Consider an economy that produces only four types of fruit: apples, oranges, pineapples, and bananas. In the base year (2017), the production and price data were as follows:

Fruit	Quantity	Price
Apple	3,000	$2
Banana	6,000	$3
Pineapple	4,000	$1.5
Oranges	8,000	$4

In the current year (2020), the production and price data are as follows:

Fruit	Quantity	Price
Apples	4,000	$3
Banana	14,000	$2
Pineapple	7,500	$2
Orange	32,000	$5

(a) Calculate the nominal GDP in the current year and in the base year. What is the percentage increase since the base year?
(b) Calculate the real GDP in the current year and in the base year. By what percentage does real GDP increase from the base year to the current year?
(c) Find the GDP deflator for the current year and the base year. By what percentage does the price level change from the base year to the current year?
(d) Would you say that the percentage increase in nominal GDP in this economy since the base year is due more to increases in prices or increases in the physical volume of output?

3. The following information is obtained from the World Bank’s World Development Indicators on the Economy of Ghana for the year 2015:
i) GDP per capita (constant 2000 US$) - $1696.08
ii) GDP per capita (current US$) - $1381.41
ii) GDP per capita, PPP (constant 2005 International $) - $3953.21

a) What factors could account for the difference between the figures in i) and ii)

b) What factors could account for the difference between the figures in i) and iii)?

c) What factors could account for difference between the figures in ii) and iii)?

4. The following relationships hold in the economy of Matata Island:
𝐶 = 320 + 0.4(𝑌 − 𝑇)

𝐼 = 150
𝐺 = 275
𝑇 = 200
a) Explain the concepts of marginal propensity to consume (MPC) and marginal propensity to save (MPS).

b) What is the MPC for this economy?
c) Explain the concepts of the autonomous spending and tax multipliers.
d) What is the autonomous spending multiplier for this economy?
e) What is the equilibrium level of income for this economy?
f) Suppose that the full employment level of output for this economy is 4000. What sort of output gap is Matata island facing?
g) What kind of policy can the government use to close this kind of gap? Explain with the aid of a diagram.

5. a) For the purposes of assessing an economy's growth performance, which is the more important statistic: real GDP or nominal GDP? Why?
b) Why are goods and services counted in GDP at market value? Explain.
c) What is the difference between intermediate good and final good? Why is the distinction important for measuring GDP?

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EC140 Lecture Notes - Lecture 8: Real Gross Domestic Product, Output Gap, Expenditure Function

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