-income

-total expenditure in economy

only include the market value of the final good, otherwise there would be double counting

ex. car with GPS system- only include value of the car b/c the price of the car captures the value of the entire gps system

defined by geography

ex. household goes to a movie, toyota builds a factory in US, Navy buys a ship, British airways buys plane form Boeing

1. consumption

2. investment

3. Government expenditure

4. Net export (export-import)

1. produce more goods and services

2. prices are increasing

reflects a change in production of goods and services only

calculate using constant prices

reflects both the change in production of goods and services and the changes in prices

calculate using current prices

prices of goods and services has increased

measures the current price level relative to a price level in a base year

-leisure (if everyone worked all the time GDP would increase but people may be worse off)

-volunteer work

-environmental quality

-health, income, distribution, etc.

1. fix the basket of goods/services

2. find the prices at each point in time and calculate the cost of the basket

3. calculate CPI

1. CPI uses a fixed basket

GDP deflator basket changes each yr

3. CPI includes non domestically produced goods

labor force

temporary unemploy that occurs as people enter the labor force or change jobs

--> it takes time to find a job

people dont possess the skills required for the jobs available

-->associated with a lack of education or a change in the structure of the economy

1. monitor banks

-monitor financial conditions

-loan banks money

2. control money supply = monetary policy

1. open market operations

2. reserve req

3. discount rate

the purchase and sale of gov bonds by the FED

when you purchase the bond you get an IOU, when you sell the bond you gove an IOU

-to increase the money supply the Fed buys bonds (Fed takes in IOUS in exchange for money)

-to decrease the money supply, the Feds sell bonds

to increase Ms lower reserve req

to decrease Ms raise reserve req

the interest rate on loans between banks and the central bank

Fed can lower discount rate, encouraging banks to take loans and increase reserves--> increase in Ms

-low return on savings

-low costs of borrowing

=save less (consume more) invest more

1. government purchases

2. taxes

3. transfer payments

fiscal policy- gov spending

a change i the level of gov spending on goods and services

ex. national defense, education, infrastructure

ex. lower income taxes

increase disposable income, increase C (consumption)

social security, medicare, medicaid

increases in transfer payments, increase consumption

works in opposite direction of multiplier effect

an increase in gvt spending increases income, as income increases, consumers want to buy more goods and services, the demand for money increases, interest rates increase, higher cost of borrowing, so people invest less

=increase in govt spending "crowds-out" investment