defines aggregate output as the dollar value of all final goods and services produced within the borders of a given country during a given period of time, typically a year.

GDP=Consumption(C) + Investment(Ig) + Government Purchases(G) + Net Exports(Xn)

Including the value of intermediate goods

and services to the GDP

• All final purchases of machinery, equipment, and tools by business enterprises.

• All construction.

• Changes in inventories

(1) expenditures for goods and services that government

consumes in providing public services and

(2) expenditures

for publicly owned capital such as schools and highways,

which have long lifetimes.

equal to exports minus imports:

Net exports (Xn) = exports (X ) - imports (M ).

includes

general sales taxes, excise taxes, business property

taxes, license fees, and customs duties

subtract consumption of fixed capital (depreciation) from GDP.

NDP =GDP-Consumption of fixed capitol (depreciation)

The huge depreciation charge made against private

and publicly owned capital each year 

Personal income less personal taxes. Personal taxes include personal income taxes, personal property taxes, and inheritance taxes.

DI= Consumption(C) + Savings(S)

A GDP based on the prices that prevailed when the output was produced  (unadjusted GDP)

Not adjusted for inflatin or deflation

A GDP that has been deflated or inflated to reflect changes in the price level. (adjusted GDP)

            Nominal GDP        

Price index (in hundredths)

A measure of the price of a specified collection of goods and services, called a “market basket,” in a given year as compared to the price of an identical (or highly similar) collection of goods and services in a reference year.

Price price of market basket

     index in specific year      

                     price of same market       x 100   (1)

basket in base year

a period in which real GDP, income,

and employment rise

 is the percentage

of the labor force unemployed

workers, after unsuccessfully

seeking employment for a time, become discouraged

and drop out of the labor force.

the unemployment rate that is

consistent with full employment, the economy is said to be producing its potential output. This is the real GDP that occurs when the economy is “fully employed.”

The difference between actual and potential GDP. That is:

GDP gap = Actual GDP - Potential GDP

Indicates that for every 1 percentage point by which

the actual unemployment rate exceeds the natural rate,

a negative GDP gap of about 2 percent occurs

Explains rising prices in terms of factors that raise per-unit production costs at each level of spending.

Eg. rising oil prices "push" product and service price up

 These are situations

in which people see an inflation coming in advance

 is the number of dollars received as

wages, rent, interest, or profits.

is a measure of the amount of goods and services nominal income can

buy; it is the purchasing power of nominal income, or income adjusted for inflation.

 Real Income=         nominal income                            

price index (in hundredths)

increases in their when the CPI rises,

although such increases rarely equal the full percentage

rise in inflation

declines in the price level

 is the percentage increase in purchasing

power that the borrower pays the lender

(the real amount of money the borrower gets minus inflation)

The percentage increase in

money that the borrower pays the lender, including that

resulting from the built-in expectation of inflation, if any.

extraordinarily

rapid inflation

 The fraction, or percentage, of total

income that is consumed. (APC).Average Propensity to Consume: The fraction, or percentage, of total

income that is consumed. (APC).

Consumption

income

 The fraction of total income that is saved.

Savings

Income

 The fraction of any change in income saved. The MS is the

ratio of a change in saving to the change in income that

brought it about:

Change in Savings

Change in Income

The proportion, or

fraction, of any change in income consumed. 

To consume (MPC) , “marginal”

meaning “extra” or “a change in.”

Change in consumption

Change in Income

 sudden boost to the value of existing wealth. When this happens, households tend to increase

their spending and reduce their saving and shifts the consumption schedule upward and

the saving schedule downward.

it is the ratio of a change in GDP to the initial change in spending

     change in real GDP    

initial change in spending

 or withdrawal of spending from

the economy’s circular flow of income and expenditures.

Saving is what causes consumption to be less than total output or GDP (saving)

In the context of the circular flow an injection is any money that gets into the domestic economy that was not earned by a domestic household through work and then spent on consumption goods, e.g. investment spending, government spending, exports. 

two different policies

that a government might pursue to close a recessionary expenditure gap and achieve full employment. The first is to increase government spending. The second is to lower taxes. Both work by increasing aggregate expenditures

C + I + G +Xn =Change in aggregate demand

DI=change in taxes

C=DI-S 

example: Taxes=+20                 

 I=-7

G=31

Xn=-9  

DI=-20 MPS=20% MPC=80%

-20(DI)= -16(C)+(-4(S))

-16 + -7 + 31 + -9= -1 (change in aggregate Demand)

Recipricol of MPS over 100=20/100=1/5=5/1

-5 x -1=-$5