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Advanced Macro (Fach) / VL2 (Lektion)

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• Definition Gross Domestic Product The market value of all final goods and services produced in a country during a period of time, typically one year
• Parts of the definition - market value Two options price, good or service is finally sold for value added - value a firms adds to a product or service
• Parts of the definition - final goods and services Only "first" sale to final user otherwise double counting would occur
• Parts of the definition - during a period of time helps against double counting makes value comparable
• Ways to measure total economic activity in an economy Production Income
• The circular flow and measurement of GDP Participants Household Government Firms Rest of the World Financal System
• Formula for GDP Y = C + I + G + NX C = Consumption I = Investment G = Government purchases NX = Net exports
• Parts of the GDP - Consumption Spending by housholds in goods and services (not including new houese -> Investment) Further divided into Services (medical care, education...) Nondurable goods (food, clothing...) Durable goods (automobile, furniture..)
• Parts of the GDP - Investment Spending by firms on new factories, office buildings, additions in inventory, new houses by housholds Further divided into Business fixed investment (new factory, office building, machinery...) Residential investment (new single-family house) Changes in business inventory (things that have been produced but not yet sold)
• Parts of the GDP - Government purchases spending by federal, state and local government on goods and services, such as teachers, highways etc. Does not include transfer payments since those do not result in immediate production of new goods and services
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• Parts of the GDP - Net exports Value of exports minus value of imports
• R&D and intellectual property in GDP In 2013, R&D as investment rather than intermediate good to emphasize importance of intellectual property Now money spent on development of entertainment goods counts as investment (money spent by artists on recording etc.)
• Shortcomings of GDP As a measure of total-production As a measure of well-being
• Shortcomings of GDP to measure Total production Houshold production (childcare, cleaning etc) not paid for and thus not counted Underground economy - up to 10 % in North America and more in developing countries More important in the long ran with small change expected over one year
• Underground economies in developing countries Referred to as the informal sector Can be up to 50% in such countries Often reflects poor government policies: high taxes and regulations, low confidence in the security of private property from government seizure
• Shortcomings of the GDP as a Measure of Well-Being GDP does not reflect  the value of leisure pollution and other negative effects of production crime and social problems the distribution of income
• Real vs. nominal GDP Nominal GDP: value of final goods and services at current-year prices real GDP: value of final goods and services at base-year prices Current base is 2009
• The GDP deflator A measure to average prices of goods and services in the economy In order to achieve price stability, we need to measure the price level GDP deflator = Nominal GDP/real GDP * 100 100 in base year

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