Transcript file
GDP: Gross Domestic Product Y = C + I + G + NX C = Consumption Consumption expenditures made by households on goods and services About 65% of GDP (!) I = Investment Investment expenditures made by firms on new capital goods including buildings, factories, and equipment. I (investment) also contains changes in inventories, as any goods produced but not sold during a period have to go into firms’ inventories and are counted as inventory investments. G = Gov’t purchases Government purchases of goods and services (they’ve gotta buy staples and pens too) Gov’t get its money from taxation and borrowing….if tax revenues are = to expenditures than there is a balanced budget. + or - leading to budget surplus or budget deficit:( NX = Net Exports Net exports is defined as all of a country’s exports (EX) minus all its imports (IM) or NX=EX-IM. EX is the number of dollars of output that foreigners are buying. IM is the number of dollars of their output that we’re buying. This is the trade balance…it is ok to have a negative trade balance or trade deficit (that is importing more that exporting) As long as international trade is voluntary, all trades enhance happiness and is simply a rearrangement of assets btw countries. 1980s Japan Inflation General level of prices in the economy is rising. If prices increase at 20-30%, it is hyperinflation Cause=money supply grows too quickly Solution=slow or halt the growth of the money supply How much money is the right amount? The value of money is determined by supply & demand. Inversely related: when value of money goes up, prices go down… Gov’t control Gov’t increases the supply at the same rate as the growing demand- prices don’t change (value of money doesn’t change) Gov’t increases the supply faster than demand for money- inflation (money too plentiful-each piece has less value, need more of it to buy=rise in prices) Gov’t contd. Gov’t increases the supply slower than the demanddeflation (each piece grows more valuable, need less to buy) Why would Gov’t want to print too much money? 1. When they can’t raise enough tax revenue to pay obligations. 2. When they want to stimulate the economy during a recession or depression. How to measure inflation… Economists use a large collection of goods & services=market basket. How much $ does it take to buy this basket at various times? CPI=Consumer Price Index is the basket used by the Bureau of Labor Statistics. Family of four uses each month. What is you Collegiate Price Index? What items would you include in your own college market basket to measure inflation over your four maybe five years of college? Collegiate Price Index Item Pizza # bought 10 2004 2005 $10 $9 Beer 60 $2 $2 Econ Text 1 $120 $160 To find the price of market basket…. 1. Total items: 2004: $340 2005: $370 To find rate of inflation…. 1. (P2nd yr. - P1st yr.) / P1st yr. 2. (P2005 - P2004) / P2004 3. Answer x 100 = ?