2. Gdp and Economic Well Being, Business Cycle

Gross Domestic Product is a market value of all services and goods, produced in a country during the given period of time, usually one year. It includes a total output (производство) of foreign firms in this country, but does not include an output of domestic firms in a foreign country.

GDP is the best single measurement of economic well-being of the country. Higher GDP, so then higher standard of life. GDP per person shows the average income and expenditure of an average person.

But GDP doesn’t show happiness, quality of life or situation in the country as environment, time parents spend with children, the activity of people in free time.

3. The components of gdp, gdp deflator

Nominal GDP measures the output in a current year price level. If there is a significant inflation in the country, so nominal GDP will be higher that real GDP

Real GDP measures the output in the base year level of prices.

GDP deflator (an indication of the overall level of inflation or deflation in the economy.) = Nominal GDP/Real GDP

The total demand for GDP (or income)=C+I+G+Nx, where

C-consumption by households

I-investments made by households

G-government purchase

Nx-net export or net foreign demand, which equals to

Ex-export

Im-import

GDP can rise, if

1) price level rises, output remains the same

2) price level remains the same, output rises

3) both price level and output rise

4. Circular Flow Model

Shows income received and payment made by each sector of economy. It is the simplest model that shows how macroeconomics works. The simple example shows hoe aggregate income is exchanged for resources, including the labor, that are bought from households.

The four aggregate macroeconomic sectors that form the foundation for macroeconomic analysis are the household sector, the business sector, the government sector, and the foreign sector.

The complete circular flow has five sectors: a household sector, a firm sector, a government sector, a foreign sector, and a financial sector. Different chapters of the book emphasize different pieces of the circular flow, and Figure 16.10 shows us how everything fits together. In the following subsections, we look at the flows into and from each sector in turn. In each case, the balance of the flows into and from each sector underlies a useful economic relationship.

The Firm Sector

Figure 16.10 includes the component of the circular flow associated with the flows into and from the firm sector of an economy. We know that the total flow of dollars from the firm sector measures the total value of production in an economy. The total flow of dollars into the firm sector equals total expenditures on GDP. We therefore know that

production = consumption + investment + government purchases + net exports.

This equation is called the national income identity and is the most fundamental relationship in the national accounts.

By consumption we mean total consumption expenditures by households on final goods and services. Investment refers to the purchase of goods and services that, in one way or another, help to produce more output in the future. Government purchases include all purchases of goods and services by the government. Net exports, which equal exports minus imports, measure the expenditure flows associated with the rest of the world.