Calculating the GDP: Expenditures and Income Approach

Expenditure Approach: 

C + Ig + G + Xn (export-imports)

Income Approach: 

W- Wages (Compensation of Employees/Salaries)
+
R- Rent
+
I- Interest (Money you have to borrow/Money in bank earning interest)
+
P- Profits
+
Statistical Adjustment 

Budget Surplus/Deficit: 

Government Purchases of Goods and Services + Government Transfer Payments - Government Tax and Fee Collections 

+ = Deficit - = Surplus 

Trade Surplus/Deficit:

Exports - Imports

+ = Surplus- = Deficit  

National Income: 

1. Compensation of Employees + Rental Income + Interest Income + Proprietors Income + Corporate Profits

2. GDP - Indirect Business Taxes - Depreciation - Net Foreign Factor Payment 

Disposable Personal Income:

National Income - Personal Household Taxes + Government Transfer Payments 

Stocks and Bonds/Transfer Payments

Stocks and Bonds: Purely Financial Transactions

• Excluded because nothing is being produced

• Transfer Payments: Money government is transferred to a time where you're going to use it.
• Excluded because nothing is being produced
• Ex: Unemployment, Social Security 

Gross Domestic Product & Gross National Product

(Gross Domestic Product): The total value of all final goods and services produced within a country's borders in a given year.

• Includes all production or income earned within the US by the US and foreign producers. It excludes production outside of the US, even by Americans. 

GNP (Gross National Product): The total value of all goods and services produced by Americans in a given year. 

• Includes production or income earned by Americans anywhere in the world. Excludes production of non-Americans even in the United States. 

                            GDP Formula: C + Ig + G + Xn (exports-imports)

Included in GDP:

• C= Consumption
• Purchase of final goods and services
• 67% of the economy
• Ig= Gross Private Domestic Investment
• Reconstruction of New Housing
• New Factory Equipment
• Factory Equipment Maintenance 
• Unsold Inventory of Products Built in a Year
• 17% of the economy
• G= Government Spending 
• School Busses
• Highway
• Guns
• 18% of the economy
• Xn= Net Exports
• EXPORTS - IMPORTS
• -2% of the economy because majority is imports

NOT Included in GDP:

• Intermediate Goods (Inputs) 
• Ex: Lettuce, Cheese in Sandwich 
• Trying to Avoid Double or Multiple Counting 
• Used or Second-Hand Goods 
• Trying to Avoid Double or Multiple Counting 
• Unreported Business Activities
• Ex: Tips
• Stocks and Bonds
• Non-Market Activity
• Ex: Volunteer, Babysitting Without Pay, Work for Self
• Illegal Activity
• Ex: Underground or Black Market 
• Gifts or Transfer Payments
• Ex: Scholarships, Social Security, Unemployment, Giving Someone Money 

Circular Flow

Circular Flow: Represents the transactions within an economy by flows around the circle

• Household: A person or a group of people who share their income
• Firms or Business: An organization that produces goods and services for sale

Excess Supply and Demand

Equilibrium

• The point in which the supply curve intercept with the demand curve 

Excess Demand 

• Occurs when quantity demanded in greater then quantity supplied
• This will result in a shortage 
• Consumer cannot get quantity of the items they want 
• Price Ceiling 
• When government puts a legal limit on how high the price of a product can be 
• Creates a storage 

Excess Supply

• When quantity supplied is greater then quantity demanded
• Creates surplus 
• Producers have inventory that they cannot get ride of 
• Price Floor 
• The lowest legal price a commodity can be sold as
• The government use price floor to keep product prices from becoming too low  

Total Revenue

Defintion 

• It is the total amount of money a firm receives from selling goods and services

Formula

• Product x Quantity
• P x Q
• Make sure you use $$$$$ signs 

                     

Price Elasticity of Demand

Elasticity of Demand

• Measure of how consumers react to a change in price 
• 3 Types 

• Elastic Demand 
• Demand that is sensitive to a change in price 
• Product is not a necessity 
• There are available substitutes 
• E > 1 
• Ex. 
• Steak
• Fur
• Soda
• Inelastic Demand

• Demand that is not very sensitive to a change in price 
• Produce is necessity 
• Few to no substitutes 
• E < 1 
• Ex. 
• Gas
• Insulin 
• Unitary Elastic
• E = 1

Price Elasticity of Demand (PED)

• Step 1: Quality 

New Quantity - Old Quantity 

Old Quantity

• Step 2: Price

New Price - Old Price 

Old Price 

• Step 3: PED 

Percent Change in Quantity

Percent Change in Price 

The Three Types of Movement that Occurs Within the PPC

 INSIDE THE PPC

ALONG THE PPC

SHIFTS OF THE PPC

Factor of Production

1. Land 
•  Natural Resources
2. Labor 
•  Work exerted 
3. Capital 
• Two Types
• Human Capital => when people acquire skills and knowledge through experience and education
• Physical Capital => can be anything like
• Money
• Tools 
• Buildings 
• Equipments 
• Machinery 
4. Entrepreneurship 
• Risk Taker 
• Innovation 

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Key Vocabulary

• Trade Off 
• An alternative that sacrifice when we make a decision 
• Scarcity reads to trade off 
• Opportunity Cost
• The most desirable alternative given up as a result of a decision 
• A type of trade off 
• Guns or Butter 
•  Trade off that the government makes when choosing between wether to produce more or less military or consumer goods
• Thinking at the Margins 
• Deciding wether to add or subtract one additional units of some resource 
• Production Possibilities 
• Graph (PPG)
• Curve (PPC)
• Frontier (PPF)
• Graphs that shows alternative ways to use an economics resources 
• Efficiency 
• Using resources in such a way to maximize the production of goods and services
• Increases profit 
• Underutilization 
• Opposite of efficiency 
• Using fewer resources then an economy is capable of using 
• Leads to decrease in profits

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Four Key Assumptions About PPG

1. Only two goods can be produced 
2. Full Employment of resources 
3. Fixed Resources 
4. Fixed Technology 

Basic Concepts of Economics

1. Macroeconomics vs Microeconomics

• Macroeconomics => the study of the economy as a whole  
• Ex. inflation, minimum wage, and international market
• Ex. looking at the whole forest 
• Microeconomics =>  the study of individuals or specific units of the economy; how household and firms make decisions and how they interact in markets 
• Ex. looking at individual trees but not the forest  

2. Positive Economics vs Normative Economics 

• Positive Economics => an attempt to describe the world as is  
• Very descriptive 
• Collects and presents facts 
•  Normative Economics => an attempt to prescribe how the world should be
• Opinion based

3. Needs vs Wants 

• Needs => basic requirements for survival 
• Ex. water, food, shelter, air 
• Wants => Desires 

4. Scarcity vs Shortage

• Scarcity => it is the most fundamental economic problem facing all societies 
• unlimited wants meet with limited resources 
• PERMANENT
• Shortage => quantity demanded exceeds quantity supply
• TEMPORARY

5.   Goods vs Services 

• Goods => tangible commodity 
• can be bought, sold, traded, and produced 
• 2 Types 
• Capital Goods => items that are used in the creation of other goods 
• Consumer Goods => intended for final use by the consumer 
• Services => work that is perform for someone