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- 1. Measuring GDP What is the circular flow of income and expenditure? How are GDP, real GDP, and the average price level measured?
- 2. Your Weekend Parkin Chapter 6 and 7 Lecture Slides, Homework when there is nothing else to do!!!!!!!
- 3. Economic Barometers The Pakistani Bureau of Statistics publishes GDP every quarter (three months). These statistics are a barometer of the economy, telling us: how fast it has grown the rate of inflation Companies use this data to forecast future demand for their products.
- 4. Gross Domestic Product Gross domestic product (GDP) is the dollar value of total production of goods and services in a country during a calendar year. the easiest way to understand GDP is to use a circular flow diagram.
- 5. The Circular Flow ofIncome and Expenditure
- 6. Sectors of the Economy The economy has four sectors: households firms governments the rest of the world
- 7. Markets of the Economy The economy has three aggregate markets: Resource or factor markets goods and services markets (heart) financial markets
- 8. Gross Domestic Product Gross domestic product is the value of aggregate production in a country during a year. GDP can be valued one of two ways: By what buyers pay for it By the Aggregate Income of Factor of Production. These two ways of adding up GDP always give the same answer.
- 9. Aggregate Expenditure The total amount that buyers pay for the goods produced is aggregate expenditure. Aggregate expenditure includes: Consumption (C) Investment (I) Government purchases (G) Net exports (NX)
- 10. Gross Domestic Product Expenditure Equals Income Y = C + I + G + NX Expenditure Approach Uses data on consumption expenditure, investment, government purchases, and net exports
- 11. Gross Domestic Product Expenditure Approach Personal consumption expenditures are the expenditures by households on goods and services produced in Pakistan and the rest of the world Consumption Function : C = a ( Y – T) a = Marginal Propensity to consume
- 12. Gross Domestic Product Expenditure Approach Gross domestic investment is expenditure on capital equipment and buildings by firms. Also, it includes the change in inventories. Investment Function : I = I ( assumed exogenous) - Investment is inversely related to interest rate.
- 13. Gross Domestic Product Expenditure Approach Government purchases of goods and services are the purchases of goods and services by all levels of government. • Does not include transfer payments Government Exp. Function : G = G (exogenous)
- 14. Gross Domestic Product Expenditure Approach Net exports of goods and services are the value of exports minus the value of imports. Net Export Function : Nx = Ex - Im
- 15. GDP in 1997 Item Amount % of (billion $) GDPConsumption (C) 5,628 68.7Investment (I) 1,133 15.3Government (G) 1,275 17.4Net exports (NX) -98 -1.4GDP (Y) 7,938 100.0
- 16. •Using the circular flow Diagram below answer the following questions:
- 17. The figure above shows the flows of expenditure and income for a typical economy. During the current fiscal year, Awas 20 million, B was 60 million, C was 24 million, D was 30 million and E was 6 million. Calculate:•Aggregate Expenditure•Aggregate Income•GDP•Government budget Deficit•Government Saving•National Saving•Borrowing from the rest of the world.Y = C+I+G+(X-M)Y-C-T=S (Private Savings = Income – consumption – taxes)T-G = S (Public Savings = Taxes – Government exp.)
- 18. •What is nominal and real GDP. Calculate Real and NominalG.D.P. Products Quantity Prices Year Balls 100 1 2008 Bats 20 5 Balls 50 2 2009 Bats 30 6
- 19. Elements of the Keynesian Cross consumption function: C = a(Y-T) govt policy variables: G=G , T=Tfor now, plannedinvestment is exogenous: I=I planned expenditure: E = a(Y-T) + I + G equilibrium condition: actual expenditure = planned expenditure Y=E
- 20. SAMPLE QUESTIONGeneral equilibrium: Solution procedureStart with the equation in general form:Y = a ( Y - T) + Ip + G + NXGiven that Marginal Propensity to consume = 0.8 , Taxes = 1000 ,Investment = 1500, Govt. Exp. = 1200 & Net Exports = 500Calculate Aggregate Income.
- 21. SAMPLE QUESTIONKeynesian equilbrium: Solution procedureStart with the equation in general form:Y = a ( Y - T) + Ip + G + NXSubstitute in the given numbers:Y = 0.8 ( Y - 1000) + 1500 + 1200 + 500Collect all the constant terms:Y = 3200 + 0.8Y - 800Y = 2400 + 0.8YSubtract 0.8 Y from both sides of the equation:0.2 Y = 2400Finally, multiply both sides by 1 / 0.2 = 5Y = 5 (2400) = 12,000

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