1. GDP: Gross Domestic Product Y = C + I + G + NX

2. C = Consumption  Consumption expenditures made by households on goods and services  About 65% of GDP (!)  Consumption expenditures made by households on goods and services  About 65% of GDP (!)

3. 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.

4. 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:(  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:(

5. 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  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

6. 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  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

7. 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…

8. 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 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)

9. Gov’t contd.  Gov’t increases the supply slower than the demand- deflation (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.  Gov’t increases the supply slower than the demand- deflation (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.

10. 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.  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.

11. 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?

12. Collegiate Price Index Item# bought2004 2005 Pizza 10$10$9 Beer 60$2$2 Econ Text 1$120$160 Item# bought2004 2005 Pizza 10$10$9 Beer 60$2$2 Econ Text 1$120$160

13. 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 = ? 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 = ?