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Reading 14: Aggregate Output, Prices and Economic Growth. (GDP Gross…

- - - - Method
        
        Sum of value added: GDP is calculated by summing the addition to value created at each stage of production & distribution.
        
        Value of final output: GDP is calculated by summing the value of all final G&S produced during the period.
      - GDP = C + I + G + (X-M)
        
        C: Consumption spending
        
        I: Business investment
        
        G: Government purchases
        
        \( G=G^{I}+G^{C} \)
        
        \(G^{C} \) Government Consumption
        
        \(G^{I} \) Government Investment
        
        X: Export
        
        M: Import
    - - GDP = Total income earned by HOUSEHOLD, BUSINESS and GOVERNMENT in the country during a time period.
  - - - \(GDP_{Nominal}=\sum(Q_{current} \times P_{current})\)
    - - \(GDP_{Real}=\sum(Q_{current} \times P_{base})\)
  - - - GDP = National Income + Capital Consumption Allowance (to replace worn-out physical capital) + Statistical Discrepancy
      - National Income = Employees' wages & benefits + Corporate and Government profit (pretax) + Interest Income + Unincorporated Business Owners' income + rent + Indirect business taxes - subsidies
  - - - G: Gorvernment Expense
      - T: Tax incomes
      - S: Saving
      - I: Investment
      - X: Export
      - M: Import
- - - - Increasing Income raises savings more than investment --> (S-I) is an increasing function of income
      - Increasing income decreases fiscal deficit (G-T) and increases imports --> (G-T)+(X-M) is a decreasing function of income
      - Interest rate increases
        Holding (S-I),(G-T),(X-M) constant
        
        Investment decreases
        
        Savings decrease
        
        must results from Income Decrease
  - - - Real Interest increase --> quantity demanded decreases
      - Income increases --> quantity demanded increases
      - Higher interest rate --> higher income
    - - Higher price level P --> LM curve moves to left (<--)
      - Lower P --> LM curve moves to right. (-->)
- - - - More Household wealth (higher C)
      - Better Economic growth expectation (higher C, I)
      - Higher Capacity ultilization ( higher I)
      - Lower Tax rate (higher C)
      - Domestic currency depreciates (higher net Export)
      - Higher Foreign GDP (higher net Export)
      - More Government Spending (higher G)
      - Higher Money supply (Lower real interest rates --> increase I, C)
  - - - Short-run AS curve shows the positive relationship between real GDP supplied and Price level (upward-sloping) while other factors held constant.
        
        In very short-run: Aggregate supply is elastic
        
        In short-run: Input price are fixed so businesses expand real output when (output) prices increase
      - Shifted by changes in anything that hits the firm marginal cost curve
        (Increase SRAS)
        
        Less Nominal wages
        
        Less Input prices
        
        Positive future forecast
        
        Less Business taxes
        
        More Subsidies
        
        Domestic Currency Appreciation
    - - As all input prices are assumed to be flexible in long-run, the long-run AS is perfectly inelastic (vertical), representing potential GDP, the full employment level of economic output.
        
        Full employment level
        
        Economy is operating at an efficient and unconstrained level of production
        
        No bottlenecks
        
        there is a modest, stable pool of unemployed workers looking for and transitioning into new jobs
      - Shift by changes in
        (Increase LRAS)
        
        More Labor supply
        
        More capital
        
        New Natural resource
        
        Labor quality
        
        More physical capital
        
        Better Technology
  - - - AD Increase
        (decrease is opposite)
        
        Unemployment Down
        
        Real GDP, Price level Up
      - AS Increase
        (Decrease is opposite)
        
        Real GDP Up
        
        Unemployment, Price level Down
    - - Both AD, AS Increase
        (Decrease is opposite)
        
        Real GDP Up
        
        Price level: Uncertain
      - AD Up, AS Down
        (AD Down, AS Up is opposite)
        
        Price level Up
        
        Real GDP Uncertain.
- - - - Then,Upward pressure on wage --> wage higher --> supply curve shifts left --> Quantity Back to long-run equilibrium but HIGHER price
      - First, higher price and quantity
  - - - Then, Downward pressure on wage --> wage lower --> supply curve shifts right --> Quantity Back to long-run equilibrium but LOWER price
      - First, lower price and quantity
  - - - High Inflation and Unemployment
      - Government can address inflation or recession but not BOTH
  - - - Real GDP up
      - Price level may up or down
    - - Real GDP down
      - Price level may up or down
    - - Real GDP may up or down
      - Price level up
    - - Real GDP may up or down
      - Price level down
- - - - Natural Resource
- - - - Main source of growth in Developed Country
      - Due to Diminishing marginal productivity of capital
        
        If Capital per Worker is low, then increasing K/L will have bigger boost to output
        
        If Capital per Worker is high, then increasing K/L won't have high boost to output
        
        Developing countries has higher marginal productivity than developed countries
        
        Income levels in both developing and developed countries converge overtime