The Aggregate Demand and Aggregate Supply Analysis

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The Aggregate Demand and Aggregate Supply Analysis

• Topic 1 Growth Domestic Product
• Topic 2 Price Level
• Topic 3 Aggregate Supply
• Topic 4 Aggregate Demand

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The Aggregate Market
Price Level
Real GDP
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Topic 1 Gross Domestic Product

• What are counted toward GDP?
• Aggregation
• Real GPD vs. nominal GDP
• GDP per capita

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Gross Domestic Product

• Gross Domestic Product (GDP) is the sum of values
  of all final goods and services produced in the
  domestic economy and first time sold on organized
  markets during a specific period of time, usually
  a year.
• the sum of values of all final goods and services
• produced in the domestic economy
• First time sold on organized markets
• during a specific period of time
• Final Goods and Services are those that are
  purchased by their ultimate users.

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Q On 12/31/2002, the following events happened.
By definition of GDP, which were and which were
not counted toward 2002 US GDP and why?

• I bought an Eminems 2002 The Eminem show CD.
• Ans Counted
• In the New Year Eve, I got tickets to enjoy a
  good time at the Quest Club.
• Ans Counted
• Erica spent some money to buy the dress that
  Christina Aguilera wore in the ceremony of 2000
  Billboard Music Award.
• Ans Not Counted.
• The dress was not produced and first time
  sold in 2002

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Q On 12/31/2002, the following events happened.
By definition of GDP, which were and which were
not counted toward 2002 US GDP and why?

• Daniel bought a dozen of imported Australian
  Pacific Oysters and had it as lunch at home
• Ans Not counted.
• It was not produced in US
• A seafood restaurant bought a super big Boston
  Lobster in order to serve it for Daniel as his
  New Year Eve dinner.
• Ans Not counted
• It is intermediate goods

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Q On 12/31/2002, the following events happened.
By definition of GDP, which were and which were
not counted toward 2002 US GDP and why?

• Before going to the Quest Club. I prepared a bowl
  of 5 minute noodle soup for myself as my New Year
  Eve dinner.
• Ans Not counted.
• Housework is not sold in the organized
  market
• Godiva made too many chocolates and cannot sell
  them all before its shops closed.
• Ans Counted.
• Inventory produced in 2002 is counted

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A Simple Example of Aggregation

• Summing up the money values of all final goods
  and services produced in US and sold on organized
  markets in 2002, we have the 2002 US GDP.
• E.g. 1 In 2000, an economy produced and sold 78
  hamburgers, 3 jeans, and 7 shows at the prices 1,
  30 and 6 respectively. What was its 2000 GDP?
• Ans 78 x 1 3 x 2 7 x 6 126
• The answer is actually the nominal GDP

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Nominal GDP

• Nominal GDP is the GDP calculated by valuing all
  outputs at current prices
• Using nominal GDP to evaluate economic
  performance is misleading
• E.g. 2 In 2001, the economy produced and sold 70
  hamburgers, 2 jeans, and 6 shows at prices 2, 40,
  and 8 respectively. What was the 2001 nominal
  GDP?
• Ans 70 x 2 2 x 40 6 x 8 268
• Comparing to 2000, nominal GDP increased but
  total production decreased!

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Real GDP

• Real GDP is calculated by valuing outputs of
  different years at common prices.
• Excluding the effect of price change, real GDP is
  the right measure for the total production.
• Real GDP Nominal GDP / P
• Can compare real GDP intertemporally or
  internationally

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Real GDP of the US
35,000
10,000
9,000
30,000
8,000
25,000
7,000
6,000
20,000
Dollars per Year
5,000
15,000
4,000
3,000
10,000
2,000
5,000
1,000
0
0
1955
1960
1965
1970
1975
1980
1985
1990
2000
1995
Year
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2000 Real GDP by Economies (millions of dollars)
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Real GDP per Capita

• Real GDP per capita equals to real GDP divided by
  population.
• It measures standard of living.

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Real GDP per Capita of the US
35,000
10,000
9,000
30,000
Per-capita real GDP (left scale)
8,000
25,000
7,000
6,000
20,000
Dollars per Year
5,000
15,000
4,000
3,000
10,000
2,000
5,000
1,000
0
0
1955
1960
1965
1970
1975
1980
1985
1990
2000
1995
Year
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Videos Life in developed, developing, and
under-developed countries
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GDP may not be perfect

• GDP only includes market activities
• GDP places no value on leisure
• GDP counts bads as well as goods
• Ecological costs are not netted out