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The Aggregate Demand and Aggregate Supply Analysis

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Title: The Aggregate Demand and Aggregate Supply Analysis


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

2
The Aggregate Market
Price Level
Real GDP
3
Topic 1 Gross Domestic Product
  • What are counted toward GDP?
  • Aggregation
  • Real GPD vs. nominal GDP
  • GDP per capita

4
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.

5
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

6
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

7
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

8
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

9
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!

10
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

11
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
12
2000 Real GDP by Economies (millions of dollars)
13
Real GDP per Capita
  • Real GDP per capita equals to real GDP divided by
    population.
  • It measures standard of living.

14
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
15
Videos Life in developed, developing, and
under-developed countries
16
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
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