Lecture 5 - National income: Where it comes from and where it goes - II. The main contents of the chapter consist of the following: Consider why an economy’s total income equals its total expenditure, learn how gross domestic product (GDP) is defined and calculated, see the breakdown of GDP into its four major components, learn the distinction between real GDP and nominal GDP, consider whether GDP is a good measure of economic well-being. | Review of the previous lecture Total output is determined by how much capital and labor the economy has the level of technology Competitive firms hire each factor until its marginal product equals its price. If the production function has constant returns to scale, then labor income plus capital income equals total income (output). 1 National Income: Where it Comes From and Where it Goes - II Instructor: Prof. Abbas Lecture 5 2 To the instructor: This is a particularly important chapter for your students to master. Many subsequent chapters in this book develop models that incorporate the material in this chapter and build on it. Your students should know at the outset that the time they invest mastering this chapter will yield returns throughout the semester by making subsequent material much easier to learn. Also: This PowerPoint presentation introduces some notation that will be used throughout the remaining chapters. In particular, the use of to denote the change in a . | Review of the previous lecture Total output is determined by how much capital and labor the economy has the level of technology Competitive firms hire each factor until its marginal product equals its price. If the production function has constant returns to scale, then labor income plus capital income equals total income (output). 1 National Income: Where it Comes From and Where it Goes - II Instructor: Prof. Abbas Lecture 5 2 To the instructor: This is a particularly important chapter for your students to master. Many subsequent chapters in this book develop models that incorporate the material in this chapter and build on it. Your students should know at the outset that the time they invest mastering this chapter will yield returns throughout the semester by making subsequent material much easier to learn. Also: This PowerPoint presentation introduces some notation that will be used throughout the remaining chapters. In particular, the use of to denote the change in a variable, and the use of arrows as shorthand for increase, decrease, and causality. The slides that introduce this notation have accompanying notes for the instructor (in the same place as the notes you are reading now). I’ve included several in-class exercises to break up the lecture and to provide immediate reinforcement of the concepts. If you wish, you can “hide” them from your presentation, perhaps assigning them as homework exercises. Near the end of the chapter, there are two hidden slides showing how the loanable funds model is different when saving depends on the real interest rate. Types of Saving Lonable funds Saving and interest rate Lecture Contents 3 Demand for goods & services Components of aggregate demand: C = consumer demand for g & s I = demand for investment goods G = government demand for g & s (closed economy: no NX ) 4 “g & s” is short for “goods & services” Consumption, C def: disposable income is total income minus total taxes: Y – T Consumption function: C = C
