Barter Economy- An economy which money is not used as the medium of exchange- Households and businesses trade goods and services in satisfying their needs- What are DISADVANTAGES of a Barter Economy?
-International trade is difficult, how do you determine if a foreign country will want any of the goods your country produces?-Since trade is difficult some traders and businesses may simply say forget it- This causes the Economy to grow more slowly than necessary or even shrink.
MONETARY ECONOMY- An economy in which money is used as the principal medium of exchange. Households reveive renumeration in the form of wages, rent, interest and profits. Businesses receive remunerationg in the form of expenditures by households, businesses, government and foreign countries.-What are advantages of a monetary economy?
- Monetary economy has distinct advanges to a barter economy. It will grow much quicker than a barter because currency makes trade easier.- Change is established and easy to make- A uniform exchange is present and a nominal value has been established-Currency can be transported with less bulk and weight
NATIONAL PRODUCT-monetary value of products flowing to households through the product market.-Gross Domestic Product (GDP)-Nations output. It is equal to consumer expenditures, business investment, government spending, and net exports (exports-Imports) Only on goods produced within US borders.
-Gross National Product is almost like GDP except only on goods produced by US companies regardless of their location
Two Approaches to measuring GDP-Expenditures approach- Measures activity in the product market- Income approach- Measures activity in resource market-Both approaches derive the same value of GDP because whatever is spent by someone on a good is income for someone else on that good
GDP Expenditures (spending)-Only New goods are counted not used, Because used goods have already been counted in a prior year. Only the end value of resources is counted-No transfer payments (social security, Grandmas $50 check for your Birthday) No farmland Purchases.-Consumers are roughly 2/3 of the GDP
GDPNominal GDP- Defined as the value of GDP or aggregate output expressed in current dollars. No correction for inflationReal GDP- Is defined as the value of GDP expressed in terms of another base period, or constant price. (takes inflation into account and adjusts for it)
A newspaper may report nominal GDP as a a 3.7% it may still be possible that the real GDP could be decreased by 2.5%meaning even with positive nominal growth the nation could stilll have negative growth and have a recessionGDP is cyclical- High points followed by low points and repeats
Consumptions Saving and Investments- Households have disposable income, they can save or spend (consume) if they spend it nondurable goods have a life span of less than a year, durable goods last longer than one year.-Saving- deferring consumption until a later date.Investments- Expenditures by businessess on captial goods, such as a new machine or a new building, expenditures by housholds for new residences and an increase in the inventories of businesses.
What makes us spend save and invest?John maynard Keynes argued that the determinant of consumption was Income. Income goes up consumption goes up but not as much as income did.Savings- Determinant of savings was income and consumption, income goes up so does savings because what we dont spend is saved! DUHInvestment- Determinants are demand for investment and interest rate. A firm will only invest in capital if price of borrowing is cheap. if it isnt then no new capital is purchased
the level of aggregate output at which labor and capital in the economy at their natural or noninflationary rate.