Chapter 23 Blog

This chapter is our first introduction to macroeconomics, the study of economy-wide phenomena, including things like inflation, unemployment, and economic growth. The main concept we learn in this chapter is Gross domestic product. Gross domestic product (GDP) is the measure of an economy’s total expenditure on newly produced goods and services and the total income earned from the production of these goods and services. Basically, GDP shows the market value of all final goods and services produced within a country in a given period of time. There are four main components of GDP: consumption, government purchases, investment, and net exports.  Consumption is spending on goods and services by households. Government purchases are expenditures on goods and services by the government. Investment is spending on capital, like equipment and structures. Net exports equal the value of exports minus the value of imports. One way to compare and quantify the measure of GDP is through nominal and real GDP. Nominal GDP is the production of goods and services valued at current prices, whereas real GDP is the production of goods and services valued at constant prices, i.e. measured using one “base year”. The GDP deflator is the ratio of nominal GDP to real GDP measures the level of prices in the economy. The GDP is generally a good measure of economic well-being in the economy because the GDP per person shows the income and expenditure of the average person in the economy, however it excludes some things that add to well-being, so it is not perfect.

Chapter 18 Blog

In this chapter, Mankiw dives into explaining the economics of the factors of production, with a specific focus on labor markets. The economy’s income is distributed into the markets of the factors of production, those being labor, land, and capital (the equipment and structures used to produce goods and services). The demand for these factors is a derived demand, which means that it comes from firms that use these factors to produce other things like goods and services. Assuming that firms are competitive and profit-maximizing, a firm will utilize a factor up to the point where the value of the marginal product of the factor is equal to the price of what they are producing. The supply of the most important factor, is derived from individuals’ trade-off between work and leisure time, since leisure time has an opportunity cost of whatever wage you could’ve been earning. Additionally, the price paid to each factor is adjusted based on the supply and demand for that factor, and because the demand for the factor reflects the VMP of that factor, the equilibrium is where each factor is compensated based on the marginal amount that they contribute to the production of goods and services. The marginal product of any factor depends on the quantities of all factors that are available, meaning that a change in the supply of one factor changes the equilibrium of all factors.