BUS313_001
General
Introduction

Theory vs Reality
A good theory should predict reality; Exactly?
Q a b c d e f g
Points a to e =>
Path predicted good theory
. by
“good” theory.
Points e to g =>
Bad theory.
Points e to f =>?
Points f to g =>?
e:f
≠ f:g
Time = Minutes, Weeks,
Decades, Centuries.

Gross Domestic Product (GDP)
Gross National Product (GNP)
Microeconomics/Macroeconomics
International Economics
Exports/Imports
Gross & Net
Rational
Markets

Two Key Assumptions
1. Economic agents (firms, consumers, workers) are rational.
2. The economy can best be understood as a set of markets (goods and services, labor, money, financial assets) in which prices adjust to equate supply and demand.

GNP, GDP, etc.
What is gross about gross domestic product?
Why domestic and not national?
If there is a gross, is there a net?

GNP = Gross National Product
US GNP: total final output produced by US nationals no matter where they are located.
Included: Value added by Illinoisans working in India, Indonesia and Indiana.
Excluded: Value added by Iranians, Iraqis or
Israelis working in Idaho.

GDP = Gross Domestic Product
US GDP: Total final output of Americans,
Albanians and Saudi Arabians working within the borders of the 50 States, Guam, Puerto
Rico and other US possessions.
Included: Value added by Honda in USA.
Excluded: Value added by Motorola in Japan.

GDP vs GNP
GDP: Produced at home by anybody’s plant, but employs domestic labor.
GDP: More closely under the control & influence of governments and more readily taxed.
GNP: Borderless, produced anywhere by home owned plants using the nation’s capital stock but often foreign labor.

G
O
O
D
S
M
A
D
E
B
Y
Income
From
HOME
OWNED
FIRMS
GOODS MADE IN
REST
OF
WORLD
OWNED
FIRMS
HOME REST OF
COUNTRY WORLD
A
+ c +
= =
GDP
H
+ b = GNP
+
D = GNP
GDP
ROW
H
ROW

WHY?
 are A & D so large?
 are b & c so small?



 is GNP
H
= A + b?
is GNP
ROW is GDP
H
= is GDP
ROW
= c + D?
A + c?
= b + D?
What is A + b + c + D?