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Macro CH 6 notes

by: Alikhan Ladhani

Macro CH 6 notes ECON 2105

Alikhan Ladhani
GPA 3.2
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Notes one Ch 6
Principles of macroeconomics
Brian A. Hunt
Class Notes




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This 6 page Class Notes was uploaded by Alikhan Ladhani on Sunday January 31, 2016. The Class Notes belongs to ECON 2105 at Georgia State University taught by Brian A. Hunt in Spring 2016. Since its upload, it has received 90 views. For similar materials see Principles of macroeconomics in Economcs at Georgia State University.


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Date Created: 01/31/16
• INTRODUCTION TO MACROECONOMICS AND GDP • Microeconomics – The study of the individual units that comprise the economy – A single household’s decisions—what job to take, how to spend income – A single firm’s decisions—output, pricing • Macroeconomics and GDP • Macroeconomics – The study of economy-wide issues. Key word is “aggregate” – How many people have jobs? Are incomes rising or falling in general? • Macroeconomics and GDP • Gross Domestic Product (GDP) – Total (gross) amount of everything produced within a specific economy – Gives us a measurement that we can use to analyze economic growth – Can compare regions or nations – Not perfectly straightforward, some qualities of life not easily captured by numbers • Production Equals Income • Output and income are essentially the same – Nations that produce a large amount of high-value output are relatively wealthy – Nations that don’t produce much high-value output are relatively poor – Idea: the output you produce is sold, and you receive income for what you sell • Defining GDP • Gross Domestic Product – The market value of all final goods and services produced in a nation within a specific period of time – Functions as a “barometer” for the economy – Sum of output from all economic activity – Output becomes income • Three uses of GDP Data • Why is GDP useful to examine? – Estimate living standards across time and nations – Measure economic growth – Determine whether an economy is experiencing a short-run expansion or recession • Measuring Living Standards • Total GDP – May not always be the best standard to compare countries – Doesn’t adjust for population size of country • Per capita GDP – GDP per person (GDP divided by population) – Average living standards in a nation • Measuring Living Standards • Measuring Economic Growth U.S. Per Capita Real GDP • Per Capita Real GDP in Six Nations • Measuring Business Cycles • Business Cycle – Short-run fluctuations in economic activity that can cause output to be above or below the long-run trend • Parts of a business cycle – Expansion – Contraction – Peak – Trough • The Business Cycle • U.S. Real GDP and Recessions, 1929—2009 • Looking Closely at How We Measure GDP • Why does GDP count the “market value”? – We can’t just count quantities. Look at the year 2010. – United States produced 12 billion bushels of corn – United States produced 8 million cars – Just looking at quantity-produced numbers, corn seems more “important” to our GDP relative to cars • Looking Closely at How We Measure GDP • Looking Closely at How We Measure GDP • Why does GDP include both goods AND services? – Goods • Tangibles • Food, clothing, cars, houses – Services • Intangibles • Health care, entertainment, advice, travel, banking – The composition of our industries and economy has greatly changed over the last 50 years • Services as a Share of U.S. GDP • Intermediate versus Final Goods • Intermediate goods – Goods that firms repackage or bundle with other goods to be sold at a later stage • Milk sold to a coffee shop • Tires sold to a car manufacturer • Intermediate versus Final Goods • Final goods – Goods sold to the final users, or consumers • To get an accurate GDP estimate and avoid double counting – Finals goods are included in GDP – Intermediate goods are not • Intermediate Steps in Cell Phone Production • Looking Closely at How We Measure GDP • Why does the definition of GDP include the word “produced”? – Has to do with double-counting again – Don’t want to recount a good that was produced last year – Examples: • Don’t count a resold used car • Stocks and bonds sold do not count, except for fees that pay for service • Looking at GDP as Different Types of Expenditures • The Bureau of Economic Analysis (BEA) is the U.S. government agency that tallies GDP data, a task is called national income accounting. • The Pieces of GDP in 2010, Billions of Dollars • Consumption • Consumption – Final purchase of goods and services by households, with the exception of new housing • Durable goods – Goods consumed over a long period of time – Cars, appliances – Subject to cyclical fluctuations • Nondurable goods – Goods consumed over a long period of time – Groceries, magazines, medicines – Not affected as much by cyclical fluctuations – Investment • Investment – Private spending on tools, factories, and equipment used to produce future output – Also includes purchases by businesses that add to their inventories • Inventories represent a stock of goods that firms can use to produce their product in the future. An increase in inventory allows the firm to make more and is an investment for the future. – New house purchases by consumers are counted as investment – Investment is NOT “investing” in stocks and bonds • Government Purchases • Government Purchases – Government employee salaries – Government buildings and equipment produced – Public works projects, national defense, schools, post offices • Does NOT count – Transfer payments, such as welfare or social security – When households spend this income, it will enter GDP as part of consumption or investment • Net Exports • Net Exports (NX) – Exports subtract imports – If imports > exports, then NX < 0 – NX represents a small fraction of total GDP • Is it bad that NX is negative? – Trade deficit – More imports means more goods and services for people in this country – Real GDP: Adjusting GDP for Price Changes • Real GDP – GDP measure with prices held constant over time • Nominal GDP – GDP measured current prices • Price level – An index to measure prices of goods and services in an economy • GDP deflator – A measure of the price level that includes prices of final goods and services in GDP – Used to “deflate” out inflation from nominal GDP so we can find Real GDP • U.S. Nominal and Real GDP • U.S. Nominal GDP and Price Level, 2000–2010 • Finding Real GDP 1. Filter out the current prices from the nominal GDP data – Divide nominal GDP by the price level for the year the GDP was produced 2. Put in the constant prices from the base year – Multiply by the price level (100) from base year 2005 • Example • Find Real GDP for 2010 – “2010 GDP in 2005 prices” – Fill in equation, use t = 2010 numbers from table • Growth Rates • Growth rates – Tell us how fast our economy is growing – Can be calculated using a percent change formula – A negative growth rate means the economy is contracting • Growth Rates • Using the numbers from the table again • Growth Rates • Price level growth rate – The same as the GDP deflator • Shortcomings of GDP • Nonmarket goods – Think about goods and services produced, but never sold, even though they create value for society – Washing dishes, mowing a lawn – In less-developed societies where houses produce many of their own goods, GDP may be a poor measure of economic output • Shortcomings of GDP • Underground economy – Hidden, uncounted transactions – Sometimes legal • Waitress tips, landscaper cuts a lawn – Sometimes illegal • Exchanges of narcotics – Size of underground economy? • 10% of GDP (estimated) in United States • 45% in developing countries • Smaller in United States due to stronger economy and less corruption • Shortcomings of GDP • The Quality of the Environment – GDP is unable to distinguish how goods are produced – Country A • 10 million units of output • Clean energy, clean air – Country B • 10 millions unit of output • No environmental standards, health problems – Equal GDP, but is well-being the same? • Shortcomings of GDP • Leisure time – GDP does not capture how long it takes to produce goods and services – Average work week • South Korea: 46 hours per week • Netherlands: 28 hours • USA: 36 hours • Japan: 36 hours • Alternative Measures of Economic Well-Being • Other measures of well-being – Life expectancy – Education levels – Access to healthcare – Crime rates – Environmental quality • Reality – Alternative measures difficult to quantify – GDP is correlated with most of these other measures anyway • Conclusion • In this chapter we learned how economists measure economic output • Determining how much output is produced in the economy gives a benchmark from which to examine economic growth and fluctuations in economic activity • Measuring GDP allows us to examine economic output across countries • Conclusion • Gross Domestic Product (GDP) – The market value of all final goods and services produced in a nation within a specific period of time – To find real GDP, we must adjust nominal GDP for inflation • Business Cycle – Short-run fluctuations in economic activity that can cause output to be above or below the long-run trend


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