ECON 204 week 2
Popular in Principles of Macroeconomics (GT-SS1)
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This 11 page Class Notes was uploaded by Lyric Jamerson on Tuesday September 6, 2016. The Class Notes belongs to ECON 204 at Colorado State University taught by Steven J Shulman in Fall 2016. Since its upload, it has received 4 views.
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Date Created: 09/06/16
T uesday 8/30/2016 Tuesday, August 30, 2016 1:02 PM 1. When we think about GDP in total income a. Not just the amount but also the way it is distributed b. Income inequality 2. Breaks things up into fifths 3. Top fifth a. Most people in the top fifth call middle class b. Easier to get into top 20 than is thought Economic Growth 1. Economic growth is measured as the percent change in GDP (%∆GDP) a. Also in real GDP 2. If GDP grows faster than population, per capita GDP & will increase. a. Average living standards could also increase depending upon how the additional income is distributed. b. Population has to grow slower than GDP 3. The main explanation for economic growth is productivity growth – increases in output per worker a. Pay attention to what is on the axis's b. Graph shows the percent change in GDP i. See that from 1900 to 1930 GDP was three times greater ii. See that GDP grows more quickly than population c. Output = f(labor, capital) i. More workers or more work done by workers c. Productivity = output/worker i. For the whole economy is the measure of productivity ii. Productivity growth drives economic growth d. For the macro-economy, productivity = GDP/worker Why Does the U.S. Produce So Much? 1. Lots of labor & capital resources a. Production is based on some combination of labor & capital inputs i. Gain more skills ii. Need more education = human capital iii. Markets allow for specialization 1. Specialize = more productivity b. Richer countries have production that is more capital-intensive i. Have better technology ii. More machines per person c. Poorer countries have production that is more labor-intensive i. Tilling the land with rudimentary tools 2. The productivity of those labor & capital resources a. Human capital – education, skills, values b. Technology c. Markets that encourage specialization, mobility & trade NATIONAL INCOME ACCOUTING 1. The expenditure definition of GDP 2. The income definition of GDP 3. The output definition of GDP 4. Why the three definitions of GDP are equivalent Three Equivalent Measurements of GDP a. Every transaction has three equivalents i. The buyer spends money (expenditure) ii. The seller receives money (income) iii. The commodity with a price (output) b. What is true for each transaction is true for all transactions taken together i. GDP is defined as total expenditures, total income & total production ii. Each definition must be equivalent to the other two definitions Expenditure Definition of GDP a. GDP: total spending on all domestically produced, final goods & services b. Total spending = C + I + G + (X−M) i. Households, firms, countries, government 1. All can engage into spending ii. Consumption (C) from households iii. Investment (I) from firms iv. Government spending (G) from federal, state & local governments v. Net exports (X-M) from foreign purchases of our exports less US purchases of imports 1. Add it all up is total spending and total GDP c. GDP data from the Economic Report of the President at https://www.whitehouse.gov/administration/eop/cea/economic-report-of- the-President/2016 i. Open link and look at spending and exports Income Definition of GDP a. Total income = wages + rent + interest + profit + depreciation + business taxes i. Workers receive wages ii. Entrepreneurs receive profit iii. Restoring = depreciation iv. Government = business taxes b. Total spending = total income because the dollar flow into firms must equal the dollar flow out of firms i. Dollars in have to equal dollars out ii. Total income has to equal total spending Thursday 9/1/2016 Thursday, September 1, 2016 1:02 PM GDP 1. Total expenditure a. Consumption (households) b. Government spending (federal state and local) c. Net exports d. Investment (Firms) e. = C + I + G + (X - M) 2. Total Income a. Wages b. Rent c. Interest d. Profits e. Business taxes f. Depreciation 3. Total Output a. Sum value added The Equivalence of Expenditure and Income 1. Should add up to the same number 2. Doesn’t matter if incorporated or unincorporated 3. Add column called statistical discrepancy to make them both add up 4. Run a balance of trade deficit Income Definitions 1. GDP is total income received by households, businesses & government 2. Personal income (PI) is pretax income received by households a. PI goes to taxes (T), consumption (C) & savings (S) b. PI = C + S + T c. Portion of total outcome that goes to households d. Business takes go to e. Productive capacity i. How much output you can produce f. The sum of consumption, savings and taxes i. Disposable income 1. Get rid of taxes 3. Disposable income (DI) is PI less taxes (T) a. DI = PI − T i. Dispose of it as you see fit ii. Buy what you want to buy and what's left over is the saving b. DI = C + S c. Everything starts in the product market i. All the money goes to businesses, sells market ii. What do they do? 1. Invest and put it back into the product market a. Minus depreciation i. Factor market 1. Where workers receive wages 2. Flows into households has personal income a. Taxes - dollar flow out b. Transfers - dollar flow in c. Government programs - social security, welfare, unemployment i. From tax payers to the elderly d. Savings 2. Government pays interest on the debt a. Bond holders get interest payment from the government Output Definition of GDP a. Value of total output or production = ∑value added i. Value added is the additional value created at each stage of production ii. Add up the value created at each stage of production to get the value of total production Example of Value Added i. Ore to make steel and steel to make a car ii. How much value did American Motors ass to the ore? 1. Assume started with Zero 2. Adds more value from ore to steel 3. Adds more value from steel to car 4. Comes to 21,500 a. Expenditure equals the sum of the value added b. Also equals the sum of income 5. Adds up to the same number for total spending and total income Why the Three Definitions of GDP are Equivalent a. Total expenditures = total incomes because all the dollars that flow into firms have to flow out of firms i. Investment has three parts 1. Depreciation a. Replacement investment b. Restore productive capacity 2. Net Investment a. Spending on new capital goods i. New machinery ii. New material b. Expands productive capacity 2. Change in inventories a. Unplanned investment b. Firms investment in itself b. Total expenditures = total production due to unplanned investment i. Total expenditures = C + I + G + (X−M) ii. I = planned investment + unplanned investment 1. Unplanned investment = ∆inventories 2. Sets total production = total expenditures b. If a = b & a = c, then b = c. Therefore a = b = c, which in our case means total expenditures = total incomes = total production REAL vs NOMINAL GDP a. Measure GDP is dollars i. Value changes over time because prices can change b. Inflation i. Produce the same number of goods and services but GDP doubles 1. Correct for inflation a. Real GDP 2. Real a. Express it in a way that can be adjusted b. Nominal i. Not adjusted for inflation Nominal GDP in a Two-Good Economy Price Quantity T otal Y ear 1 -- Guns $500 1,000 $500,000 Year 1 -- $2 300,000 $600,000 Butter Year 1 – $1,100,000 Nominal GDP Year 2 -- Guns $600 1500 $900,000 Year 2 -- $3 400,000 $1,200,000 Butter Year 2 – $2,100,000 Nominal GDP 1. Take one year as a base year 2. And express other years to the price of the base year Real vs Nominal GDP i. Nominal GDP is unadjusted for price changes. 1. Comparisons of nominal GDP reflect price changes as well as output changes. 2. Cannot be used to determine economic growth ii.Real GDP holds prices constant. 1. Comparisons of real GDP show changes only in output, i.e., in actual economic activity. 2. Eco(Real GD− Real G) / Real GDPcent changes in real GDP a. Year 2 Year1 Year1 Nominal & Real US GDP, 2000-2015 Nominal Real GDP Economic GDP (billions of growth (billions of 2009 (average current dollars) annual dollars) %∆ real GDP) 200 $10,248 $12,560 0 200 $13,094 $14,234 2.7% 5 201 $14,964 $14,784 0.8% (!) 0 201 $17,938 $16,342 2.1% 5 a.i.Inbetweene base year 1. It is a disaster 1. It is the financial crisis of 2008 2. Wide spread economic destruction 3. Radical slowdown of economic growth Planned investment Friday Recitation Friday, September 2, 2016 12:59 PM Price level in economy 2000, 2001 ……. 100 … (price numbers go here) Real GDP = nominal GDP / (Price level / base year price level) Base year is needed = nominal GDP/ (price level/100) Intuition for the calculation for Real GDP (Nominal GDP/ (price level / quantity in that year)) * 100 = value of goods in the base year Review of growth GDP Growth = GDP(t + 1) - GDP(t) / GDP(t) Percentage of growth = (GDP (t + 1)DP (t)DP ) (t)00 GDP = total spending = total income = GDP = total added value o
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