Week 3 Notes Macroeconomics
Week 3 Notes Macroeconomics Econ-UA 1
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This 7 page Class Notes was uploaded by Cindy Notetaker on Friday September 23, 2016. The Class Notes belongs to Econ-UA 1 at New York University taught by Gerald McIntyre in Fall 2016. Since its upload, it has received 43 views.
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Date Created: 09/23/16
Chapter 10: Measuring a Nation's Income if we want to know someone's wellbeing, we ask for their income; same goes for the country --we could ass up national expenditures (national income); every seller earns income Circular Flow of Income and Spending **sans: taxes and government spending **sans : international sector Measuring a Nation's Income: GDP: "the final value (intended for the LAST user) of goods and services produced within a country at a certain point in time" --"value"=market value --"goods and services"=tangibles (food, clothing, cars) and intangibles (haircuts, housecleaning, doctor visits) --"produced": CURRENTLY produced; does not include transactions involving items produced in the past --"within": example is the 50 states plus foreigners --it adds together many different kinds of products into a single measure of the value of economic activity NOTE: goods not sold in market are NOT included in the GDP ex) grandma babysitting her grandkids or illegal drugs GNP: "the value of final goods produced by domestic nationals regardless of where they live and excludes the incomes that foreigners earn " --the total income produced by a nation's residents (nationals) ex) the income and production as a Canadian teacher in America counts as GDP for the United States and GNP in Canada *the period time for GDP/GNP is usually a year* Components of GDP on the Spending Scale (C) consumption: all spending by households (I) investment: business firms for plant and equipment (G) government purchases: for consideration (for something in return; government gets something back) (NX) net exports= exports-imports GDP(Y)=C+I+G+NX. <<<the four expenditure categories Consumption (C) --70% of GDP --renters: rent is included in consumption --homeowners: purchase of house included in previous year but as IMPUTED value (a hypothesized rent) gets included -**the purchase of a new home is an INVESTMENT** -**purchase of an existing home is not in GDP at all, but because you paid real estate agent, those fees do count in GDP** NOTE: key feature of C+I: it has to last more than 1 year to be considered investment Investment (I) --does not mean stocks, bonds, etc... --total spending of NEW (have to be new) goods by firms that will be used in the future to produce more goods (like a piece of machinery) --18% of GDP --examples: -capital equipment -new structures -change in inventories (if a shoe company doesn't sell, shoes go to inventory and an increase in investment): can be negative -new homes by households --the biggest part of I is non-residential Government Purchases (G ) --spending by state, local and federal government for consideration --about 38% of GDP --DOES NOT include transfer payment -a negative tax: payments the government makes to us and gets nothing in return NOT INCLUDED ex) unemployment insurance, social security, etc.. Net Exports (NX) --exports-imports=trade balance --currently -3% GDP (imports exceed exports) -exports: 13% of GDP -imports: 16% of GDP --this means that international relation amount to 3% of America's macroeconomic problems Examples: US Consumer pays 20K for US Car: Y+C US Firm pays 20K for US car: Y+I US Consumer pays 20K for Japanese Car: NX-20K, C+20K =0 China pays 20K for 2016 US Car: Y+NX US Consumer pays 20K for 2015 US Car: C(but not Y) b/c was not this year, -20k I=0 Real GDP vs Nominal GDP GDP= a measurement of the total spending on goods and services in all markets of the economy Two Ways GDP Can Increase: --Price increases (countries are not getting better off) --the number of goods produced increases Nominal (NGDP): not adjusted for price or inflation -- Real (RGDP): adjusted for price or inflation; value using prices in some kind of base (past) year --it answers the hypothetical question: what would be the value of goods and prices produced this year if we valued these goods and services at the prices that prevailed in a specific year in the past --shows how the economy's overall production of goods and services changes over time Components of GDP on the Spending Side GDP=total income=total spending --in general, GDP(Y) falls during recessions (though there are exceptions) Trends - -investment: volatility is more pronounced during recessions than in consumption -often the first sign that there is trouble in the economy: inventories --consumption: less volatile; smoother Nominal GDP (NGDP) is measured using CURRENT prices Real GDP (RGDP) is measured using CONSTANT prices --when real RGDP<NGDP: -real GDP in years after base year will have to be lower than nominal GDP because nominal GDP has inflated prices --when RGDP>NGDP -you are reevaluating much older people rices to new prices, you're boosting it up NOTE: the change in NGDP from year to year reflects changes in both quantity and prices Nominal GDP=Price Effect X RGDP NGDP=GDP deflator X RGDP Definition for GDP deflator (index) * *GDP deﬂator=100 X NGDP/RGDP** --this gives us the percent change from year to year, but is not the only way to discuss inflation --this equation includes C,I,G and EX but NOT IM --always assuming it's 100 in the base year when applying the GDP calculator --when we cross multiply... NGDP/P*100 Second Approach to Measuring GDP: Value Added Approach stages of production: the value that firms added at each stage ex) $1.00+$0.50+$0.75+$1.25+$1.50=$5.00 **the values that were created at each stage** Third Approach to Measuring GDP: Factor Payments Approach the biggest factor that any firm makes: labor Approaches Analytic: expenditure=> Y=C+I+G+NX Value added: Y=sum of value added by all firms Factor Payments: Y= wages+salaries+interest+rent+profit=household income --measured --the easiest way GDP and Wellbeing RGDP is an ok measure --quality of environment not counted --does not measure the health of our children, but countries with higher GDP have access to better healthcare --does not measure value of non-market activity (like grandma babysitting kids) --doesn't measure pleasure that goes along with these goods and services --there is more to life than GDP --study taken... -people in richer countries didn't appear to be any happier than people in poor countries -no evidence for a link between countries' income and peoples' reported state of happiness --approach to fix this: -to enhance GDP with other objective factors such as inequality, leisure and life expectancy -in other places in the worlds, additional leisure time and lower levels of inequality led to increase living standards and accounted for longer life expectancy NOTE: **GDP is a good measure of economic well-being for most, BUT NOT ALL, purposes** **GDP does not directly measure the things that make like worthwhile, but it does measure our ability to obtain many of the input in a worthwhile life** The Costs of "Free" College today: about 20 million students enrolled in colleges On average: explicit costs: $28,000=$28K (tuition, books, fees) implicit costs: $20,000=20K(=10/hr *2000 hours) Total cost is about $50,000=$50K today's equilibrium quantity: 20(million) today's equilibrium price: 50(thousand) Qd=70-P Qs=-30+P Equilibrium: Qd=Qs 70-P=-30+P solve: 100=2P P=$50K (now put this into either supply or demand function) ...Q=20 what do we mean by "free" college? --the price that STUDENTS pay ($0) --the government would have to pay a subsidy Total Expenditures(TE)=P(original)*Q(original) =($50K)(20)=> $1 trillion (roughly half is opportunity cost because we're include both implicit and explicit costs) Total Expenditures.2 (TE2)= $100K*70=> $7 trillion --this is everything within the BIGGER dashed box in the graph above --taxes would have to go up seven fold **if students paid tuition, it would be the SMALLER dashed box** Costs of Spending an Additional $6 Trillion 1. O.C.--why universities? Why not medicines, primary or secondary schools? 2. Not free for everybody, just free for public universities --what happens to private market? Demand for private university education would fall and therefore put these universities under significant financial stress 3. If University is free, you're not the customer anymore and so college doesn't have to please you
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