ecO 2013, week 6 notes
ecO 2013, week 6 notes Eco2013
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This 10 page Class Notes was uploaded by Lauren Carstens on Tuesday March 1, 2016. The Class Notes belongs to Eco2013 at Florida State University taught by Joan Corey in Spring 2016. Since its upload, it has received 41 views. For similar materials see Principles of Macroeconomics in Economcs at Florida State University.
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Date Created: 03/01/16
Macroeconomics Chapter 7: Taking the Nation’s Economic Pulse Gross Domestic Product (GDP) Gross Domestic Product: The market value of all final goods and services produced within a country during a specific period (usually a year/annually) o Market Value: Goods are weighted according to the purchase price of the good and service The dollar is the common measure for the value of the good/service produced (convert everything into dollar amounts) Goods that are considered to be worth more add more to the GDP Total spending on all goods and services produced during the year is summed to obtain the annual GDP o Final Goods and services: goods and services purchased by their ultimate user Ultimate user: The last user Intermediate goods/services: Goods purchases for resale or for use in producing another good or service Ex: If you buy a loaf of bread and then use it for sandwiches that you will sell, only the price of the sandwiches goes into the GDP Avoid double counting: We don’t count intermediate goods because their value is contained within a final good If you double count, you are overstating what GDP actually is Ex: Making bread Ex: Are tires an intermediate good or a final good o Could be both Intermediate if being used for cars; final good if used as a tire swing o Production: Only goods and services that are produced are included in GDP, transfers are not Not included: $100 graduation gift Welfare payments /government transfers Just giving money to someone to help them out Financial transactions (you’re not producing anything) o Note: sales commission is counted in GDP because they are being paid for doing something (only the sales commission is included, not the full payment) o Within a country: GDP only counts goods and services produced within the geographic borders of a country Ex: Production of a Japanese car factory in the U.S. is included in U.S. GDP It’s still being produced in the country even if it’s run by the Japanese Ex: Production of a U.S. Nike Shoe factory in Indonesia is NOT included in U.S. GDP Even if it is run by Americans, it is not within our borders o During a specific period: Only goods produced in 2016 are included in the figure for 2016 GDP If it was made in the previous year and then sold in 2016, it is not included in the 2016 GDP because it was already added to the 2015 GDP Two Ways to Measure GDP o Expenditure approach Y=C+I+G+NX Y: GDP C: Consumption Household spending on goods and services during the current period Consists of o Durable goods (long lasting appliances: house, oven, car) o Nondurable goods (stuff that doesn’t last: food, trash bag) o Services (What intermediaries (stock broker, real estate agent, lawyer) do for you when you pay them) Consumption is the largest component of GDP I: Private Investment Production or construction of capital goods that provide future service Consists of: o Fixed investment (Buying a new factory or new fork lift that will contribute to future goods) o Inventory Investment (Ending inventory – beginning inventory) G: Government Consumption and Gross Investment Government Expenditures Include spending on: o Goods and Services (staplers or paying police officers) o Capital goods (Goods that will be around for a while) Does not include transfer payments Government expenditures are counted at cost (not value) to tax payers NX: Net Exports Exports(X) – Imports(M) o Exports: Domestically produced goods and services sold abroad o Imports: Foreign produced goods and services that are produced domestically Produced in another country and bought here Usually a small negative number o Resource cost-income approach 1. Employee Compensation (54.6%) 2. Proprietors’ income (7.7%) 3. Rents (3.0%) 4. Corporate Profits (12.4%) Profits eventually distributed to the shareholders 5. Interest income (3.2%) Interest incurred on loans from individuals 6. Indirect Business taxes (7.4%) Sales taxes 7. Depreciation (13.3% Capital that’s been used up by a company Value of a good depreciates over time 8. Net income of foreigners (-1.6%) Amount of money foreigners are earning in the U.S – All the money the U.S. citizens are earning in other countries U.S. citizens usually make more abroad than foreigners who are here Will give you the same number as the expenditure approach Gross National Product (GNP) Gross National Product (GNP) o Total market value of all final goods and services produced by the citizens of a country It doesn’t matter where the citizens are, their production value gets added to our GNP If someone from Japan is here producing, he will add to Japan’s GNP o Counts all the income of Americans earned abroad o Ignores the income foreigners earn in the U.S. Adjusting for Price Changes Nominal Values: values expressed in current dollars Real values: Values that have been adjusted for the effects of inflation o In the 1920s, coke was $0.05 but the Wage was about $0.35 / hour which gives about 7 cokes an hour Now, coke is about $1.25, but wage is about $8.75 which still gives you 7 cokes/hour Price Index: Measures the cost of purchasing a market basket of goods at a point in time relative to the cost of purchasing the identical market basket during an earlier reference period o Stay within the same geographical area o PI= Cost of the bundle in the current year / Cost of same bundle in a base year o Ex: Beer and liquor o 2 Key Price Indexes 1. Consumer Price Index (CPI): Indicator of general level of prices. Compares the cost of a market basket in a specific period to the cost of the same basket in a different period Designed to measure the impact of price changes on the cost of the typical bundles of goods purchased by households Basket only includes things households tend to buy 2. GDP Deflator: reveals the cost during the current period of purchasing the items included in GDP relative to the cost during the base year Includes anything included in the calculation for GDP Broader than CPI because it includes capital goods and other goods purchased by businesses and government Which should we use? Depends on what you care about and what your goals are: o How do rising prices affect households? Use CPI o If we want an economy wide measure of inflation? Use GDP deflator Calculating real values o To calculate real values, you need to know: 1. Nominal values 2. Price index for the current year and the year you are comparing it to Real = Nominal x (PI base yearIcurrent year o Ex: Real GDP Given: Nominal GDP in 2015= $18 trillion 1980: PI = 1 base year 2015: PI current year Real = Nominal GDP (2015) x (PI (1980)/PI (2015)) 18T x 1/3 = 6T The 2015’s cancel out so this is in 1980 dollars Limitations of GDP 1. Excludes non-market production o Any production that happens at home or domestically, is not included in GDP o GDP can go down if you hire someone to do something for you and they later offer to do the same production for free 2. Excludes the underground economy o Underground economy: Any transactions that take place outside recorded market channels Drug deals and prostitutes 3. Excludes leisure and human costs o Time it takes to produce things and physical risk is going down now, but that is not calculated into GDP 4. Difficulties measuring quality variation and introduction of new goods o Items may be sold for the same price in different years but be very different qualities 5. Excludes the cost of harmful side effects o Pollution Per Capita GDP GDP/ Population Per Capita GDP is a broad indicator of general living standards o How to define the richest/poorest countries in the world o High economic freedom often correlates to high Per Capita GDP Review 1. Define GDP 2. Know what gets included into GDP 3. Know the four components of the expenditure approach a. Y=C+I+G+NX 4. Define GNP 5. Be able to calculate a price index and real value a. Consumer Price Index vs. GDP deflator b. (Price index base year/ Price index of current year) x Nominal Value 6. Know the limitations of GDP Macroeconomics Chapter 8: Economic Fluctuations, Unemployment and Inflation Business Cycles Business Cycle: Fluctuations in the general level of economic activity o Graph of Real GDP vs. time Moves in cycles (as the economic prosperity increases and decreases) Trendline: Growth of about 2-3% / year Usually measured by two variables: Changes in real GDP Unemployment rate o Definitions: 1. Expansion: characterized by growing GDP and declining unemployment 2. Peak (boom): the height of the expansion phase 3. Contraction: characterized by falling GDP and rising unemployment 4. Trough: The lowest point of the contraction phase 5. Recession: A decline in GDP fro two or more consecutive quarters/ 6 months An extended period of contraction 6. Depression: A prolonged and severe recession Not a real measure for sever or prolonged Labor Market Definitions o 1. Employed: If someone has worked full-time or part-time (even just a few hours) in the past week or, if not, is on vacation or sick leave from a regular job o 2. Unemployed: A person who is not currently employed, but is Actively seeking employment (in the last 4 weeks) Students and stay at home moms who are not looking for work are just not in the labor force Waiting to start or return to a job You’re not looking for work, but you’re waiting for the job you know you have Teachers who have the summers off are unemployed in the summer o Note: Those who do not have a job and are NOT seeking employment are NOT considered unemployed Just not in the labor force (discouraged workers) o Total Population: Under 16 and/ or institutionalized Over 16 and not institutionalized Not in the labor force (full-time students, retirees, disabled) In the labor force o Employed o Unemployed o 3. Civilian Labor Force: Number of people age 16 or older who are employed or unemployed Employed + Unemployed o 4. Labor Force Participation Rate: Percent of population age 16 or older who is in the civilian labor force Civilian Labor Force / Population (16 & older) o 5. Unemployment Rate: Percentage of people in the labor force who are unemployed Unemployed / Civilian Labor Force Can go down if more people start working, but also can go down if people stop looking/ are only working a few hours a week o 6. Employment / Population ratio: Percent of population age 16 and over who are employed Employed / Population (16 & older) 3 Types of Unemployment f 1. Frictional Unemployment (U ): Unemployment resulting from changes in the economy and imperfect information that prevents workers form being immediately matched up with existing job openings o People will not take the first job opening they see right when they graduate because it may not match their skills/ expertise 2.
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