Chapter 6 Notes: Intro to Macroecon and GDP
Chapter 6 Notes: Intro to Macroecon and GDP 2105
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Macroeconomics 2105 Fall 2015 Chapter 6 Introduction to Macroeconomics and Gross Domestic Product 1 GDP productivity and income are useful measures of evaluating the performance of an entire economy because a productive economy is a healthy economy and this is also an economy that generates income for its workers 2 How is Macroeconomics Different from Microeconomics a Macroeconomics the study of the economy of an entire nation or society i Considers what happens when the national output of goods and services overall national national employment levels and overall price levels rises and falls ii Big picture created by all markets in the economy b Microeconomics considers the behavior of individual people firms and industries i What people buy ii What jobs they take iii How many distribute their income between purchases and savings iv Decisions of firms and how they compete with other firms 3 What Does GDP Tell Us about the Economy a Total output overall health of economy i Large amounts of output healthy economy ii Smallfalling amounts unhealthy economy b Production Equals Income i Countries that produce a lot wealthy ii Countries that don t produce a lot poor iii Gross domestic product GDP the market value of all final goods and services produced within a nation during a specific period of time 1 Typically a year Primary measure used to gauge nation s output Also used to measure nation s income When GDP goes up national output and income are both higher When GDP falls the economy is producing less than before and total national income is falling c 3 Uses of GDP Data i Estimate living standards 1 When both output and income are higher usually indicates that living standards are higher 2 Not the best indicator for a typical person a EX Japan and China had same amount of overall GDP Yet population of China was 10X population of Japan Dividing the GDP of each nation by its population Japan had 43000 worth of GDP or income for every person and in China only about 4300person 3 When gauging living standards for an average person use per capita GDP which is GDP per person ii Measure economic growth 1 Changes in living standards over time 2 When economies grow living standards rise 3 In ation the growth in the overall level of prices in an economy a Causes GDP to go up even if no change in quantity of goods and services produced 4 Real GDP adjusted for changes in prices a Anytime when evaluating GDP f1gures over time must use real GDP to account for in ation 955 J iii 5 Economic growth measured as the percentage change in real per capita GDP a Adjusts for both population growth and in ation Determine whether an economy is experiencing recession or expansion business cycle 1 Recessions shortterm economic downturns that typically last about 618 months a Great Recession 20072009 lasted for 19 months and real GDP fell by almost 9 in last three months of 2008 Recovery extremely slow 2 Business cycles shortrun uctuations in economic activity a Normal for an economy that s expanding in long run to experience temporary downturns b 2 phases i expansions trough to peak economy growing faster than usual 1 Jobs easy to nd 2 Average income levels rise ii contractions peak to trough economy growing at slower rate than usual 1 Enters a recession 2 Most people lose jobs 3 Income levels fall 4 How is GDP Computed a Counting Market Values i ii iii Includes both the quantity and the price of the good service Economic health depends on total quantities of goods and services produced Market values rely on prices which can rise when in ation occurs 1 Ex What if the prices of both cars and corn rise but the quantities produced remain unchanged GDP will rise even though production levels stay the same a This is why real GDP is adjusted for in ation b Including Goods and Services i ii Majority of US GDP comes from services Services outputs that provide bene ts without the production of a tangible product 0 Including Only Final Goods and Services 1 ii iii iv GDP is basically the summation of spending on goods and services but not all spending counts Intermediate goods those that rms repackage or bundle with other goods for sale at a later stage Final goods goods that are sold to nal users Not possible to get accurate measure of GDP by summing all the sales made through out the economy during the year since many of them re ect intermediate steps in production process 1 However possible to get accurate measure by taking the sale price of the nal good or by taking the value added at each step along the way a But not both because this would be doublecounting d Within a Country i ii GDP includes only goods and services produced domestically or within the physical borders of a nation 1 Output of foreignowned rms that is produced inside the US is included in US GDP 2 Output of US rms that produce overseas is included in that nation s GDP not the US a Ex Nike contributes to the GDP of Thailand since the shoes are produced there Gross national product the output produced by workers and resources owned by residents of the nation 1 Ex Shoes produced by Nike in Thailand would count as part of the US GNP since the owners of Nike are citizens and residents of the US e Including Only Production from a Particular Period i Goods or services produced in earlier years do not count in the current year s GDP 1 Ex When a new car is produced it adds to GDP in the year it is sold a A used car that is resold does not count in current GDP since it was already counted in GDP for the year when it was produced and sold the first time i Considered double counting ii Sales of nancial assets such as stocks and bonds do not count toward GDP 1 They do not create anything new Simply transfers ownership from one person to another 2 HOWEVER brokerage fees do count as payment for brokerage service and they are included in GDP f Looking at GDP as Different Types of Expenditures i Bureau of Economic Analysis BEA is the US government agency that tallies GDP data in a process called national income accounting ii 4 categories of GDP 1 Consumption C the purchase of final goods and services by households with the exception of new housing a Durable goods consumed over a long period i Ex automobiles appliances and computers ii Subject to significant cyclical uctuations that correlate with the health of economy iii Consumers tend to purchase durable goods when the economy is strong since they re designed to last for many years 1 When the economy is weak they hold off on purchasing durables and make use of what they already have such as using an old computer for another year rather than replacing it with a new model b Nondurable goods consumed over a short period i Since they don t last very long consumers must often purchase them regardless of economic conditions ii Ex groceries clothes shoes etc c Services i Ex haircut doctor s visit etc 2 Investment 1 private spending on tools plant and equipment used to produce future output a Fixed investment b Change in business c Inventories i Ex In preparation of Christmas buying an electronics retailer will order more TVs cameras and computers ii GDP rises when business inventories increase d Ex Something as simple as a shovel tractor or personal computer to help a small business produce more i Or something as big and complex as the construction of large factories e In the national income accounts purchasing a house is considered as an investment iii i ii iii 3 Government purchases G spending by all levels of government on nal goods and services a b 0 Federal State and local Ex Every government employee receives a salary which is considered part of GDP Examples of government purchases i Buildings equipment and supply from privatesector rms ii Public work projects national defense highway construction schools and post of ces HOWEVER transfer payments that the government makes to households such as welfare payments or unemployment insurance do not count in GDP since they are not direct purchases of goods and services i Moves income from one group to another 4 Net exports NX a b C Exports i Only exports counted in GDP because they are produced in US Imports negative amount i Not counted in GDP because they re produced elsewhere but are used domestically within the US ii Can be harmful to an economy because they seem to reduce GDP but does not make us worse off iii More imports coming in means more goods and services for people in the nation it s being imported into GDP only includes net exports i NX exports imports ii When spending on imports is larger than spending on exports net exports are negative 1 US NX typically negative GDPCIGNX g Real GDP Adjusting GDP for Price Changes Current prices the raw GDP data based on market values is computed on the basis of goods and services current at the time the GDP is produced 1 GDP calculated from current prices is nominal GDP a b Includes information on both price level and real GDP i When either of these factors changes nominal GDP is effected Fails to account for changes in price Price levels an index of the average prices of goods and services throughout the economy 1 Goes up when prices rise goes down when prices fall 2 GDP deflator includes the prices of the nal goods and services counted in GDP a Serves to de ate all the price in ation out of nominal GDP so that we can see real GDP To compute real GDP extract the current price of goods and services and then insert prices from a common time period or base period 1 Filter out the current prices from the nominal GDP data a Divide nominal GDP by the price level from the time period in which GDP was produced 2 Put in the constant prices from the base period a Multiply by the price level 100 from base period h Growth Rates 5 What Are Some Shortcomings of GDP Data a NonMarket Goods i ii Goods and services that are produced but not sold are not counted in GDP data even though they create value for society 1 EX washing your own dishes mowing your own grass etc When nonmarket segment of an economy is large there can be dramatic undercounting of annual output being produced b Underground Economy i ii iii Encompasses transaction that are not reported to the government therefore not taxed 1 Usually settled in cash 2 Some are legal such as bartenderwaitress tips 3 Illegal exchanges of drugs Not directly measurable because income is not reported therefore not included in official measures of GDP Makes up roughly 15 of GDP in wealthy developed countries 1 213 0 in transitioning economies 2 NigeriaArmenia accounts for 40 of their GDP 3 US has one of the smallest shadow economies makes up less than 10 of GDP a Why so small Strong economies that generate jobs and opportunities for advancement helps to reduce size of underground economy c America s Shadow Economy i 1 trillion 8 of measured GDP d Quality of the Environment i Cannot be determined through GDP because it can t indicate what economy is producing their goods with clean air and what economy isn t e Leisure Time i ii iii iv GDP fails to capture how long laborers work to produce goods and services 1 Does not account for the extra time available to workers in countries with substantially fewer hours worked Average work week in developed nations 35 hours Measures of wellbeing not included because they re hard to measure However higher levels of GDP highly correlated with a better environment higher quality and better access to health care more education more leisure time and lower crime rates