Macroeconomics

1. Macroeconomics examines the economy as a whole, i.e. the combined effects of individual actions, overall price levels, inflation, deflation, unemployment, fiscal policies of government and the monetary policy of the Federal Reserve System.

2. Gross Domestic Product (GDP) Is the dollar value of all final G & S produced within a country in 1 year. Products are valued at their market prices, so: • Things that don’t have a dollar value are excluded, e.g., housework you do for yourself.

3. Gross Domestic Product (GDP) Is… the dollar value of all final G & S produced within a country in 1 year. Final goodsare intended for the end user. Intermediate goodsare used in the production of other goods. i.e 2 x 4’s used to build a house GDP only includes final goods, as they already include the value of the intermediate goods used in their production.

4. Gross Domestic Product (GDP) Is… the dollar value of all final goods & services produced within a country in a year. GDP includes tangible goods (like DVDs, mountain bikes, milk) and intangible services (dry cleaning, concerts, cell phone service).

5. Gross Domestic Product (GDP) Is… the dollar value of all final goods & services produced within a country in a year. GDP includes currently produced goods, not goods produced in the past.

6. Gross Domestic Product (GDP) Is… the dollar value of all final goods & services produced within a country in a year. GDP measures the value of production that occurs within a country’s borders, whether done by its own citizens or by foreigners located there.

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8. Are there any cool formulas you can give us relating to this interesting concept you ask? GDP = C + I + G + NX • Recall: GDP is total spending. • Four components: • Consumption (C) • Investment (I) • Government Purchases (G) • Net Exports (NX) • These components add up to GDP

9. Consumption (C) • is total spending by households on g&s. • Note on housing costs: • For renters, consumption includes rent payments.

10. Investment (I) • is total spending on goods that will be used in the future to produce more goods. • includes spending on • capital equipment (e.g., machines, tools) • structures (factories, office buildings, houses) • inventories (goods produced but not yet sold) Note: “Investment” does not mean the purchase of financial assets like stocks and bonds.

11. Government Purchases (G) • is all spending on the g&s purchased by govt at the federal, state, and local levels. (aircraft carriers and paper clips) • G excludes transfer payments, such as Social Security or unemployment insurance benefits …transfer of income not purchases

12. Net Exports (NX) • NX = exports – imports • Exports represent foreign spending on the U.S. produced G&S. • Imports are the portions of C, I, and Gthat are spent on G&S produced abroad. • Adding up all the components of GDP gives: GDP = C + I + G + NX

13. billions % of GDP per capita GDP $12,480 100.0 $42,035 C 8,746 70.1 29,460 I 2,100 16.8 7,072 G 2,360 18.9 7,950 NX –726 –5.8 –2,444 U.S. GDP and Its Components, 2005

14. A.Debbie spends $200 to buy her husband dinner at the finest restaurant in Boston. Consumption and GDP rise by $200. B.Sarah spends $1800 on a new laptop to use in her publishing business. The laptop was built in China. Investment rises by $1800, net exports fall by $1800, GDP is unchanged.

15. Real versus Nominal GDP • Inflation can distort economic variables like GDP, so we have two versions of GDP: One is corrected for inflation, the other is not. • Nominal GDPvalues output using current prices. It is not corrected for inflation. • Real GDPvalues output using the prices of a base year. Real GDP is corrected for inflation.

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17. EXAMPLE: Compute nominal GDP in each year: 2002: $10 x 400 + $2 x 1000 = $6,000 2003: $11 x 500 + $2.50 x 1100 = $8,250 2004: $12 x 600 + $3 x 1200 = $10,800

18. EXAMPLE: In each year, • nominal GDP is measured using the (then) current prices. • real GDP is measured using constant prices from the base year (2002 in this example).

19. Nominal and Real GDP in the U.S., 1965-2005 Real GDP (base year 2000) Nominal GDP

20. GDP and Economic Well-Being • Real GDP per capita is the main indicator of the average person’s standard of living.

21. GDP Does Not Value: • the quality of the environment • leisure time • non-market activity, such as the child care a parent provides his or her child at home • an equitable distribution of income • The underground economy

22. Then Why Do We Care About GDP? • Having a large GDP enables a country to afford better schools, a cleaner environment, health care, etc. • Many indicators of the quality of life are positively correlated with GDP. For example…

23. GDP and Life Expectancy in 12 Countries Life expectancy (in years) Japan U.S. Germany Mexico China Brazil Indonesia Russia India Pakistan Bangladesh Nigeria Real GDP per capita, 2002

24. GDP and Adult Literacy in 12 Countries Adult Literacy (% of population) Russia U.S. China Japan Mexico Germany Brazil Indonesia Nigeria India Pakistan Bangladesh Real GDP per capita, 2002

25. GDP and Internet Usage in 12 Countries Internet Usage (% of population) U.S. Japan Germany Mexico China Brazil Russia Real GDP per capita, 2002

26. Per Capita GDP GDP divided by a country’s population

27. What Influences GDP? 1. Business Investment 2. Interest Rates and Credit 3.Consumer Expectations Consumer Confidence 4. External Shocks

28. Aggregate Demand AD is the amt. of G & S that will be purchased at all possible price levels. Lower price levels will increase AD as consumers’ purchasing power increases and vice versa Measuring GDP THINK SPENDING!!!

29. Shifts in Aggregate Demand Price Level AD3 AD2 AD1 Real GDP

30. Aggregate Supply AS is the total amount of G & S in the economy available at all possible price levels. As price levels rise, aggregate supply rises and real GDP increases and vice versa Measuring GDP cont’d

31. Shifts in Aggregate Supply Price Level AS1 AS2 AS3 Real GDP

32. Measuring GDP Cont’d • Aggregate Supply/Aggregate Demand Equilibrium • By combining AS curves and AD curves, equilibrium for • the macroeconomy can be determined.

33. Combined Aggregate Supply and Demand Price Level Equilibrium Price AD AS AD1 Equilibrium GDP Real GDP

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35. What Is a Business Cycle? A business cycle is macroeconomic period of expansion followed by a period of contraction. A modern economies experiences cycles of & & &

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38. Business Cycle

39. Phases of the Business Cycle Expansion • A period of economic growth as measured by a in real GDP. Economic growth is a steady, long-term rise in real GDP.

40. Phases of the Business Cycle Peak • When real GDP stops rising, or the height of its economic expansion.

41. Phases of the Business Cycle Contraction • An decline marked by a in real GDP. A recession is a prolonged ( 6 months of GDP ) contraction. An especially long or severe recession may be called a depression.

42. Phases of the Business Cycle Trough • Lowest point of economic decline, when real GDP stops .

43. Where Are We Now?

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46. Forecasting Business Cycles • Leading indicatorsare key economic variables economists use to predict a new phase of a business cycle. • Examples are stock market performance, interest rates, and new home sales.

47. GROW Economy GROW!!! • 1. The process of increasing the amt. of capital per worker is called capital deepening. Capital deepening is one of the most impt. sources of growth in modern economies.

48. Firms increase physical capital by purchasing more equipment. Firms and employees increase human capital through additional training and education. Capital Deepening

49. 2.The Effects of Savings and Investing • The % of disposable income spent to income saved is called the savings rate. • When people save, their $ becomes available for firms to borrow & use to deepen capital.

50. 3.Technological progress is an increase in efficiency gained by producing more output without using more inputs.