Measuring Broad Economic Goals GDP, Inflation, Unemployment

1. Measuring Broad Economic GoalsGDP, Inflation, Unemployment Unit 2

2. Microeconomics and Macroeconomics – What is the difference? • Microeconomics– studies the economic behavior of individuals and firms (businesses) • Macroeconomics– studies the economy as a whole – it is concerned with the Aggregates of the following indicators: • Gross Domestic Product (GDP) • Unemployment • Inflation

4. Production Possibilities Curve/Gross Domestic Product Connection .A Assume this economy is fully employing all of its resources in the least costly way (Productive Efficiency) and chooses to produce at point “A” (Allocative Efficiency) Assume this economy can produce 5 Capital goods and services And 10 consumption goods and services Assume one capital G/S costs $5.00 and 1 consumption G/S costs $1.00 What is this economy’s GDP? Capital 5 Aggregate Demand/Aggregate Supply 10 LRAS Consumption Price Level 5 Capital G/S X $5.00 = $25.00 10 Consumption G/S x $1.00 = $10.00 GDP - $35.00 This GDP represents Full-Employment or “Potential GDP”. $35 FE ***Point “A” on the PPC is the same thing as Full Employment Real GDP Represented by LRAS – only expressed In $$$$$$*** Real GDP

5. Gross Domestic Product(GDP) • “The total market value of all final goods and services produced within a country in a given year” – (also known as OUTPUT or Income) What does this mean? “Total Market Value” The price of a good or service at the time it is sold multiplied by the number produced. Example: Price of my Dry Erase Marker

6. Gross Domestic Product(GDP) • “The total market value of all final goods and services produced within a country in a given year” - OUTPUT “Final goods and services” The intended end condition of the good or service. Example: The Dry Erase Marker itself

7. Gross Domestic Product(GDP) • “The total market value of all final goods and services produced within a country in a given year” - OUTPUT “Produced within a country” • The Goods and Services included in the GDP must have been produced within the borders of the United States (or the country you are talking about, for example Canada, France, China)

8. Gross Domestic Product(GDP) • “The total market value of all final goods and services produced within a country in a given year” - OUTPUT • “in a given year” Either a fiscal or calendar year – 365days

9. Gross Domestic Product(GDP)“The total market value of all final goods and services produced within a country in a given year” - OUTPUT • GDP is a Monetary measure – it has a dollar value $$$$$$. • All countries have a GDP

10. GDP ComparisonData source: 2007 CIA World Factbook • World $46,660,000,000,000 • European Union $13,620,000,000,000 • United States $13,220,000,000,000 • Japan $4,911,000,000,000 • Germany $2,858,000,000,000 • China $2,512,000,000,000 • United Kingdom $2,341,000,000,000 • France $2,154,000,000,000 • Italy $1,780,000,000,000 • Canada $1,089,000,000,000 • Spain $1,081,000,000,000 • India $796,100,000,000 • Korea, South $768,500,000,000 • Mexico $741,500,000,000 • Russia $733,000,000,000 • Australia $645,300,000,000 • Brazil $620,700,000,000 • Netherlands $612,700,000,000 • Switzerland $386,800,000,000 • Sweden $371,500,000,000

11. Gross STATE Product • California, it is often said, would be the world’s sixth- or seventh-largest economy if it was a separate country. Actually, that would be the eighth, according to this map, as France (with a GDP of $2,15 trillion) is #8 on the aforementioned list. • Texas’ economy is significantly smaller, exactly half of California’s, as its GDP compares to that of Canada (#10, $1,08 trillion). • Florida also does well, with its GDP comparable to Asian tiger South Korea’s (#13 at $786 billion). • Illinois – Mexico (GDP #14 at $741 billion) • New Jersey – Russia (GDP #15 at $733 billion) • Ohio – Australia (GDP #16 at $645 billion) • New York – Brazil (GDP #17 at $621 billion) • Pennsylvania – Netherlands (GDP #18 at $613 billion) • Georgia – Switzerland (GDP #19 at $387 billion) • North Carolina – Sweden (GDP #20 at $371 billion) • Massachusetts – Belgium (GDP #21 at $368 billion) • Washington – Turkey (GDP #22 at $358 billion) • Virginia – Austria (GDP #24 at $309 billion) • Tennessee – Saudi Arabia (GDP #25 at $286 billion) • Missouri – Poland (GDP #26 at $265 billion) • Louisiana – Indonesia (GDP #27 at $264 billion) • Minnesota – Norway (GDP #28 at $262 billion) • Indiana – Denmark (GDP #29 at $256 billion) • Connecticut – Greece (GDP #30 at $222 billion) • Michigan – Argentina (GDP #31 at $210 billion)

13. Gross Domestic Product(GDP) LOCATION IS IMPORTANT!! • GDP DOES INCLUDE the market value of goods and services produced by American owned businesses located in the U.S. or by foreigners who own a business located in the U.S. • Honda Motors is a Japanese company but the Accords it produces in the U.S.are included in the U.S. GDP.

14. GNP – Ownership All goods/services produced legally for paybycitizens of a country. [Citizenship mattered,not geography] China Europe Nike in Indonesia Plano, TX in Chicago GDP - Location All goods/services produced legally for pay ina country’s borders. [Geography matters,not citizenship] Provo,UT BMW in Waco Honda in Ohio The difference between GDP & GNP is about 2/10 of 1%.

15. Gross Domestic Product(GDP) LOCATION IS IMPORTANT!! • GDP DOES NOT INCLUDE the market value of Goods and Services produced by Americans who locate their businesses in foreign countries • General Motors is an American owned company, but the cars it produces in Mexico do not count in the U.S. GDP

16. Gross Domestic Product(GDP) • Now the we know where GDP is produced we can define exactly what is included and excluded in counting GDP.

17. Gross Domestic Product(GDP) • What is INCLUDEDwhen we count GDP? • Personal Consumption Expenditures (C) Spending by Households on Goods and Services Goods: Tangible Items – things you can see and touch Durable Goods – Goods that last 3 years or more Non-Durable Goods – Goods that last less than 3 years Services:Intangible Items – things you can’t really see or touch. Intangible items – labor for haircuts, medical care, teaching, legal services, fees to stockbrokers, labor for T.V., car, or home repairs. CONSUMPTION ACCOUNTS FOR APPROX 65% OF GDP!!

18. EXPENDITURES APPROACH GDP = C(66%) + Ig(18%) + G(17%) + Xn Personal Consumption Expenditure ( C ) • Durable ConsumerGoods[12%] • Nondurables[29%][soup & soap] • Consumer Expenditures for Services[59%] Maytag produced here Ferrari produced here

19. Gross Domestic Product(GDP) • What is INCLUDEDwhen we count GDP? • Investment (I) - Can also be called Capital or Savings The purchase of goods that will be used in the present and future to produce more goods and service. Capital Goods – Physical Capital Tools, factories, computers, airplanes and structures such as from new construction – new houses, office buildings, etc. INVESTMENT ACCOUNTS FOR 15% OF GDP

20. EXPENDITURES APPROACH Personal Consumption Expenditure ( C ) Let’s say this Porsche is produced by a foreign co. in Plano, Texas. Gross Private Domestic Investment (IG) 3 Subcategories[*spending on output not consumed] A. Business fixed investment-tools, machinery, & plants B. Residential fixed investment – construction of new houses [can rent for financial return] & apartments. C. Inventory investment – change in inventories [Anet increase in inventories is investment;anet decrease in inventoriesis negative investmentor disinvestment(disinvestmentrepresents sale ofoutput produced in a previous year)

21. EXPENDITURES APPROACH Personal Consumption Expenditure ( C ) Gross Private Domestic Investment ( Ig ) Government Purchases (G) [state, local & federal] [“G” purchases of goods/svcs produced (not transfer payments) 3 Subcategories of Government A. Federal government [40%] B. 50 State governments C. 84,000 local governments [60% for state and local]

22. Gross Domestic Product(GDP) • What is INCLUDEDwhen we count GDP? Government (G) Government purchases of Goods and Services Examples : everything from paper clips to tanks and bombs. GOVERNMENT ACCOUNTS FOR 20% OF GDP

23. Gross Domestic Product(GDP) • What isINCLUDEDwhen we count GDP? Net Exports (Nx) Exports minus Imports = Net Exports What are Exports? Goods and Services made in the U.S. and shipped to other countries What are Imports? Goods and Services made in foreign countries and shipped to the U.S. NET EXPORTS ACCOUNTS 0% OF THE GDP!!!

24. Gross Domestic Product(GDP) What is the bottom line on GDP??? GDP is calculated using the sum totals of all of the above – Personal Consumption (C), Investment (I), Government (G), and Net Exports (Nx) or Price X Quantity = Nominal GDP (for each good and/service in the economy) GDP = C + I + G + Nx “Expenditures Model”

25. GDP 2005 [$12,486 Trillion] Consumption $8,534 Government purchases $2,260 Investment $2,085 Export Spending $1,210 Import Spending $1,938

26. Gross Domestic Product(GDP) Go to http://www.bea.gov/newsreleases/national/gdp/2007/pdf/gdp107p.pdf

27. Gross Domestic Product(GDP) • What is EXCLUDED when we count GDP?

28. Gross Domestic Product(GDP) Intermediate Goods Goods that are purchased for resale or for further use in manufacturing process INTERMEDIATE GOODS ARE NOT COUNTED IN THE GDP they are INPUTS!! Example: Steel used to make cars. When a huge roll of steel is purchased by the auto maker, the value of the steel is not counted in the GDP at that point. It is counted when the steel is cut up, put into a car, and then sold to you at the purchase price of the car. If you were to include the price of the steel paid by the auto maker AND the final price paid for the car, you would be MULTIPLECOUNTING the value of the steel.

29. What Eight Things Do Not Count In GDP? 1.Intermediate Goods – components of the final good. A. Ford buys batteries or tires for its cars. B.KFC buys chickens to eventually sell to customers.

30. Production of Bread . Value Added $2.02

31. Gross Domestic Product(GDP) • What is EXCLUDED when we count GDP? • 1. Transfer Payments • Recipients contribute nothing to current production in return for payments. • Two Types of Transfer Payments: a. Public Transfer Payments – Social Security, welfare (food stamps, Section 8 housing), veterans retirement, etc. b. Private Transfer Payments – Transfer of funds from one person to another – Cash as a gift; the purchase of a business or a corporation by another person or corporation 1. Stock Market Transactions - The buying and selling of stocks and bonds (government securties)

32. GDP– what is not counted [#3] 3. Purely Financial Transactions – stocks, bonds, CDs. There is no current production. Ex: If 100 shares of Dell stock is bought Buying stock is not buying a product butbuying ownership of the firm. I’m not buying a Dell computer but part ownership of Dell. Exchanging one financial asset for another

33. GDP– what is not counted [#4]. 4.Transfer Payments –welfare, unemployment, social security. [There is nocontribution to final production] “Now that I’ve gotten my welfare check, I can get an iPod nano and listen to 1,000 songs”

34. Gross Domestic Product(GDP) • What is EXCLUDED when we count GDP? • Secondhand Sales (Used Goods) The sale of used cars, houses, computers, clothes, jewlery, etc. Not counted because the goods would have been counted in the year they were made and credited to the GDP of that year. Counting them again would be Double (Multiple) Counting.

35. GDP - what is not counted [#2] 2. Second Hand Sales – no current production. A. If a 1957 Chevy is bought in 2005 57 Chevy Car salesman [It has not been produced again so would not count.] The salesman is doing productive work. His commission would count. B.Boots produced in 1980 are bought in a Thrift Store in 05. They also have not been produced again. Salesman’s commission would count. You are buying his services. Shoe salesman

36. Gross Domestic Product(GDP) • What is EXCLUDED when we count GDP? • Things that you do for yourself, or household, are not counted in the GDP. • The value of the labor households use to clean house, mow the grass, change the oil in your car. • Household Production is more important when you consider the economies of Traditional Societies – which tend to grow their own food, make their own clothes, eat their livestock. • Example: Americans buy food and meat at the store • Counts in GDP • Most Sudanese grow their own food and livestock • Does not count in GDP Not including Household Production of Goods and Services tends to underestimate the value of GDP.

37. 7.Non-market Transactions Are Not Counted Work in your own household or volunteer work in the community does not count because there was no payment. You need to do some of this housework.

38. 7.Non-market Transactions Are Not Counted Work in your own household or volunteer work in the community does not count because there was no payment. So, don’t marry your maid, gardener, or fitness instructor, or you will hurt GDP.

39. Is GDP a perfect measure of Social Welfare? No! • What is EXCLUDED when we count GDP? • Black Market Items • bootleg videos and music • Drugs • Other illegal activities • Household production not counted • Other illegal activities • Leisure time

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