Macroeconomics - ECO 2013

1. Macroeconomics - ECO 2013 Fall 2005 – 1 Term August 24 – December 16, 2005

2. Chapter 7: Measuring Domestic Output, National Income, and Price Level • National Income Accounting measures the economy’s OVERALL performance • Bureau of Economic Analysis • Assess health of the economy by comparing levels of production • Track the long-run course of the economy • Formulate policies

3. Gross Domestic Product (GDP) • Aggregate Output: primary measure of the economy’s performance is its annual total output of G & S • Gross Domestic Product (GDP) = Aggregate Output • GDP = total market value of all FINAL G & S produced in a given year • G & S produced by citizen-supplied or foreign-supplied resourced employed WITHIN a country

4. Gross Domestic Product (GDP) • GDP is a monetary measure • Avoids multiple counting: Includes ONLY FINAL goods & excludes intermediates • Intermediates: G & S purchased for resale or further processing/manufacturing • Final: G & S purchased for final use by consumer

5. GDP Excludes Nonproduction Transactions • Nonproduction transactions must be excluded from GDP b/c they have nothing to do w/ the general of final goods • Two types: • Financial Transactions • Public Transfer Payments • Private Transfer Payments • Stock Market Transactions • Secondhand Sales

6. Two ways to Calculate GDP • Expenditures Approach • Output Approach: Sum of all the money spent in buying good • Income Approach • Earnings / Allocations Approach: Income derived or created from producing good

7. Expenditures Approach • Add up all spending on final G & S that has taken place throughout the year • GDP = C + Ig + G + Xn where C = Personal Consumption Ig = Private Domestic Investment G = Government purchases of G & S Xn = Net exports

8. Personal Consumption Expenditures (C) • Durable Consumer Goods • Nondurable Consumer Goods • Consumer Expenditures for Services

9. Gross Private Domestic Investment (Ig) • Final purchases of machinery, equipment, & tools by business enterprises • Construction • Changes in inventories • Net Investment = Gross Investment – Depreciation (amount of capital used up over the course of a year)

10. Government Purchases (G) • Government Consumption Expenditures & Gross Investment • Two components: • Expenditures for G & S that government consumes in providing public services • Expenditures for Social Capital (e.g., schools & highways) • Does not include Transfer payments

11. Net Exports (Xn) • Net Exports (Xn) = Exports (X) – Imports (M) • When Imports (M) > Exports (X), Net Exports (Xn) is NEGATIVE  Trade Deficit!

12. Global Perspective of GDP • United States • Japan • Germany • France • United Kingdom • Italy • China • Brazil • Canada • Spain • India • Mexico • Korea • Netherlands • Australia

13. Income Approach • National Income + Adjustments • GDP = Wages + Rent + Interest + Profit + Adjustments where • Wages includes salary supplements • (insurance, benefits) • NET Rents received from property resources • (less depreciation) • Interest paid by private businesses to suppliers of capital • Proprietor’s Income • sole proprietorships, partnerships, & corporate profits • Corporate Profits • Corporate Income Taxes • Dividends • Undistributed Corporate Profits (aka Retained Earnings)

14. Nominal GDP v. Real GDP • Compare market values of GDP from year to year, despite any changes due to inflation • Deflate GDP when prices rise • Inflate GDP when prices fall • From a REFERENCE year • Nominal GDP: GDP based on prices that prevailed when output was produced (aka unadjusted GDP) • Real GDP: GDP that has been deflated or inflated to reflect changes in price level (aka adjusted GDP)

15. GDP Price Index • Price Index: Measure of price of specified collection of G & S (market basket) in a given year as compared to price of an identical collection of G & S in a reference year • Price Index in Given Year = (Price of Market Basket in Specific Year / Price of Market Basket in Base Year) * 100 • Real GDP = Nominal GDP / Price Index (in hundredths)

16. Consumer Price Index (CPI) • Compiled by Bureau of Labor Statistic (BLS) • Reports price of a market basket of ~300 G & S that are presumably purchased by a “typical urban consumer”

17. Shortcomings of GDP • Nonmarket Transactions (e.g., Homemakers) • Understates GDP • Leisure • Understates well-being • Improved Product Quality • GDP is Quantitative v. Qualitative measure • Underground Economy • Business that conceal income • Factors: • Extent & Complexity of Regulation • Type & Degree of Taxation • Effectiveness of Law Enforcement

18. Shortcomings of GDP • Environment • Social costs of negative by-products reduce economic well-being • Overstates GDP • Composition & Distribution of Output • Per Capita Output • Divide GDP by population • Noneconomic Sources of Well-Being

19. Chapter 7 Study Questions • 7: Net Exports • 8 & 9: GDP, NDP, NI, PI • 12: Real GDP • 13: GDP