Chapter 19 Macroeconomics- Intro to Macro and Gross Domestic Product

Chapter 19 Macroeconomics- Intro to Macro and Gross Domestic Product Fundamentals of Macro • We examine total output in an economy rather than just a single firm or industry. • We look at total employment across the economy rather than employment at a single firm. • We consider all prices in the economy rather than the price of just one product. GDP • Gross domestic product (GDP): the market value of all final goods and services produced within a nation during a specific period of time—typically, a year. • GDP is the primary measure of a nation’s output. (sum of all firms’ output) • GDP measures both output and income in a macroeconomy and is a gauge of productivity and the overall level of wealth in an economy. • Nations and individuals that produce large amounts of highly valued output are relatively wealthy. Nations and individuals that don’t produce much highly valued output are relatively poor. • Three uses of GDP: o Measuring Living Standards ▪ When both output and income are higher, it indicates that living standards are also higher ▪ Per capita GDP: GDP per person. That is, we divide the country’s total GDP by its population when we want to gauge living standards for an average person ▪ A small country could have a low GDP but a high per capita GDP, indicating good quality of life o Measuring economic growth ▪ Economic growth: changes in living standards over time. When economies grow, living standards rise, and this outcome is evident in GDP data. (percentage change in real per capita GDP) ▪ Inflation: the growth in the overall level of prices in an economy. Because GDP is calculated using market values (prices) of goods and services, inflation causes GDP to go up even if there is no change in the quantity of goods and services produced ▪ Real GDP: GDP adjusted for changes in price (like inflation) o Whether the economy is going through recession or expansion ▪ Recession: a short-term economic downturn that typically lasts about 6 to 18 months ▪ Business cycle: short-run fluctuation in economic activity ▪ Economic expansion: occurs from the bottom of a trough to the next peak • ▪ Unemployment rates are lower Economic contraction: period from the peak down to the trough • unemployment rises Calculating GDP • Quantity x unit price = market value (then add all the values together!) • Services: outputs that provide benefits without producing a tangible product o Service output is 2/3 US output • Intermediate goods: goods that firms repackage or bundle with other goods for sale at a later stage. (good rule of thumb=if a manufacturer/firm buys it) o Es: the cell phone’s outer case, which is combined with other intermediate goods to make the final product • Final goods: goods that are sold to final users. o Ex: The sale of a cell phone is included as part of GDP, but the value of the intermediate goods is not. • Gross national product (GNP): the output produced by workers and resources owned by residents of the nation, an alternative measure of national output. o Many nations prefer GDP to GNP because much of their domestic output is produced by foreign-owned firms (like Nike shoes produced in Thailand). For nations with lots of foreign firms, GDP is larger than GNP. o Goods created within the borders the United States contribute to the GDP of the United States, even if the company that makes them is foreign-owned. The output of an American company operating in another country contributes to the GNP of the United States. • Resold products (like used cars) do not count in GDP • sales of financial assets such as stocks and bonds do not count toward GDP GDP as Different Expenditures • The Bureau of Economic Analysis (BEA): the U.S. government agency that tallies GDP data in a process called national income accounting. • The BEA breaks GDP into four major categories: o Consumption (C): purchase of final goods and services by households, with the exception of new housing (largest component of GDP) ▪ Nondurable consumption goods are consumed over a short period ▪ Durable consumption goods are consumed over a long period (3 yrs+) • subject to significant cyclical fluctuations that correspond to the health of the economy • purchased when economy is doing well o Investment (I): private spending on tools, plant, and equipment used to produce future output ▪ Ex: a new house, a factory, a shovel o Government purchases (G): any spending on any level of the government ▪ Ex: government paychecks, school funds, military expenses, public works projects ▪ Transfer payments: payments the government make directly to people not in an exchange / such as welfare payments, social security, and unemployment insurance, do not count as GDP, since they are not direct purchases of new goods and services. o net exports (NX)- NX=exports-imports ▪ • normally negative for US You can express GDP as the following equation: GDP=C+I+G+NX Real GDP • Nominal GDP: the GDP calculated from current prices (sum of all price x quantity) o Cannot determine if an economy is getting weaker or stronger • Current prices: the raw data based on market values computed on up-to-date prices of goods and services • Inflation occurs if nominal GDP is higher than real GDP o This is common because nominal GDP reflects both growth in production and also in prices • Price level: an index of the average prices of goods and services throughout the economy o positive correlation with prices • GDP deflator: price level we use to adjust GDP data, includes the prices of final goods and services in GDP • Base period: an agreed upon common time period Calculating Real GDP • Real GDP can be calculated by multiplying quantities by prices from the base year • To calculate real GDP, use current prices of goods and services and adjust them to prices from a base period (explicitly says or use year before) o Divide nominal GDP by the price level o Multiply the result by the price level (100) from the base period o Ex: if nominal GDP was $17,938 billion and the price level was 110: Growth Rates • Calculated via percentage change in a variable • growth=(New-old/old)x100 • growth of nominal GDP ≈ growth of real GDP + growth in price level • % change in nominal GDP≈% change in real GDP+% change in price level • growth in real GDP≈ growth of nominal GDP-growth in price level Shortcomings of GDP • Nonmarket Goods: goods and services that are produced but not sold o Ex: work done at home or made for free • Underground economy: transactions that are not reported to the government (smallest in countries with strong economies) o Ex: illegal goods and services like drugs and gambling o Ex: non-illegal activities like tips and home renovations • Quality of the environment: GDP does not account for negative environmental side effects that sometimes occur in production o Ex: One economy relies on clean energy for its production, and the other has lax environmental standards. Citizens in both countries enjoy the same standard of living, but their well-being is not the same • Leisure time: GDP fails to capture how long laborers work to produce goods and services o Ex: in the United States the average workweek is 36 hours. A comparison with Japan, which also averages 36 hours per workweek, would be valid o Ex: a comparison of U.S. GDP with that of Sweden (31-hour workweek) or Greece (41-hour workweek) would be misleading • Happiness: money does not buy happiness even though, ceteris paribus, greater wealth does make it easier to afford conveniences, experiences, and even health and well-being that contribute to life satisfaction or happiness. o Per capita GDP is positively correlated with many human welfare outcomes that nearly everybody finds desirable: higher life expectancy, higher levels of education, and reduced infant mortality ▪ Related to a higher standard of living because it measures average income o Stevenson/Wolfers research: ▪ a doubling of income leads to about a 0.35 unit increase on the life satisfaction ladder (0-10) ▪ People and nations with relatively low life satisfaction will produce survey results in the 3–4 range, but people and nations with relatively high life satisfaction will produce survey results in the 6–8 range.