1 macroeconomics!. macroeconomics: the study of the economy as a whole. goals: 1.measure health of...
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MACROECONOMICS!
Macroeconomics: the study of the economy as a whole.
• Goals:1.Measure health of the
economy2.Guide government policy
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1.Promote Economic Growth
2.Limit Unemployment
3.Limit Inflation
For all countries there are three major policy goals:
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Goal #1Promote Economic Growth
How does a country measureeconomic growth?
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How do we know how well the economy is doing?
• Economists collect statistics on production, income, investment, and savings.
The most famous statistic is GDP.
Gross Domestic Product (GDP): the dollar value of all final goods and services produced within a country’s borders in one year.
• *Final Goods - GDP does not include the value of intermediate goods (goods used in the production of final goods and services)
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Basically, how much wealth a country produces
Uses of GDP1. Compare to previous years (Is there growth?)2. Compare policy changes (Did a new policy work?)3. Compare to other countries (Are we better off?)
What does GDP tell us?
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We’re number 1!Countries by GDP (2014)
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World map – land area
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World map – population
World GDP Distribution
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World GDP Distribution
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Nominal GDP – 2014 rankings
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U.S. State Rankings – Gross State Product
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The GDP of US states is comparable to entire countries
How can we measure economic growth?
% Change in GDP
=Year 2 - Year 1
Year 1X 100
Mordor’s GDP in 2007 was $4000Mordor’s GDP in 2008 was $5000What is the % Change in GDP?
Transylvania’s GDP in 2007 was $2,000Transylvania’s GDP in 2008 was $2,100
What is the % Change in GDP?13
2. Nonproduction Transactions• Financial Transactions (nothing produced)
• Ex: Stocks, bonds, Real estate• Used Goods
• Ex: Old cars, used clothes
What is NOT included in GDP?1. Intermediate Goods
• No Multiple Counting, Only Final Goods• EX: Price of finished car, not the radio,
tire, etc.
3. Non-Market (Illegal) Activities • Ex: Illegal drugs, unpaid work
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Calculating GDP
Two Ways to calculate GDP:
1. Expenditures Approach - Add up all the spending on final goods and services produced in a given year.
2. Income Approach - Add up all the income from sales of final goods and services
*Same result; all money spent is income to someone else
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Four components of GDP:1. Consumer Spending
Ex: $5 Little Caesar's Pizza2. Investment Spending - When businesses put
money back into their own business.Ex: Machinery or tools
3. Government SpendingEx: Bombs or tanks, NOT social security
4. Net Exports - Exports (X) – Imports (M) Ex: Value of 3 Ford Fiestas minus 2 Honda Civics
GDP = C + I + G + Xn
Expenditures Approach
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Calculating GDP
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Included or not Included in GDP?For each situation, identify if it is included in
GDP the identify the category C, I, G, or Xn
1. $10.00 for movie tickets2. $5M increase in defense spending3. $45 for a used economics textbook4. Ford makes new $2M factory5. $20K Toyota made in Mexico6. $10K profit from selling stocks7. $15K car made in US, sold in Canada8. $10K Tuition to attend college9. $120 Social Security payment to Bob10.Farmer purchases new $100K tractor
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Nominal GDP vs. Real GDP
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How can you figure out which is the most popular movie of all time?
What is the problem with this method? Nominal Box Office Receipts
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How can you figure out which is the most popular movie of all time?
Real Box Office Receipts (adjusted for inflation)
The Problem with GDP
If a country’s GDP increased from $4 Billion to $5 Billion in one year, is the country experiencing economic growth? Did the country definitely produce 25% more products?
What is Inflation?• A rising general level of prices
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1. What is Macroeconomics?2. What is GDP?3. What are the four main components
of GDP (using the expenditures approach)?
4. What’s NOT included in GDP?5. What’s the difference between
nominal and real GDP growth?6. What’s the best movie of all time?
Warm UpAnswer the following with your neighbor:
1.What’s Macroeconomics?2.What is GDP?3.What are the four main
components of GDP?4.What’s NOT included in GDP?5.What’s the difference between
Nominal and Real GDP?6.What’s inflation?7.What’s the best movie of all time?
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Real vs. Nominal GDPNominal GDP is measured in current prices.
Doesn’t account for inflation
Real GDP is expressed in constant, or unchanging, dollars
Real GDP adjusts for inflation.
REAL GDP IS THE BEST MEASURE OF ECONOMIC GROWTH
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Real vs. Nominal GDP2013
10 cars at $15,000 each = $150,00010 trucks at $20,000 each = $200,000Nominal GDP = $350,000
201410 cars at $16,000 each = $160,00010 trucks at $21,000 each= $210,000Nominal GDP = $370,000
The GDP in year 2013 shows the dollar value of all final goods produced.
The nominal GDP in year 2014 is higher, which suggests that the economy is improving.
But did the economy really grow? How can we find out?
Use 2013 Prices
2014 GDP is the same as 2013 GDP after the inflation adjustment
201410 cars at $15,000 each = $150,00010 trucks at $20,000 each= $200,000REAL GDP = $350,000
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Real GDP “deflates” nominal GDP by adjusting for inflation in terms of a base year prices.
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Does GDP accurately measure standard of living?
Example: Norway and Nigeria have roughly the same GDP ($500 Billion). Is Nigeria as wealthy as Norway?
• Two adjustments: –1) divide GDP by population (GDP
per capita)–2) adjust for cost of living – PPP
(Purchasing Power Parity)
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Country rankings – GDP per capita (PPP adjusted)
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Why are some countries wealthier than others?
1. Economic System and InstitutionsCapitalism vs. fascism, socialism, totalitarianismGood governance vs. corruption
2. Physical CapitalEx: Machinery, tools, and man-made resources.Example#1: Bangladesh has over 100 million people but
relatively few capital resources => poverty
3. Human CapitalAn educated, knowledgeable workforce is more productive – E.g. Japan is wealthy despite limited natural resources
4. Natural ResourcesEx: Mauritania is mostly barren desert
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Where-To-Be-Born Index (WTBBI)Even better than GDP (PPP) per capita!
WTBBI Includes:• Average Income• Life expectancy• Divorce rates• Political freedoms• Corruption• Climate
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Bottom 10
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According to results from a Gallup poll of over 140,000 people in 143 different countries, the happiest* country in the world is Paraguay. Paraguay ranks 110th in the world in GDP per capita and 111th on the Human Development Index. How do you explain this apparent discrepancy?
Warm Up
*The survey defines happiness as “experiencing positive emotions on a daily basis”
THE BUSINESS CYCLE
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The Business Cycle• The Business Cycle describes
the fluctuations in economic activity (as measured by real GDP) that a national economy experiences over time
Expa
nsio
n
Peak
Contraction
Trough
Expa
nsio
n
PeakContraction
The Business Cycle
Expansion• During a period of expansion:
–Wages increase–Unemployment is low–Consumers spend more money–High demand for goods/services–More businesses are launched–Getting a loan is easier–Businesses make more profits and
stock prices rise
Peak• When the business cycle peaks:
–The economy stops growing –Real GDP reaches a maximum–Businesses stop expanding
and hiring workers–Economy begins to contract
Contraction
Contraction• During a period of contraction:
–Businesses cut back production and lay off workers
–Unemployment increases–Wages fall–Consumers become pessimistic
about the economy and decrease spending
–Banks cut back on lending
Trough• When the business cycle reaches a
trough:–Real GDP “bottoms-out” (reaches a low
point)–High unemployment and low spending–Stock prices drop
On the bright side, when an economy bottoms out, there’s nowhere to go but up!
Recession and Depression• A prolonged contraction is called a
recession (contraction for over 6 months)
• A really prolonged recession (generally a year or more) is called a depression
Causes of the Business Cycle1.External “shocks” to the economy
• e.g. sharp changes in oil prices, wars, droughts
2.Financial crises• e.g. the Great Depression and
Recession
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