WELCOME TO SEMINAR 7

February 18, Wed. 10-11 pm ET

MT445-01 MANAGERIAL ECONOMICSINSTRUCTOR: PAUL CHOI, PH.D.

LIVE SEMINARS(Wednesday 10-11 PM ET)

Live Seminar Schedule: • Live Seminar 1: January 7 (Wednesday 10-11 pm ET) • Live Seminar 2: January 14 (Wednesday 10-11 pm ET) • Live Seminar 3: January 21 (Wednesday 10-11 pm ET) • Live Seminar 4: January 28 (Wednesday 10-11 pm ET) • Live Seminar 5: February 4 (Wednesday 10-11 pm ET) • Live Seminar 6: February 11 (Wednesday 10-11 pm ET) • Live Seminar 7: February 18 (Wednesday 10-11 pm ET) • Live Seminar 8: February 25 (Wednesday 10-11 pm ET) • Live Seminar 9: March 4 (Wednesday 10-11 pm ET) • Live Seminar 10: March 11 (Wednesday 10-11 pm ET)

• It is strongly suggested that you attend the graded seminar at the regularly scheduled time. If you are unable to attend the seminar, you can complete the following assignment.

UNIT 7 READING

Chapter 19 discusses how total production is measured; the GDP as a measure of well being; the difference between real GDP and nominal GDP; and other measures of total production and total income.

UNIT 7 READING

Chapter 21 discusses long-run economic growth; the role of the financial system in facilitating long-run economic growth; and the business cycle.

UNIT 7 READING

Chapter 22 discusses economic growth over time and around the world; the economic growth model; fluctuations in productivity growth in the United States; why many countries have not experienced economic growth; and government policies that foster economic growth.

READING: CHAPTER 19

Measuring Total Production: Gross Domestic Product

Gross Domestic Product (GDP): The market value of all final goods and services produced in a country during a period of time, typically one year.

GDP is Measured Using Market Values, Not Quantities

READING: CHAPTER 19

Measuring Total Production: Gross Domestic Product

GDP Includes Only the Market Value of Final Goods

Final Good or Service: A good or service purchased by a final user.

Intermediate Good or Service: A good or service that is an input into another good or service, such as tire on a truck.

READING: CHAPTER 19

Gross Domestic Product Measures Total Production

Production, Income, and the Circular-Flow Diagram

Transfer Payments: Payments by the government to individuals for which the government does not receive a new good or service in return.

READING: CHAPTER 19

Gross Domestic Product Measures Total Production

Components of GDP Personal Consumption Expenditures, or

“Consumption”: Spending by households on goods and services, not including spending on new houses.

Gross Private Domestic Investment, or “Investment”: Spending by firms on new factories, office buildings, machinery, and additions to inventories, and spending by households on new houses.

READING: CHAPTER 19

Gross Domestic Product Measures Total Production

Components of GDP Government Consumption and Gross Investment,

or “Government Purchases”: Spending by federal, state, and local governments on goods and services.

Net Exports of Goods and Services, or “Net Exports”: Exports minus imports

READING: CHAPTER 19

Gross Domestic Product Measures Total Production

An Equation for GDP and Some Actual Values

• Consumer spending on services is greater than the sum of spending on durable and nondurable goods.

• Business fixed investment is the largest component of investment.

•Purchases made by state and local governments are greater than purchases made by the federal government.

•Imports are greater than exports, so net exports are negative

READING: CHAPTER 19

Does GDP Measure What We Want It to Measure?

Shortcomings in GDP as a Measure Household Production: Household production

refers to goods and services people produce for themselves.

The Underground Economy: Buying and selling of goods and services that is concealed from the government to avoid taxes or regulations or because the goods and services are illegal.

READING: CHAPTER 19

Does GDP Measure What We Want It to Measure?

Shortcomings in GDP as a Measure - The Value of Leisure is Not Included in GDP. - GDP Is Not Adjusted for Pollution or Other

Negative Effects of Production. - GDP Is Not Adjusted for Changes in Crime and

Other Social Problems. - GDP Measures the Size of the Pie but Not How

the Pie Is Divided Up.

READING: CHAPTER 19

Real GDP versus Nominal GDP Calculating Real GDP Real GDP: The value of final goods

and services evaluated at base-year prices.

Nominal GDP: The value of final goods and services evaluated at current-year prices.

READING: CHAPTER 19

Real GDP versus Nominal GDP

READING: CHAPTER 19

Real GDP versus Nominal GDP The GDP Deflator Price Level: A measure of the average

prices of goods and services in the economy.

GDP Deflator: A measure of the price level, calculated by dividing nominal GDP by real GDP and multiplying by 100.

GDP Deflator = (Nominal GDP/Real GDP) x 100

READING: CHAPTER 21

Long-Run Economic Growth Long-Run Economic Growth: The process by

which rising productivity increases the average standard of living.

• Long-run economic growth is the sustained upward trend in the economy’s output over time.

• A country can achieve a permanent increase in the standard of living of its citizens only through long-run growth.

• A central concern of macroeconomics is what determines long-run economic growth.

READING: CHAPTER 21

Long-Run Economic Growth Calculating Growth Rates and the Rule of

70

Number of Years to Double = 70/Growth Rate

What Determines the Rate of Long-Run Growth?

Labor Productivity: The quantity of goods and services that can be produced by one worker or by one hour of work.

READING: CHAPTER 21

Long-Run Economic Growth What Determines the Rate of Long-Run

Growth? Increases in Capital per Hour Worked Capital: Manufactured goods that are used to

produce other goods and services. Technological Change - Economic growth depends more on

technological change than on increases in capital per hour worked.

Technological change is an increase in the quantity of output firms can produce using a given quantity of inputs.

READING: CHAPTER 21

Long-Run Economic Growth Potential Real GDP Potential GDP: The level of GDP

attained when all firms are producing at capacity.

READING: CHAPTER 21

Saving, Investment, and Financial System

Financial System Financial System: The system of

financial markets and financial intermediaries through which firms acquire funds from households.

READING: CHAPTER 21

Saving, Investment, and Financial System

An Overview of the Financial System

Financial Markets: Markets where financial securities, such as stocks and bonds, are bought and sold.

Financial Intermediaries: Firms, such as banks, mutual funds, pension funds, and insurance companies, that borrow funds from savers and lend them to borrowers.

READING: CHAPTER 21

Saving, Investment, and Financial System

The Macroeconomics of Saving and Investment

Y = C + I + G + NX Y = C + I + G I = Y – C – G Sprivate = Y + TR – C – T Spublic = T – G - TR

READING: CHAPTER 21

Saving, Investment, and Financial System

The Macroeconomics of Saving and Investment

S = Sprivate + Spublic or S = (Y + TR – C – T) + (T – G – TR) or S = Y - C – G So, we can conclude that total saving

must be equal total investment: S = I

READING: CHAPTER 21

Saving, Investment, and Financial System

The Market for Loanable Funds Market for Loanable Funds: The

interaction of borrowers and lenders that determines the market interest rate and the liquidity of loanable funds exchanged.

READING: CHAPTER 21

Saving, Investment, and Financial System

The Market for Loanable Funds Explaining Movements in Saving,

Investment, and Interest Rates Crowding Out: A decline in private

expenditures as a result of an increase in government purchases

READING: CHAPTER 21

The Business Cycle Business Cycle Business Cycle: Alternating periods

of economic expansion and economic recession.

READING: CHAPTER 21

Business Cycle

READING: CHAPTER 21

The Business Cycle Recession The National Bureau of Economic

Research (NBER) has the following broader definition: “A recession is a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income, and wholesale-retail trade.”

READING: CHAPTER 21

The Business Cycle Why Is the Economy More

Stable? • The increasing importance of services

and the declining importance of goods. • The establishment of unemployment

insurance and other government transfer programs that provide funds to the unemployed.

• Active federal government policies to stabilize the economy.

READING: CHAPTER 22

Economic Growth over Time and around the World

Economic Growth from 1,000,000 BC to the Present

Industrial Revolution: The application of mechanical power to the production of goods, beginning in England around 1750.

READING: CHAPTER 22

Economic Growth over Time and around the World

Small Differences in Growth Rates Are Important

In the long run, small differences in economic growth rates result in big differences in living standards.

Why Do Growth Rates Matter? Growth rates matter because an economy that

grows too slowly fails to raise living standards.

READING: CHAPTER 22

What Determines How Fast Economies Grow?

Economic Growth Model: A model that explains growth rates in real GDP per capita over the long run.

Labor Productivity: The quantity of goods and services that can be produced by one worker or by one hour of work.

Technological Change: A change in the quantity of output a firm can produce using a given quantity of inputs.

READING: CHAPTER 22

What Determines How Fast Economies Grow?

There Are Three Main Sources of Technological Change:

• Better machinery and equipment • Increases in human capital Human capital – The accumulated knowledge

and skills that workers acquire from education and training or from their life experiences.

• Better means of organizing and managing production

READING: CHAPTER 22

What Determines How Fast Economies Grow?

The Per-Worker Production Function • Per-Worker Production Function: The

relationship between real GDP per hour worked and capital per hour worked, holding the level of technology constant.

READING: CHAPTER 22

What Determines How Fast Economies Grow?

Which Is More Important for Economic Growth: More Capital or Technological Change?

• Technological change helps economies avoid diminishing returns to capital.

READING: CHAPTER 22

What Determines How Fast Economies Grow?

New Growth Theory • New Growth Theory: A model of long-

run economic growth which emphasizes that technological change is influenced by economic incentives and so is determined by the working of the market system.

READING: CHAPTER 22

Why Isn’t the Whole World Rich?

Catch-Up: Sometimes, but Not Always

• Catch-Up: The prediction that the level of GDP per capita (or income per capita) in poor countries will grow faster than in rich countries.

READING: CHAPTER 22

Why Isn’t the Whole World Rich?

Why Don’t More Low-Income Countries Experience Rapid Growth?

Failure to Enforce the Rule of Law • Property Rights: The rights individuals or

firms have to the exclusive use of their property, including the right to buy or sell it.

• Rule of Law: The ability of a government to enforce the laws of the country, particularly with respect to protecting private property and enforcing contracts.

READING: CHAPTER 22

Why Isn’t the Whole World Rich?

Why Don’t More Low-Income Countries Experience Rapid Growth?

Wars and Revolutions • Wars have made it impossible for

countries such as Afghanistan, Angola, Ethiopia, the Central African Republic and the Congo to accumulate capital or adopt new technologies.

READING: CHAPTER 22

Why Isn’t the Whole World Rich?

Why Don’t More Low-Income Countries Experience Rapid Growth?

Poor Public Education and Health • Many low-income countries have weak

public school systems, so many workers are unable to read and write.

People who are sick work less and are less productive when they do work.

READING: CHAPTER 22

Why Isn’t the Whole World Rich?

Why Don’t More Low-Income Countries Experience Rapid Growth?

Low Rates of Saving and Investment • The low savings rates in developing

countries contribute to a vicious cycle of poverty.

READING: CHAPTER 22

Why Isn’t the Whole World Rich?

The Benefits of Globalization • Foreign Direct Investment (FDI): The

purchase or building by a corporation of a facility in a foreign country.

• Foreign Portfolio Investment: The purchase by an individual or a firm of stock or bonds issued in another country.

• Globalization: The process of countries becoming more open to foreign trade and investment.

READING: CHAPTER 22

Growth Policies We have seen that even small differences in

growth rates compounded over the years can lead to major differences in standards of living.

Therefore, there is potentially a very high payoff to government policies that increase growth rates.

- Enhancing Property Rights and the Rule of Law - Improving Health and Education - Policies with Respect to Technology - Policies with Respect to Saving and

Investment.

UNIT 7 DISCUSSION

Topic 1 The national income accounts

measure productivity, spending, and income; but these accounts were not designed to measure economic welfare. Discuss aspects of economic welfare ignored in GDP. HINT: Do a “Google” search on the Genuine Progress Indicator and compare this with GDP in terms of measuring economic welfare.

UNIT 7 DISCUSSION Topic 2 What factors might contribute to a low growth

rates in a country? Why do some poor countries, such as Botswana, experience higher growth rates than others when all face the same challenges such as the HIV epidemic? Compare growth rates across countries by visiting The World Bank website (http://data.worldbank.org/indicator). How does GDP growth (GDP growth (annual %)) compare across developed countries such as the U.S. and poorer countries such as Nigeria. Why might growth rates of developed nations be lower than those of poorer countries?

UNIT 7 ASSIGNMENT

Instructions Summary: Please Read Unit 7 Assignment Instructions

• Please answer the following questions located in the template document. Submit the file as a Microsoft Word ® document to the Dropbox when completed.

SEMINAR

Read About Graded Seminars Attending seminars is important to your

academic success. They (seminars) will allow you to review the important concepts that are presented in each unit, discuss work issues in your lives that pertain to these concepts, ask your instructor questions and allow you to come together in real time with your fellow classmates.

There will be a seminar in units 1 through 10 in this course. You must either attend the seminar or complete the Alternative Seminar Assignment in order to obtain the points for this part of class.

UNIT 7 SEMINAR

Unit 7 Alternative Assignment: • It is strongly suggested that you attend the

graded seminar at the regularly scheduled time. If you are unable to attend the seminar, you must complete the following alternative assignment to earn points for this part of the class.

View this week’s archived Seminar and write a 1 page paper, double spaced that summarizes the Seminar and what you learned.

Once completed, submit your alternative assignment to the Seminar Dropbox.