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Where You Are!

Economics 201 – Principles of Macroeconomics

Tuesday and Thursday 2:00 to 3:15pm

1. Principles of Macroeconomics by Parkin, 12th edition,

Pearson.

1. MyEconLab for Parkin for graded homework

assignments and practice.

Course website: http://www.terpconnect.umd.edu/~jneri/Econ201

Who Am I

Dr. John Neri

Office Location: 1106D Morrill Hall

Office Hours: T and Th 3:30pm-4:30pm

Illness or Family Emergency and Exams

Steps you MUST follow:

• Pre-Notification: If you are sick or have a family

emergency and cannot take an exam, you must contact

Professor Neri before the exam. You must fill out the

Request for Excuse form found on the course web page.

• Written Verification: Illness or family emergency must be

subsequently verified in writing by a physician. If you go to the

health center and a doctor will not write you a note, that means

they consider you well enough to continue with academic

activities.

• If both steps are not followed, you will not be excused

from the exam

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Students using the DSS facility must meet

with me within the first 2 weeks of classes.

Advice!!!

• Course is cumulative.

• Important to keep up with the lectures,

homework and readings each week.

Microeconomics Examines the functioning of individual

industries and the behavior of individual decision-making

units - firms and households.

Macroeconomics Deals with the economy as a whole.

Focuses on determinants of total national income, deals

with aggregates such as aggregate consumption and

investment, and looks at the overall level of prices instead

of individual prices.

aggregate behavior The behavior of all households and

firms together.

sticky prices Prices that do not always adjust rapidly to

maintain equality between quantity supplied and quantity

demanded.

Macroeconomics vs Microeconomics

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• Growth in production • how much we produce and can we keep it

growing

• Unemployment

• High employment - Low unemployment

• Inflation and deflation

• Low stable inflation

Three Major Macroeconomic Concerns

Examples of Macroeconomic Questions • What causes inflation?

• Why is the unemployment rate sometimes high and

sometimes low?

• What might cause interest rates to be low one year

and high the next?

• How do changes in the money supply affect the

economy?

• How do changes in government spending and tax

policy affect the economy?

A couple of questions for you:

What is the current unemployment rate in the US?

What is fiscal policy?

What is the federal government budget deficit?

What is the Federal Reserve System?

What is monetary policy?

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A Little Macroeconomic History:

• 19th and early 20th century, Classical

Theory/Classical Economist

• They focused on microeconomics

• They argued that market forces drive the

economy toward full employment, possibly quickly

– markets clear.

• In Macro Speak “The economy self-corrects”

• If unemployment exist, wages would fall to

move the economy back to full employment.

A Little Macroeconomic History:

• 1929 to 1933: The Great Depression

• Worldwide economic crisis.

• Total amount of goods and services produced in the U.S. fell by more than 25%.

• Unemployment increased to 25%.

• A lot of unemployment for a long period of time.

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A Little Macroeconomic History:

• 1936: John Maynard Keynes, “The

General Theory of Employment, Interest,

and Money”

• Replaces classical theory with theory

based on:

– Aggregate (Total) Demand

– Wage and price rigidities – sticky!

– Markets don’t clear and it may take a

long time for the economy to “self-correct”

• Birth of Macroeconomics as a field

separate from microeconomics

A Little Macroeconomic History:

• Keynes believed government should

intervene in the economy to stimulate the

level of output and employment

– During periods of low private demand, the government should take action to stimulate aggregate (total) demand to lift the economy to full employment.

– Keynes was not a socialist. He was a capitalist. He simply felt capitalism could be unstable.

A Little Macroeconomic History:

• Private demand and Public demand?

• What can the government do to stimulate aggregate total demand (private and public) to lift the economy out of recession?

• Big, Big Question – does this stuff work?

• Almost 80 years later still debating this!

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Chapter 4

Part 1

MEASURING GDP AND

ECONOMIC GROWTH

Define GDP (Gross Domestic Product)

Explain why GDP equals aggregate

expenditure and aggregate income

Explain how the Bureau of Economic

Analysis measures U.S. nominal GDP and

real GDP

Explain the uses and limitations of real GDP

as a measure of economic well-being

Goals of Chapter 4:

Production and GDP

• Gross Domestic Product (GDP)

– Total value

– of all final goods and services

– produced for the marketplace

– during a given year

– within the nation’s borders

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Production and GDP

• Total value…

– GDP is measured in dollar values (P x Q)

• …of all final…

– Final goods and services: sold to their

final user

• …goods and services…

• Goods: tangibles

• Services: intangibles 19

Production and GDP

• …produced…

– Not included: land, stocks and bonds

used goods …

• …for the marketplace…

– With the intention of being sold

• …during a given period…

– Specific period of time

• …within a nation’s borders

– Regardless of who owns the resources

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Gross Domestic Product

Final Goods and Services

GDP is the value of the final goods and services produced.

A final good (or service) is an item bought by its final user

during a specified time period.

A final good contrasts with an intermediate good, which

is an item that is produced by one firm, bought by another

firm, and used as a component of a final good or service.

Excluding the value of intermediate goods and services

avoids counting the same value more than once – double

counting.

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Intermediate and Final Good

Tires taken from that pile and mounted on the wheels of

the new car before it is sold are considered intermediate

goods.

Tires taken from that pile to replace tires on your old car

are considered final goods.

If we included the value of the tires (an intermediate good)

on new cars and the value of new cars (including the tires),

we would be double counting.

The Expenditure Approach to GDP

• Expenditure approach: GDP=C+I+G+NX

– Adding the value of goods and services

purchased by each type of final user

1. Consumption goods and services (C)

purchased by households

2. Private investment goods and services (I)

purchased by businesses

3. Government goods and services (G)

purchased by government agencies

4. Net exports (NX) purchased by foreigners

The Expenditure Approach to GDP

• Consumption spending (C)

– Part of GDP purchased by households as

final users

– 70% of total production

– Not included:

• Imported consumption goods and

components

• New home construction

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The Expenditure Approach to GDP

• Consumption spending (C)

– Included - even though households don’t

actually buy them

• Total value of food products produced on

farms that are consumed by the farmers and

their families themselves

• Total value of housing services provided by

owner-occupied homes

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The Expenditure Approach to GDP

• Private investment (I)

– Business purchases of plant, equipment,

and software

– New home construction

– Changes in inventories

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The Expenditure Approach to GDP

• Private investment (I)

– Adds to the nation’s capital stock

– Ignores depreciation

• Net investment

– Investment minus depreciation

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The Expenditure Approach to GDP

• Government purchases (G )

– Spending by federal, state, and local

governments on goods and services

• Government outlays

– Government purchases + Transfer

payments

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The Expenditure Approach to GDP

• Transfer payments

– Payment that is not compensation for

supplying goods, services, or resources

– Money redistributed from one group of

citizens (taxpayers) to another (the poor,

the unemployed, the elderly)

– Included in government budgets as outlays

– Not included in the government purchases

component of GDP

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The Expenditure Approach to GDP

• Net exports (NX)

– Total exports minus total imports

• Total exports

– U.S. production that is purchased by

foreigners

• Total imports

– Americans’ purchases of goods produced

outside of the United States

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X = 2339 and M = 2877

13,100

3,140

3,330

-570

______

19,000

2017

Gross National Product (GNP)

• GNP is the value of goods and services produced

anywhere in the world by the residents of a

nation.

• Nike’s income from shoe factories in Vietnam is part of

US GNP and Vietnam’s GDP.

• Toyota’s income from car plants in the US is part of

Japan’s GNP and US GDP.

• GNP = GDP plus payments received from the

rest of the world minus income paid to the rest of

the world

Gross Domestic Product

Depreciation is the decrease in the value of a firm’s

capital that results from wear and tear and

obsolescence.

Gross investment is the total amount spent on

purchases of new capital and on replacing

depreciated capital.

Net investment is the increase in the value of the

firm’s capital.

Net investment = Gross investment Depreciation.

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Measuring U.S. GDP

The Bureau of Economic Analysis

complies the GDP data

Uses two approaches -

The expenditure approach

The income approach

Measuring U.S. GDP

The Expenditure Approach

The expenditure approach measures GDP as the

sum of consumption expenditure, business

investment expenditure, government expenditure on

goods and services, and net exports.

GDP = C + I + G + (X M)

The Income Approach to GDP • Factor payments

– Payments to the owners of resources that are

used in production

• Income Approach

GDP = sum the factor payments earned by all

households in the economy (wages and salaries,

rent, interest, and profit)

• Total output of the economy (GDP) = total

income earned in the economy

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Why does expenditure = income

In every transaction,

the buyer’s expenditure becomes the seller’s

income.

Thus, the sum of all expenditure equals

the sum of all income.

Simple Circular Flow

Incom e ($)

Labor

Goods (bread)

Expenditure ($)

Households Firms

The circular flow diagram shows

the income received and

payments made by each

sector of the economy.

Measuring U.S. GDP

The Income Approach

The sum of all factor incomes is called net domestic income

at factor cost.

Two adjustments must be made to the net domestic income

get GDP:

1. Add Indirect taxes

2. Add depreciation

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