INTRODUCTION TO MACROECONOMICS AND GDPMisconceptionThe Big QuestionsMacroeconomics and GDPSlide 5Slide 6Production Equals IncomeDefining GDPThree uses of GDP DataMeasuring Living StandardsMeasuring Economic Growth U.S. Per Capita Real GDPSlide 12Visualizing Economic GrowthMeasuring Business CyclesThe Business CycleU.S. Real GDP and Recessions, 1929—2009Looking Closely at How We Measure GDPSlide 18Slide 19Services as a Share of U.S. GDPIntermediate versus Final GoodsSlide 22Intermediate Steps in Cell Phone ProductionGeography and GDPTime and GDPLooking at GDP as Different Types of ExpendituresThe Pieces of GDP in 2010, Billions of DollarsConsumptionInvestmentGovernment PurchasesNet ExportsReal GDP: Adjusting GDP for Price ChangesU.S. Nominal and Real GDPU.S. Nominal GDP and Price Level, 2000–2010Finding Real GDPExampleGrowth RatesSlide 38Slide 39Shortcomings of GDPSlide 41Slide 42Slide 43Slide 44Alternative Measures of Economic Well-BeingConclusionSlide 47Practice What You KnowSlide 49Slide 50Slide 51Slide 52INTRODUCTION TO MACROECONOMICS AND GDP06Misconception•Misconception: –There is no reliable way to determine how well an entire economy is performing–Economists disagree whether our economy is good or bad, whether it is getting better or worse•However, there is an objective and reliable measure of macroeconomic performance—and this is the primary focus of this chapterThe Big Questions1. How is macroeconomics different from microeconomics?2. What does GDP tell us about the economy?3. How is GDP computed?4. What are some shortcomings of GDP data?Macroeconomics and GDP•Microeconomics–The study of the individual units that comprise the economy–A single household’s decisions—what job to take, how to spend income–A single firm’s decisions—output, pricingMacroeconomics and GDP•Macroeconomics–The study of economy-wide issues. Key word is “aggregate”–How many people have jobs? Are incomes rising or falling in general?Macroeconomics and GDP•Gross Domestic Product (GDP)–Total (gross) amount of everything produced within a specific economy–Gives us a measurement that we can use to analyze economic growth–Can compare regions or nations–Not perfectly straightforward, some qualities of life not easily captured by numbersProduction Equals Income•Output and income are essentially the same–Nations that produce a large amount of high-value output are relatively wealthy–Nations that don’t produce much high-value output are relatively poor–Idea: the output you produce is sold, and you receive income for what you sellDefining GDP•Gross Domestic Product–The market value of all final goods and services produced in a nation within a specific period of time–Functions as a “barometer” for the economy–Sum of output from all economic activity–Output becomes incomeOutput = GDP = IncomeThree uses of GDP Data•Why is GDP useful to examine?1. Estimate living standards across time and nations2. Measure economic growth3. Determine whether an economy is experiencing a short-run expansion or recessionMeasuring Living Standards•Total GDP–May not always be the best standard to compare countries–Does not adjust for population size of country•Per capita GDP–GDP per person (GDP divided by population)–Average living standards in a nationMeasuring Economic GrowthU.S. Per Capita Real GDPMeasuring Living StandardsVisualizing Economic Growth•Hans Rosling•Demonstrates economic growth across counties and over time–Many countries (like the U.S.) have become much richer and healthier–Other countries (like those in Sub-Saharan Africa) have remained poor and sickMeasuring Business Cycles•Business Cycle–Short-run fluctuations in economic activity that can cause output to be above or below the long-run trend•Parts of a business cycle–Expansion–Contraction–Peak–TroughThe Business CycleU.S. Real GDP and Recessions, 1929—2009Looking Closely at How We Measure GDP•Why does GDP count the “market value”?–We can’t just count quantities. Look at the year 2010.–United States produced 12 billion bushels of corn–United States produced 8 million cars–Just looking at quantity-produced numbers, corn seems more “important” to our GDP relative to carsLooking Closely at How We Measure GDPQuantity x Price =Market ValueCorn12 billion bushelsx $5 = $60 billionCars8 million vehiclesx $30,000 =$240 billion$300 billionLooking Closely at How We Measure GDP•Why does GDP include both goods AND services?–Goods•Tangibles•Food, clothing, cars, houses–Services•Intangibles•Health care, entertainment, advice, travel, banking–The composition of our industries and economy has greatly changed over the last 50 yearsServices as a Share of U.S. GDPIntermediate versusFinal Goods•Intermediate goods–Goods that firms repackage or bundle with other goods to be sold at a later stage•Milk sold to a coffee shop•Tires sold to a car manufacturerIntermediate versusFinal Goods•Final goods–Goods sold to the final users, or consumers•To get an accurate GDP estimate and avoid double counting–Finals goods are included in GDP–Intermediate goods are notIntermediate Steps in Cell Phone ProductionStepsValue added during stepPrices of completed steps1. Outer case and keyboard $ 5 $ 52. Internal hardware 10 153. Install operating system15 304. Connect to network 49 795. Retail sale 120 199Sum total $199 $338Geography and GDP•GDP counts goods “produced in a nation”–Could be produced by residents or foreigners–Examples:•Nissan plant in Mississippi - Counts to US GDP•Nike plant in Thailand – Counts to Thailand’s GDP•Gross National Product (GNP)–Counts goods produced by residents of a nation–Examples:•Nissan plant in Mississippi – Counts to Japan’s GNP•Nike plan in Thailand – Counts to US GNPTime and GDP•GDP only counts items produced “within a specific period of time”–Avoids double counting–Examples•Used textbooks or used cars (any second-hand item)•Purchases of existing homes–Closing costs and the agent fees count to GDP•Purchases of stocks and bonds–Brokerage fees count to GDPLooking at GDP as Different Types of Expenditures•The Bureau of Economic Analysis (BEA) is the U.S. government agency that tallies GDP data, a task is called national income accounting. GDP = C + I + G + NXConsumptionInvestmentGovernmentPurchasesNetExportsThe Pieces of GDP in 2010,