Slide 1Questions of the YearSlide 3Slide 4GDP OVERVIEW2013 Current Gross Domestic Product20 Largest Economies, 1961GDP: WHAT DOES IT MEAN?GDP: WHAT DOES IT MEAN?GDP: WHAT DOES IT MEAN?GDP: WHAT DOES IT MEAN?GDP: WHAT DOES IT MEAN?CALCULATING GDPExpenditure ApproachGDP Components: C, I, G, NXGDP Components: Consumption (C)GDP Components: Investment (I)GDP Components: Government (G)GDP Components: Net Exports (NX)Slide 20Components of U.S. Nominal GDP 2013GDP Expenditure Components, 2009Calculating GDP using expenditure approachMEASURING GDPNominal vs. Real GDPCalculating GDP: ExampleCalculating GDP: Nominal GDPCalculating GDP: Real GDP (2007=base)Calculating GDP: ObservationsBIG IDEA IN ECONOMICSCalculating GDP: The GDP chain price indexGDP Chain index: Calculation and InterpretationGDP Chain Price Index: Annual InflationGDP Chain price index: ObservationsINCOME AND EXPENDITUREPractice – GDP ComponentsKey Terms and IdeasMACROECONOMICSModeling things in the aggregate1Questions of the Year•What do we mean by ‘The Economy?’•How do we try to measure its overall health•How can we measure the value generated of an entire economy?•What does the labor market look like?•What should the unemployment rate be?•Is inflation around the corner?•Does a small amount of inflation even matter?•What are stimulus plans and why do we need them?•Is there a best way to stimulate the economy?•What is money and how can it affect an economy?•Why is economic growth to crucial and how do we achieve it?•Macroeconomics can be controversial, and unfortunately there is often no consensus between economists for answers2‘THE ECONOMY’WHAT IS IT AND HOW DOES IT WORK?The Economy I: Gross Domestic ProductThe Economy II: Business cycles and UnemploymentThe Economy III: Inflation and the Cost of LivingThe Economy IV: Modeling The Economy3THE ECONOMY I:GROSS DOMESTIC PRODUCT (GDP)Measuring a Nation’s Total Output, Income, and Standard of Living All at Once!4GDP OVERVIEW•Is it possible to measure the total value of everything a country produces each year?•How would you even begin to do that?•The U.S. produced a total of almost $17,000,000,000,000 in 2013, the most of any country•What does that number represent?•How is it calculated?•Today, GDP is THE most closely watched macroeconomic variable in the world•Policymakers and others track it to gauge the overall ‘heath’ of an economy52013 Current Gross Domestic Product BrazilItalyRussian FedIndiaMexicoLuxembourg$0$2,000$4,000$6,000$8,000$10,000$12,000$14,000$16,000$18,0006Source: World Bank; World Development Indicators; numbers in billions$16.8 Trillion$60 BillionTop 10 World’s Largest Economies plus Mexico and Luxembourg20 Largest Economies, 1961U.S.UKFranceJapanChinaItalyCanadaIndiaAustraliaSwedenBrazilMexicoSpainNetherlandsBelgiumSwitzerlandVenezuelaTurkeyS. AfricaAustria$0$100$200$300$400$500$6001961 GDP7Source: World Bank, World Development Indicators; Numbers in billions, nominalGDP: WHAT DOES IT MEAN?GDP: Gross Domestic ProductMarket Value •GDP is measured in •It is the •not 100 cars and 50 haircuts, but rather the price of 100 cars and 50 haircuts•Goods that don’t have a market value (cleaning your own house) aren’t 8GDP: WHAT DOES IT MEAN?GDP: Gross Domestic ProductThe market value of all final goods and services produced within a country during a given time periodFinal•GDP does not count everything produced, but only •When Ford buys a car battery from Die Hard, this is •When you buy a Die Hard battery from Sears, •Intermediate Goods: goods 9GDP: WHAT DOES IT MEAN?GDP: Gross Domestic ProductThe market value of all final goods and services produced within a country during a given time periodGoods and Services •GDP includes tangible •Shoes, •GDP also includes •haircuts,10GDP: WHAT DOES IT MEAN?GDP: Gross Domestic ProductThe market value of all final goods and services produced within a country during a given time periodWithin a country•GDP includes only goods and services produced• Cars produced from a Honda plant in Indiana •Cars produced from a Ford plant in Tokyo 11GDP: WHAT DOES IT MEAN?GDP: Gross Domestic ProductThe market value of all final goods and services produced within a country during a given time periodDuring some time period•GDP includes only those goods and services •Only counts new goods and services•Purchase of a new car •Purchase of a “certified previously owned vehicle” •Measured quarterly (every 3 months) and yearly 12CALCULATING GDPHow do we measure the value of output exactly?•GDP is measured/calculated by the Bureau of Economic Analysis under the Department of Commerce (www.bea.gov) •calculated and reported on a quarterly and yearly basisIt is measured in several different ways1. Value-added approach2. Expenditure approach3. Sum of factor payments approach13Expenditure ApproachExpenditure Approach: calculating GDP by •The Expenditure approach works by simply adding up how much is spent on U.S. produced goods•Theory: if the world spent $16 trillion on new U.S. goods and serviced, then Who buys our stuff?• 14GDP Components: C, I, G, NXC: I: Investment (spending by US firms)G: NX: Net Exports (spending by foreign buyers)Adding up all components yields GDP (given as Y):15GDP = Y = GDP = Y = GDP = Y = GDP = Y = orGDP Components: Consumption (C)C: Consumption SpendingIncludes spending by US households on all new goods and services, regardless where the good is produced 1. Durables: goods that typically last longer than 2. Non-durables: goods that typically last less than 3. Services•This is the largest component of GDP •About two-thirds - meaning about 2/3 of all final goods and services produced in US are purchased by US households16GDP Components: Investment (I)I: Investment in economics means purchasing a good that will provide services/benefits in the future (most often entails borrowing)1. Fixed business capital: New capital and equipment2. Residential: New housing and apartment3. Change in inventories: unsold items•This is the most volatile of the components17Note: Investment, in economics,GDP Components: Government (G)G: Includes spending by •Goods: computers, desks, fighter planes, etc.•Services: salaries of government workers (since the government is buying their service)•Pres. Obama’s salary of $400,000 counts towards US GDP in G•Not included: transfer payments –