Topic 3 Economic Statistics Agenda Recap what we ve done so far What are we trying to do What exactly GDP is and why it s useful How do we calculate GDP NGDP vs RGDP How to account for price changes Unemployment Policy and Unemployment Last Topic Flow Diagrams and AD AS equilibrium Mapped out the economy Agents and Markets Turned output market into a supply demand graph AD and AS curves determine two types of equilibrium short run quantity long run quantity implies economy is stable which is good Overview GDP How to calculate GDP NGDP vs RGDP Unemploy ment Policy and Unemploy ment Suppose someone asks How much economic activity was there in the US in 2011 What does this mean One option Short run equilibrium Recall SR equilibrium GDP sort of Overview GDP How to calculate GDP NGDP vs RGDP Unemploy ment Policy and Unemploy ment How will GDP measure the quantity Overview GDP How to calculate GDP NGDP vs RGDP Unemploy ment Policy and Unemploy ment Back to the Farm Example Suppose two farms produce Apples Oranges Farm 1 1 2 Farm 2 2 1 Which farm produced more value to society from Year 1 to Year 2 Depends on the value of apples vs the value of oranges Overview GDP How to calculate GDP NGDP vs RGDP Unemploy ment Policy and Unemploy ment Market Value using prices is how we measure value Price reflects Cost to make the good supply How much people like the good demand If apples cost 2 and oranges cost 3 which farm produced more value Note price is not a perfect measure of value but it s the best we ve got Overview GDP How to calculate GDP NGDP vs RGDP Unemploy ment Policy and Unemploy ment Definition of GDP Gross Domestic Product GDP The market value of final goods and services produced within the borders of a given country within a given period of time GDP extends the farm calculation to every good in the economy Overview GDP How to calculate GDP NGDP vs RGDP Unemploy ment Policy and Unemploy ment Definition of GDP let s break it down Gross Domestic Product GDP The market value of final goods and services produced within the borders of a given country within a given period of time 2008 USA GDP the value of final goods and services produced in USA in 2008 even if produced by foreigners Overview GDP How to calculate GDP NGDP vs RGDP Unemploy ment Policy and Unemploy ment Definition of GDP let s break it down Gross Domestic Product GDP The market value of final goods and services produced within the borders of a given country within a given period of time 2008 USA GDP are goods produced by a BMW factory in California in 2009 included Overview GDP How to calculate GDP NGDP vs RGDP Unemploy ment Policy and Unemploy ment Definition of GDP let s break it down Gross Domestic Product GDP The market value of final goods and services produced within the borders of a given country within a given period of time Market value The revenue firms receive from selling their products at the price the buyer and seller agree on Overview GDP How to calculate GDP NGDP vs RGDP Unemploy ment Policy and Unemploy ment Definition of GDP let s break it down Gross Domestic Product GDP The market value of final goods and services produced within the borders of a given country within a given period of time Market value Does Ford s inventory of 2012 model Fusion s count towards GDP Overview GDP How to calculate GDP NGDP vs RGDP Unemploy ment Policy and Unemploy ment Definition of GDP let s break it down Gross Domestic Product GDP The market value of final goods and services produced within the borders of a given country within a given period of time Intermediate good A good that s used entirely to produce another good Final good Any good that s not an intermediate good Overview GDP How to calculate GDP NGDP vs RGDP Unemploy ment Policy and Unemploy ment Definition of GDP let s break it down Gross Domestic Product GDP The market value of final goods and services produced within the borders of a given country within a given period of time Example Flour and Pizza Only count the pizza No double counting Overview GDP How to calculate GDP NGDP vs RGDP Unemploy ment Policy and Unemploy ment A more intuitive interpretation GDP The total money spent in the economy In equilibrium total money spent Overview GDP How to calculate it NGDP vs RGDP Unemploy ment Policy and Unemploy ment To include or not Item Include Informal Production Home Production Land Used Goods Overview GDP How to calculate GDP NGDP vs RGDP Unemploy ment Policy and Unemploy ment Reason Let s test your understanding Which of the following would be included in Japan s 2009 GDP Item Include In 2009 sale of Starbucks coffee in Tokyo In 2009 purchase of land to build a house In 2009 sale of a handgun by organized crime In 2009 salary of a waiter at a restaurant In 2010 sale of Starbucks coffee in Osaka Overview GDP How to calculate GDP NGDP vs RGDP Unemploy ment Policy and Unemploy ment Reason How do we calculate GDP How does our flow diagram help us break GDP into smaller components Overview GDP How to calculate GDP NGDP vs RGDP Unemploy ment Policy and Unemploy ment How do we calculate GDP The market value of final goods and services produced within the borders of a given country within a given period of time Let s see if our flow diagram helps Focus on the arrows pointing to and from the Output Market Overview GDP How to calculate GDP NGDP vs RGDP Unemploy ment Policy and Unemploy ment Complete Flow Diagram without lables Government Consumers Output Market Factor Market Firms Rest of the World Overview GDP How to calculate GDP NGDP vs RGDP Unemploy ment Policy and Unemploy ment Financial Market Option 1 GDP Revenue If we add up all the revenue from final goods and services earned in a given country in a given period of time that s GDP So GDP Y Revenue R Overview GDP How to calculate GDP NGDP vs RGDP Unemploy ment Policy and Unemploy ment Option 2 Spending The money that flows into the Output Market spending the money that flows out of it Revenue Another way of saying this is AD AS So GDP Y Consumption C Gov t Spending G Investment I Exports X Imports M Overview GDP How to calculate GDP NGDP vs RGDP Unemploy ment Policy and Unemploy ment Let s review the abbreviations Overview Therefore we have Y GDP R Revenue C Consumption G Gov t Spending I Investment X Exports M Imports NX Net Exports GDP How to calculate GDP NGDP vs RGDP Unemploy ment Y R Y C G I X M C G I NX Policy and Unemploy ment Let s see what this looks like for the USA Data from the Bureau of Economic
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