Zara Mahmood September 5 13 EC102 Lecture 1 Gross Domestic Product GDP About all firms and how all firms interact with all firms All consumers all firms all markets Characteristics of Macroeconomics The time frame o Long run vs short run Long run economic growth Short run Business cycle fluctuations ups downs of economy Aggregate demand Demand management government tries to boost stunt economy during hard good times o Monetary policies money related loans o Fiscal policies deficit o Making decisions based on what will happen in the future as well as Expectations the present Greater complexity o More complex math Highly empirical o Emphasis on data Policy driven o Solving problems in economy through policy Gross Domestic Product GDP country in a year GDP is the market value of all final goods and services produced within a o Sum of everything produced bought sold in goods and services o Taken for dollar value not quantities Market Value Need some sort of market transaction to count in GDP Not quantity but values Eg stay at home parent taking care not market Parent taking child to day care market Final Good service may go through many stages or steps before it is considered its final Final price embodies each intermediate stage of production and its value Use it to add in GDP Final good service a good or service purchased by a final user Intermediate good service A good or service that is an input into another good or service o Tire for a truck Zara Mahmood September 5 13 EC102 o GDP counts value of truck but not of tire so as not to double count tire value Annual Production Has to have been produces cannot be the transaction of something already created Service can count as a product arranging the sale of an already produced land Used goods don t count buying used house o Selling used items on Amazon Within Country Must have been produced within the borders of the country Overseas companies contribute to GDP of country they are in not ownership o Japanese automobile companies in America count as US GDP country Measuring GDP National Income Accounting calculated by the Bureau of Economic Analysis division of the Department of Commerce o Resulting product NIPA National Income and Product Accounts Components of GDP GDP is divided into four major categories of expenditure Consumption spending by households on goods on services not including spending on new houses o Durable nondurable goods and services med care Investment Spending by firms on new factories office buildings machinery and additions to inventory plus spending by households and firms on new houses o Business fixed residential investment and changes in business Government purchases Spending by federal state and local governments inventories on goods and services o Transfer payments are not included pension Net exports exports minus imports o Exports goods produced locally and sold abroad o Imports are greater than exports so net exports are negative The Expenditure Method Calculates GDP by adding up the value of expenditures on all final goods and services in the economy o Who does the consuming o Add exports of goods and services Produced in country should go towards GDP o Subtract imports of goods and services Should not count towards GDP Zara Mahmood September 5 13 EC102 An Important Identity Y C I G NX o Y GDP o C Consumption o I Investment Durable and nondurable goods House current year inventory machinery firms Stocks and bonds are not investments savings not in GDP o G Government purchases Not transfer payments to poor no transaction not in GDP Building schools hospitals teachers o NX Net Exports Value of everything we sell value of everything we buy Measuring GDP Using the Value Added Method GDP can also be calculated using the value added method Value Added The market value a firm adds to the product o Difference between value paid for a product and value product is sold o Eg cotton fabric 15 shirt sold 35 value added 20 Real GDP versus Nominal GDP Increases in GDP over years is not only because of increase in production Increase in GDP is partly due to increase in production partly due to increase in price o Need a way to isolate the prices changes from quantity changes Per Capita GDP Accounts for differing populations in countries o Per Capita GDP GDP Population 2012 GDP 15 7 T Population 314 M 2012 Per Capita GDP 15 7 T 314 M 50 000 Per capita GDP is average standard of living Potential GDP Potential GDP The level of real GDP attained when all firms are producing at capacity Potential GDP is an estimate of what GDP would have been if all factors of production eg labor and capital had been used at their normal rates o Cannot count it is an estimate o normal 8 hr day job but some might work only 4 hrs below potential o Benchmark of what economy could produce at normal rate Measure of economy s capacity to produce Zara Mahmood September 5 13 EC102 Nominal GDP Nominal GDP The value of final goods and services evaluated at current year prices Does not account for inflation whereas real GDP does Assume there are N goods produces in the economy 12Q1 2012 Nominal GDP P1 15 7T 12 P2 12 P3 12Q2 12Q3 12 PN 12QN 12 Real GDP Real GDP The value of final goods and services evaluated at base year prices Real GDP is the value of all goods and services measured at a constant price level o Picks a single year s price and use it as a base price Value output of other years using prices of base year Keeping prices constant know changes in real GDP are due to changes in quantity of goods and services Assume year 2005 as base 2012 Real GDP P1 13 6T 05Q1 12 P2 05Q2 12 P3 05Q3 12 PN 05QN 12 Notation for the Rest of the Course Y Real GDP P Price Level P x Y Nominal GDP