Macroeconomics Gross Domestic Product GDP is the market value of all final goods and services produced within a country s borders in a year GDP per capita is GDP divided by the country s population Fundamental idea sum up price times quantity for all goods and services GDP Papples X Qapples Pcomputers X Qcomputers Why price Values goods at their marginal social cost Two problems How do we add apples gasoline water computers and houses together How do we determine the value of a gallon of gas relative to the value of a laptop Solution Use market priecs Intermediate good those sold to firms and then bundled or processed with other goods or services for sale at a later stage Final good finished goods sold to final users and then consumed or held in personal inventories Count only final production This avoids double countin Goods are tangible houses cars computers apples paper Services are intangible haircuts tour guides financial advice teaching GDP counts production of new goods Sales of used goods are not included Sales of financial assets are not included Sales of financial services are included GDP counts production within national borders Japanese firms producing goods in Tennessee counts toward US GDP US firms producing goods in Japan counts towards Japan s GDP Gross National Product counts goods and services produced by national citizens no matter where they live GDP is a flow It is not wealth which is the value of a nation s assets at a point in time In practice we measure GDP four times per year The growth rate of GDP tells us how quickly GDP is rising or falling over time Formula GDP growth rate in 2005 GDP2005 GDP2004 GDP2004 X 100 May wish to consider GDP growth per capita This adjusts for population size and population growth If GDP growth is 4 5 and pop growth is 1 then GDP growth per capita is 4 5 1 3 5 Might want to take into account inflataion When looking at GDP most growth occurred in the prior year Nominal GDP measures output at current year prices Real GDP measures output using constant year prices say 1990 or 2005 prices want to measure change in quantities not prices quantity growth represents real change in standard of living price growth doesn t Mechanics compute GDP as normal p q but use same prices in each year We can split apart nominal GDP into two pieces a price component and a real component N P Y N Nominal GDP P index of prices Y is real GDP Nominal GDP growth over the past 30 years about 5 per year Price growth about 2 2 per year Population growth about 1 per year Real GDP growth per capita about 1 8 per year For now fcus on the real component Later we ll have lots to say about the price component Grgdp Gngdp Gprice n We can break GDP real or nominal into components of expenditure Y C I G Ex IM Consumption of households Investment by firms Government consumption and investment Imports of goods and services from abroad Exports of goods and services to other countries Works for both nominal and real GDP Nondurable goods things lasting less than a year food clothes Durable goods consumption goods lasting more than a year cars fridge Investment Nonresidential Residential Change in inventories Government Spending Federal defense spending Federal nondefense spending State and local spending Does not include transfers like social security unemployment insurance We can count GDP in a different way Fundamental idea all spending is also income So we can count all production by counting up all income Math GDP Wages Rent Interest payments Profits Real GDP per capita measures real income per person Economists often use real GDP per capita as a measure of national welfare It measures the real production available to the average person in a nation GDP values goods at market prices GDP doesn t count non market activity GDP doesn t count leisure GDP doesn t count bads properly pollution environmental concerns GDP pays no attention to the distribution of income GDP doesn t count health or education REVIEW Nominal GDP real GDP GDP growth inflation Greal Gnominal Gprice n Y C I G Ex Im Y WL RK D Real GDP per capta Wages o Wage ratio rises when high skill wages rise faster than low skill wages o Ratios decline otherwise o 150 means skilled wages are 50 higher than unskilled o Clear upward trend grater return to education since 1973 o Even more gains after 1995 about 175 Reasons Why Widening Income Inequality o Trade globalization explanation o Technology skills explanation o Policy explanation o Demographic explanation o Role of labor unions Worldwide trade in goods has expanded rapidly since the 1970s Lots of competition for low skill medium wage production processes Increased US demand for foreign manufacturing Unemployment Official unemployment rate U3 Broad unemployment rate U6 Payroll Employment a number change in payrolls o Change in payrolls is reported in thousands of jobs Wages tend to be high for jobs where o The job requires specialized skills o There is a high demand for the services the job fulfills o The job is unpleasant o There are few people willing to do the job o all of these explainable with supply and demand Labor demand o Falls when the real wage falls o Rises when GDP rises falls when GDP falls o Rises on productivity increases o Fundamentally a marginal product of labor schedule o Marginal Willingness to hire Labor supply o Rises when the real wage rises o Is relatively low for jobs that are unpleasant Economic growth in U S has been about 3 2 per capita