ECONOMICS KEY MACRO VARIABLES 1 GROSS DOMESTIC PRODUCT GDP GDP is the most fundamental macro economic concept GDP is measured every quar ter and it is closely monitored by different financial markets GDP IS THE BEST SNAP SHOT FOR US TO SEE HOW THE OVERAL ECONOMY IS FUNCTIONING GDP is the market value of all final goods and services pro Definition duced within a country in a given year Key terms Market Value Final AMPLE Goods must be bought and sold in a market anything done in a household thats not part of a market transaction is not counted e g homeschooling Controversial Devalues the work done by women cooking cleaning etc However it would be impractical to try and value what people do in their own home e g child raising We are dependent on what is happening in the market to tell us about GDP Lots of composition goes into the final product e g A loaf of bread BREAD EX Cost of wheat to miller 0 50 Cost of flour to baker 1 50 Cost of loaf to retailer 2 00 Price of bread on the shelf to the consumer 2 50 Total 6 50 However what we count as going towards GDP is the last time that the loaf of bread is transacted So in this example GDP only goes up by 2 50 the final price the bread was sold for because this is the final transaction In a given year The good has to be produced in the year that its bought E g If you buy a new car in 2010 then than that money counts towards 2010 s GDP VS If you buy a used car in 2010 that was produced in 2006 that transaction counts towards the GDP for 2006 when the car was produced and originally bought Produced Used goods don t count Must be made produced not bought Excludes shares and stocks Financial assets don t count or land The land wasn t produced and therefore does not count however if you build a house on that land it counts towards that years GDP because it is being produced made Within a country Disregards international businesses that are in the USA Immigrants contribute to the USA GDP because the goods they produce are produced within the USA E g Toyota set up a plant in Alabama even though they are a japanese company their production was done in the USA so this will contribute to the USA s GDP not Japans Measurement METHOD ONE THE EXPENDITURE METHOD Who is the information collected by The information is collected through a process called National Income Account This is done by a section of the Dept of Commerce called the Bureau of Eco ing nomic Analysis This Bureau then issues the National Income of Product Accounts NIPA All economically developed countries collect their information in the same way as the USA How is it collected How is GDP measured Through the Expenditure Method This calculates GDP by adding up the value of expenditures on all final goods and services in the economy The US Nominal GDP and components 2008 and 2009 slide 22 slideshow sept 8th This table was calculated using the Expenditure Method Table shows that GDP declined from 2008 to 2009 this shows that there was a reces sion because in a recession GDP declines Components of GDP Who s spending Consumers Measured in personal consumption expenditures see slide 22 sept 8th 1 Nondurable goods Beer food etc Things that don t last 2 Durable goods Computers TV s etc Things that last for a while 3 Services Daycare spa s etc Consumer consumption is over 70 of total spending in the economy Businesses Measured as gross private domestic investment see slide 22 sept 8th 1 On a consumer level investment is referred to as buying stocks or bonds or when a family buys a house this is an investment VS 2 Economist definition of business investment When a business buys stuff to make more stuff Another aspect of investment for businesses is Inventory When business keep things in stock In 2009 businesses took more stuff out of their inventories and didn t replace it slide 22 sept 8th inventories de creased by 265 52 Why is this The markets slowed down in 2009 recession so businesses aren t producing as much This is because businesses don t want to produce more goods in case they are not bought Instead they use a less risk strategy by using inven tory they already have produced INVENTORY IS THE MOST VOLATILE COMPONENT IN THE ECONOMY NOTE When consumers buy stuff Consumption When businesses buy stuff Investment Government Measured as government purchases see slide 22 sept 8th Refers to the federal govt and state and local govts 1 National Defense Army marines etc 2 Non Defense 3 State and Local It can be seen that state and local govt spending is more than the federal govts spending this is because if you add the spendings of all states and local govts you are going to get a huge amount This is because they are the ones that purchase the most services E g they are the ones who pay the policeman pay for the libraries etc 4 Federal Smaller purchases then local and state govts Although federal spend ing increased in 2009 because of the many stimulus packages NOTE Social security payments unemployment checks food stamps disability payments etc are not federal govt purchases because it is a Transfer payment This means that the govt takes money from one person through their tax pay ments and gives it to another person in the form of a social security payment etc Measures as net exports of goods and services see slide 22 People abroad sept 8th 1 The US exports alot of things in the form of entertainment E g if a spanish TV channel buys the right to broadcast American Idol 2 Alot of things consumers and businesses use are not produced in the USA and therefore they are imported If the USA s imports were included in the GDP cal culation then it would give us a skewed snapshot Therefore in the Net Exports Section we subtract the imports Exports Imports Net exports of goods and services IMPORTANT IDENTITY Fundamental equation in all of Macro Economics Y C I G NX Y GDP subtotal of everything produced in the economy C Consumption consumer consumption expenditures I Investment Investment spending by businesses G Government purchases NX Net Exports Exports Imports All of these are seen in the table on slide 22 sept 8th in relation to The Expenditure Method value of total output aggregate expenditure Question What about goods produced in a certain year but then sold in a differ ent year are they included in this identity Answer These types of situations have to do with INVENTORY INVESTMENT Example If Ford produces a car in 2008 bur the car isn t sold until 2009 the cost of the car is 20 000 In this