Econ Macro Notes 1 25 12 Three Main Topics throughout the course Output Y The total amount of goods and services produced by economy Unemployment Rate UR The percent of working age people who want a job who don t have Inflation Rate TT Growth Rate of price level Evidence from US Elections 1929 Stock Market Crash Result Great Depression Between 1929 and 1933 Y in U S decreased by 30 percent UR increased from 3 percent to 25 percent Prices Fall about 23 Percent Deflation 1932 Presidential Election Incumbent Hoover Franklin D Roosevelt Makes economy number one issue that he focuses on after he won the election 1973 Price of oil jumps after geopolitical turmoil in Middle East Result stagflation Recession Y decreases in 1974 and 75 in U S UR increases to 8 5 Percent by 1975 Inflation about 9 percent in 1974 1975 1976 Election Incumbent Ford loses to Jimmy Carter 1979 Re Run Geopolitical turmoil in Middle East triggers another big oil price 1980 Election Y deceases in 1980 UR increases to over 7 percent Inflation in 1980 increase Again Stagflation about 9 percent 1980 Election Carter Loses to Ronal Reagan if economy was good Reagan probably would of won the election In 1991 Following Gulf war President George H W Bush has approval ratings of 90 percent But Economy slips into Recession in 1991 Y decreases in 1991 Grows slowly jn 1992 UR increases over 7 percent in 1991 1992 inflation low 0 2 percent 1992 Election Bush loses to Bill Clinton Incumbent presidents running for reelection win if economy is in good shape lose otherwise Look at Y UR inflation Y Severe construction from December 2007 to June 2008 Largest decrease in Y Since Great Depression Y has grown now for 25 years but slowly Over last four quarters Ending in sep 1011 Y Growth 1 5 Percent Below long run average Y Growth Rate UR 5 Percent in December 2007 rose to 10 1 percent by Oct 2009 Since then fallen to 8 5 Percent Inflation Under control 3 percent in 2011 Core Inflation 2 2 percent Obama is in big trouble Incumbent presidents running for reelection win if economy is in good shape loose otherwise Nominal Gross Domestic Product NGDP Total value at current market prices of all final goods and services produced domestically this period What about 2012 Output How is it measured Example Suppose in 2011 Quantity 20 100 Price 30 2 Guns Butter NGDP 2011 30 x20 2 x100 800 Market value of guns Market value of butter January 30 2012 Nominal GDP Market value at current prices of all final goods and services produced domestically this period Problem Set 1 due Monday GDP includes Only new goods and services not used if I buy a new house that was built this year 20 year old house only includes realtors commissions why not Avoid double counting Only domestic output is included not foreign Imports M excluded or deducted from U S NGDP A BMW dealership in Bethesda that buys a car from Germany for the equivalent of 20 000 Suppose the dealership resells car to me for 30 000 US GDP would rise by 30 000 20 000 10 000 The parts made in foreign countries do not get included I go to France and buy a bottle of wine for 10 000 of wine Excluded from US GDP Only final goods and services are included in GDP Exclude transactions known as intermediate transactions Final good or service is sold to its ultimate user where as an intermediate transaction means that the good or service is used up as an input to another good or service Reason to avoid double counting as well Farmer buys seed corn for 1 000 grows corn sells to Stokely for 10 000 Stokely sells frozen corn to Safeway for 20 000 Safeway sells to households 30 000 Last transaction would be considered final GDP increases 30 000 Other intermediate not affect GDP VALUE OF CORN IS REFLECTED IN FINAL SALE PRICE AT SAFEWAY DON T WANT TO DOUBLE COUNT Equivalent way of measuring GDP is to count all transactions but to include only the value added at each step where the value added to the sales price minus the price of intermediate inputs In general GDP Sum of value added of every step along the value chain Categories of Final Goods and Services 1 Consumption c most household spending 2 Investment I refers to purchase of tangible physical capital assets Business structure business equipment business inventories residential housing DOES NOT INCLUDE PURCHASES OF PAPER ASSETS OF STOCKS AND BONDS Investment vs intermediate investment is included in GDP while intermediate is not included in GDP Investment is durable capital asset will help company produce for many years Example GM buys conveyor belt for assembly line Intermediate used up quickly in and input in making another product Example GM buys tires and puts on the cars 3 Government G government purchases of goods and services federal state local Examples school construction salary of policemen teachers bureaucrats president defense spending DOES NOT INCLUDE TRANSFER PAYMENTS FROM GOVERNMENT TO SOME GROUP OF CITIZENS Transfer payments social security TANF welfare unemployment insurance and interest on nation debt 4 Exports x all exports include in GDP regardless of the type of transaction National Income Accounting Identity Y GDP C I G 5554 Need to subtract the value of imports from GDP because some of domestic spending on C I or G falls on these imports Earlier example BMW Dealership If I buy the car for 30 000 C increases by 30 000 However car imported for 20 000 M increases by 20 000 Thus GDP increases by 30K 20K 10K If I buy a bottle of French Wine C increases by 10K M increases by 10K Y is unchanged How important are different components of final demand Consumption 70 of GDP Investment 15 of GDP much more volatile than C Government 20 of GDP NX 5 of GDP Nominal versus Real GDP Example 2011 Q P Guns 30 20 Butter 2 100 Example 2012 Q P Guns 33 19 Butter 2 20 95 NGDP 800 in 2011 NGDP 836 in 2012 What is the growth rate of Nominal GDP 836 800 800 x100 4 5 According to NGDP the economy made more output in 2012 than in 2011 Because of inflation changes in NGDP reflect both changes in prices and quantities If price is changing due to inflation or deflation then changes in NGDP will be misleading as indicated of changes in the economy s real output Solution real gross domestic product corrects NGDP for inflation Rule of thumb gRGDP gNGDP inflation rate Example Inflation rate in the economy is roughly 10 for both guns and butter and so the gRGDP is going to be 4 5 10 inflation and you get 5 5 February 1 2012 Changes in NGDP reflect changes in both prices
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