ECON 104 Notes What is GDP We need to understand GDP and inflation ex real per capita GDP o U S 50 700 o Australia 43 300 o China 9 300 o Haiti 1 300 Terms to know o Capital Definition manufactured goods owned by firms to produce other goods and services Ex hammer o Investment Definition the purchase of capital goods or addition of inventories goods to be used or sold later by a business or the purchase of a new house or apt Clicker question How many types of investment would a household be likely to make 1 just the purchase of a new home o Intermediate good Definition an intermediate good is used up or transformed in the production process Ex flour to bread wood to house o Final good Definition is a good purchased by the final user Ex bread Ex House Boeing 787 Ammunition for the war in Afghanistan United Airlines buys a new Boeing 787 Me buying a new house A ski store stocking up for winter o How many of the following things would be counted as an investment o One difference between a capital good and an intermediate good is used up or transformed in the production process and a capital good is not TRUE o GDP by production When measured by production GDP for a nation s economy Is the market value of all final goods and services produced domestically in that year How many of the following things would be included in GDP when measured by production SpaceX produces a rocket for NASA iTunes song sold online toa boy in IRAQ NX me getting my haircut consumption service machine made for Boeing to manufacture jetliners capital good made for investment spending o GDP by purchases flip side of production Consumption C purchases by households Investment I as before Government purchases G Govt Expenditures purchases transfers interest payments Smaller than govt expenditures on its debt Net Exports NX exports imports Shares of total GDP in the U S BEA C 69 I 16 G 19 NX 3 GDP C I G NX 16 9 Trillion dollars nominal o GDP by income measure well being Do you think that when you measure all products you get the same value as when measure all purchases Yes because If someone buys a drink at McDonalds for 2 the value of money is going both ways equally Inventory still counts as spending because it is connected to investment therefore inventory does not make the value different Also if you measure all income its dollar value equals all spending and all production GDP example Real capita GDP US 50 700 Australia 43 000 China 9 300 Haiti 1 300 Measure GDP in 3 ways Measure Wellbeing Question in 2010 Avg Hours worked year GDP per person Germany 1 436 38 300 US 1804 46 600 How well does GDP per person tell you which country is better off Not much o GDP and money Def money is an asset that does each of Medium or exchange purchases A store of value A unit of account Standard of deferred payment payback in dollars M1 cash checkable deposits means of purchases M2 M1 savings account things that you can transform into M1 Question Every time a dollar is used to make a purchase in a country this will show up in GDP o NO because of intermediate goods underground markets used goods foreign goods How many of the following things would be money in the US o Corporate stock o US savings bond o Capital owned by Boeing o Investment by Ford in a factory o Funds in a checking account o US currency cash Are credit Cards money No Question You ve heard of GDP but what are the specifics Answer When measured by production GDP for a nation s economy is the market value of all final goods and services produced domestically in that year o Same dollar value for purchases o Same dollar value for income In capita per person terms it roughly measures well being Ex US 50 700 China 9 300 US in 1935 Haiti 1 300 US in 1800 Calculating and understanding REAL GDP o Puzzle in the 2001 recession GDP rose by 190 billion How can this be Shouldn t GDP fall in a recession o Say just two things are produced doctor visits and cars 2012 100M visits 50 each 10M cars 20 000 2013 103M visits 53 each 11M cars 20 500 Base year 2012 What would Real GDP in 2013 would be 103M x 50 11M x 20 000 use those from base year What would nominal GDP in 2013 be 103M x 53 11M x 20 500 for nominal take all quantities and prices from the actual year Real vs nominal GDP o When valuing production or purchases nominal GDP uses prices from the year in question o Ex nominal GDP in 2013 uses 2013 prices o Real GDP uses prices from a given base year prices as does real GDP from 1997 o Real GDP chart There was inflation over this period that is the prices of all goods rose which is real GDP Red or blue line BLUE LINE IS REAL GDP NOMINAL IS RED o Question In a recession production declines Also the US almost always has inflation With this in mind which is most likely to fall in a recession REAL or NOMINAL It is real because measuring GDP on quantity of goods and the prices would stay the same resulting in showing a decrease o Question In 2013 III real GDP was 15 8 Trillion and in 2012 it was 15 5 trillion What was the annual economic growth the percentage change in real GDP over this period 15 8 15 5 15 5 1 9 o Behavior of real GDP Great Recessions 2007 2009 o Real GDP fell about 6 Trillion o Most severe downturn since the great depression of the 1930s 33 down 6 7 o This generated a large rise in the unemployment rate to 10 now o To deal with it the federal govt Increased expenditures so G and transfer ex social security increases Cut taxes to cushion fall in Consumption and investment These are fiscal policy changes in the federal budget o The Federal Reserve i e the Fed Cut interest rates to stimulate Consumption and Investment monetary policy Aided the financial system o Together generally thought to have kept us from something much worse o Question In the 2001 recession GDP rose bu 190 billion How can this be Shouldn t the GDP fall in a recession Nominal GDP prices rose more than the number of goods produced fell Real GDP fell by 40 billion prices held constant Ex Great Recession Fiscal and Monetary Policy o Conducted by the US Federal Reserve US central bank o Charted by Congress o Most key positions appointed by the President and confirmed b the Senate Monetary policy o Chairman Ben Barnanke on 2 1 14 Janet Yellen o Congressional mandate to the Fed promote effectively the goals of maximum employment stable prices and moderate long term interest rates 2 …