ECON 104 Notes- What is GDP?- We need to understand GDP and inflation. - ex : real per capita GDP o U.S.: $50,700o Australia: $43,300o China: $9,300o Haiti $1,300 -- Terms to know:o Capital Definition-manufactured goods owned by firms to produce other goods and services Ex: hammero 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 homeo Intermediate good  Definition: an intermediate good is used up or transformed in the production process - Ex: flour to bread, wood to houseo Final good Definition: is a good purchased by the final user- Ex: bread- Ex: House- Boeing 787- Ammunition for the war in Afghanistano How many of the following things would be counted as an investment  United Airlines buys a new Boeing 787 Me buying a new house A ski store stocking up for wintero 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 – TRUEo 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 spendingo GDP by purchases (flip side of production) Consumption (C): purchases by households Investment (I) : as before  Government purchases (G) Smaller than govt. “expenditures” Govt. Expenditures= purchases + transfers + interest payments(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 mucho 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 GDPo 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 stocko US savings bondo Capital owned by Boeingo Investment by Ford in a factoryo Funds in a checking accounto 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 yearo Same dollar value for purchaseso 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 GDPo Puzzle: in the 2001 recession, GDP rose by $190 billion. How can this be? Shouldn’t GDP fall in a recessiono 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 GDPo When valuing production or purchases, nominal GDP uses prices fromthe year in questiono Ex: nominal GDP in 2013 uses 2013 priceso Real GDP uses prices from a given “base year” prices, as does real GDPfrom 1997o 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 REDo 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 decreaseo 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 Trilliono Most severe downturn since the great depression of the 1930s (33%down)o This generated a large rise in the unemployment rate to 10% ( now 6.7%)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 budgeto The Federal Reserve i.e. the “Fed” Cut interest rates to stimulate Consumption and Investment – “monetary policy” Aided the financial systemo Together, generally thought to have kept us from something much worseo 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)