Econ 104Section 1- Why are some countries rich and some poor?- Per capita = per person- US capita = $50,700, China $9,300- Capital – manufactured goods used to produce others goods and serviceso Ex- hammer to build - Investment – the purchase of capital goods by a business or person o Purchase of a new house- Question- How many types of investments would a household make?o Answer – 1 -> purchase of a new house- Households DON’T own capital except for new houses- business buy capital to make products- Intermediate good- is used up or transformed into the producto Ex. Flour to breado Wood to house- Final good- final product bought by consumer- GDP = Price X Quantity- One difference between a capital good and an intermediate good is that an intermediate good is used up in production process while capital good is not- Consumption – purchase by households- Government – smaller than government expenditures - Export – net exports = exports – imports- Investments – purchase of capital good- GDP = C + I + G + NXo Consumption + investment + government spending + net exports - Money o Is an asset that does Medium of exchange – used to make a purchase A store of value  A unit of account Standard of deferred payment- Payable in terms of money agree to make a payment with ito Money 1 = cash + Checking deposits = $2.6 tril Checking deposits = something you can write a check witho Money 2 = money 1 + savings account = $10.8 tril Cannot make a direct payment with savings accounto Question- is every dollar made for a purchase counted in GDP? Answer – No, example underground market and/or used goods o Question - How many of the following would be money in the US? Corporate stock US Savings Bond Capital owned by Boeing Funds in a checking account US currency- Answer – the last two - Different methods of calculating GDPo Production Final  Value added (text)o Income  A dollar spent on production is purchases and it generates income for someone Thus different methods lead to the same valueo Gross Domestic Income (GDI) $16.6 trillion Compensation to employees = 53%- Healthcare/ other benefits- Salary- Bonus Corporate profits = 10% Small business profits = 8% Rent 4% Net interests = 4%- Spread between interest giving and interest taken on loans Other = 21%Calculating and understand Real GDP - Nominal GDPo When valuing production, it uses prices from the year in question.  Uses the value for that year. Ex.. Nominal GDP in 2013 uses 2013 prices Current dollar GDP- Real GDPo Uses base year. Value of products from a previous year. For 2013 we use base year in 2009o Sometime called constant dollar or chained GDP- Which is more accurate?o Depends on what your looking for.o Use real GDP to measure of what the economy is doingo Nominal GDP to measure the current valueo Real GDP takes out the inflation- Question: In a recession, production declines. Also, the US almost always has inflation. With these in mind, which is most likely to fall in a recession. o A- Real GDPo B-Nominal GDPo Answer: A –real gdp Gdp can rise because of inflation. Production may fall by a few percent however the inflation will be greater causing a nominalincrease. - Real GDP is most often used to track the economy, it was $15.6 trillion in 2013 II.- Real GDP & the Great Recession (2007-2009)o Real gdp fell about $.6 Trillion – Down 4.2 %o The great depression in the 1930s fell by 33%o This generated a large rise in the unemployment rate %10. Current is 7.3%o The government increased expenditures and transfer payments (example is social security)o Tax cuts to cushion falls in consumption and investment spendingo These are fiscal policy changes in the federal budgeto The Federal Reserve AKA the FED Cut interest rates to stimulate consumption and investment (monetary policy)  Aided the financial system Generally the feds are considered to have kept US from worse- Fiscal & Monetary Policyo Question- how does the government try to influence the economy in the short run? (Few years) Answer – With monetary and fiscal policy - The influence the C, I, and G, of GDPo Monetary Policy Conducted by the US reserve - Charted by congress- Most key positions appointed by the president and confirmed by the senate- Chairman: Ben Bernanke Congressional Mandate- “Promote effectively the goals of maximum employment, stable prices (2% inflation per year) and moderate long term interest rates” The US , usually carried out by changes in the Federal Fund Rate- Rate banks charge each other for loanso Huge impact on other rates With the great recession in 2007-09 the Fed also manipulated long term interest rates with quantitative easing,- Lower interest rates on student loans and mortgages Question- If interest rates fall what will likely happen to GDP- A. Fall B. Stay the same C. Riseo Fiscal Policy Changes in federal expenditures and taxes Controlled by the president and congress Question: IF taxes rates fall what will happen to gdp - A. Fall B. Stay the same C. Rise - Government budget deficit = Federal expenditures minus federal taxes- 2013- $642 bil.= $3,455 bil. - $2813o 4% = 21.5% - 17.5%- The difference is borrowed by the US Treasury by selling US treasury bonds to investing public - Total amount of bonds is about $12 tril / 75% of GDPQUIZ 1 ^NEW MATERIAL- GDP Deflatoro Question – can you use real and nominal GDP to measure of prices in the economy?o Measures the relative price not average- it’s a comparison o Question- If nominal GDP is rising more quickly than real GDP, then the prices in the economy are  A. Falling B. Not sure C. Risingo Uses nominal and Real GDP to measure the price level/ average price of all goods and services in economyo GDP deflator = nominal GDP/Real GDP * 100 Current Value = 106 = $16.6 tril /$15.6 tril * 100 Real and nominal are the same in base year Base period is a reference Gdp deflator is a price index Inflation = %change index GDP deflator 2013II= 106.3 GDP deflator 2012 II 104.7- 1.5% change Question: Which most accurately reflects the us economy since 1970?- A- Production usually rises and prices always rise- B-Production always rises and prices usually rise- C- neither- Deflation- is a fall in prices in the economy- haven’t had deflation since 1970- Always had inflation in recessionso Disinflation is less inflation 1980s- Question-