Econ 104 Section 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 services Investment the purchase of capital goods by a business or person o Ex hammer to build 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 product o Ex Flour to bread o 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 NX o 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 it o Money 1 cash Checking deposits 2 6 tril Checking deposits something you can write a check with o Money 2 money 1 savings account 10 8 tril Cannot make a direct payment with savings account o Question is every dollar made for a purchase counted in GDP Answer No example underground market and or used o Question How many of the following would be money in the US goods Corporate stock US Savings Bond Capital owned by Boeing Funds in a checking account US currency Answer the last two Different methods of calculating GDP o 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 value o Gross Domestic Income GDI 16 6 trillion Compensation to employees 53 Healthcare other benefits Salary Bonus Small business profits 8 Corporate profits 10 Rent 4 Net interests 4 Spread between interest giving and interest taken on loans Other 21 Calculating and understand Real GDP Nominal GDP o 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 GDP o Uses base year Value of products from a previous year For 2013 we use base year in 2009 o 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 doing o Nominal GDP to measure the current value o 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 GDP o B Nominal GDP o 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 nominal increase 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 spending o These are fiscal policy changes in the federal budget o 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 Policy o 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 GDP o 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 loans o 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 Rise o 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 2813 o 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 GDP QUIZ 1 NEW MATERIAL GDP Deflator the economy o Question can you use real and nominal GDP to measure of prices in 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 Rising o Uses nominal and Real GDP to measure the price level average price of all goods and services in economy o 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 recessions o Disinflation is less inflation Question Can you use real and nominal gdp to measure the average prices in 1980s the economy Consumer Price Index CPI o Learning goals Be able to set up formulas that calculate real gdp nominal gdp the gdp deflator and the cpi Be able to calculate the inflation rate o Average consumer buys 3 things A car every 10 years 1 year 1 2 a 2 bedroom apartment year Every meal at McDonalds 1 095 yr Market Basket purchases year 1 car 5 apartments 1095 meals Prices in yr 1 o