Chapter 1 Questions macroeconomics seeks to address 1 What causes sustained growth 2 Can this continue indefinitely or is there a limit 3 What is the government s role Growth and Public Policy 4 What causes business cycles 5 Can dramatic increases and decreases in GDP from WWII and the Great Depression be repeated 6 Should government smooth business cycle Real Interest Rate Nominal Interest Rate Quoted Interest Rate Inflation Growth Rate gt Yt Yt 1 Yt 1 gt growth rate at time t Yt GDP at time t Yt 1 GDP at time t 1 Aggregate Productivity Yt Nt Yt GDP at time t Nt labor force at time t Chapter 2 Y C I G X M GDP equation Measuring GDP 1 Expenditure Approach 2 Income Approach 3 Product Approach These approaches all yield the same value Island Economy Example Measuring GDP calculating total value of goods and services produced in an economy in a specific period of time also comparisons to previous years periods 2 producers coconut farmer and a restaurant Consumers Government No international trade Coconut Farmer Sell for 2 per coconut Produces 10 M million coconuts annually Pays 5 M in wages Pays 0 5 M interest payments Pays 1 5 M in taxes Restaurant Produces 30 M in meals Buys 6 M coconuts at 2 each Pays 4 M in wages Pays 3 M in taxes Consumers Buy 4 M coconuts 2 each Pay 1 M in taxes Government Supply 5 5 M in Army services TE total expenditures C I G X M I 0 and X M 0 left with C and G in the economy C 2 4 M coconuts 8 M 30 M in meals 8 M 30 M 38 M C G 5 5 M in Army Services from the government TE C 0 G 0 38 M 5 5 M 43 5 M 2 Calculate GDP using Income Approach sum of all income by consumers firms and government 1 Calculate GDP using Expenditure Approach calculating total spending on all final goods and services 5 5 M in Army wages 5 M in coconut producer wages 4 M in restaurant wages 13 M c profit of coconut producer c 20 M 5 M 5 M 1 5 13 M 11 M r profit of restaurant r 30 M 12 M 4 M 3 M 11 M 0 5 M interest 5 5 M tax income 1 M taxes Sum all above figures of income to equal 43 5 M note that it is the same outcome as the Expenditure Approach 3 Calculate GDP using product approach sum value of all goods and services produced minus the cost of intermediate goods 20 M of coconuts produced 5 5 M Army materials 30 M 12 M cost of coconuts purchased 6 M x 2 each 18 20 M 18 M 5 5 M 43 5 M same as Expenditure and Income approach Inventory Investment suppose the coconut producer grew 13 M coconuts and sold 10 M of them 3 M coconuts are leftover these 3 M coconuts are accounted for as investment I and they are valued at the market price in this case 2 per coconut GNP Gross National Product total value of goods and services produced within a specified period time frame by capital owned by a given country s residents GDP is the value of final goods and services produced within a country s boarders Think of the GNP as the who and GDP as the where GNP GDP NFP Net Factor Payments net income from abroad GDP criticisms GDP omits several economic components 1 Non market activity cooking household chores you wouldn t count the ingredients your mother uses to make a sandwich for you in GDP 2 Underground economy a Illicit drugs b Undocumented labor c Human trafficking prostitution d Stolen goods fencing the middle man between sellers and buyers of stolen goods e Illegal gambling 3 Used goods Consumption Expenditures 68 70 of GDP stays roughly constant Durables generally not destroyed through use home automobile Non durables food clothing medicine drug services Investment Expenditures 15 of GDP percentage is more variable and subject to change Fixed production of capital residential and non residential Inventory goods put into storage Investments are variable because they lead the business cycle discussed later in the guide Net Exports usually a negative value in the United States 13 in exports and 17 in imports equates to a net of 4 for Net Exports Government Expenditures 20 of GDP note this does NOT include transfers weighed average of a set of goods and services produced in an economy over period Price Indexes Indices of time Two Major Price Indices CPI consumer price index PP producer price index in the economy particular year The CPI is calculated by pricing a basket of goods using differing prices by year Purpose of price indices is to measure inflation or the change in general price level GDP is reported in nominal terms using the value of the dollar associated with that This makes comparing GDP s for different years problematic Therefore if we want to compare GDP s of different years we need to adjust for the value of the dollar the utilization of Real GDP The following example uses ambiguous numbers created during lecture by Professor Franke don t mind the unusual prices Nominal Valuation Goods year 1942 year 1842 Price Quantity Spatulas 20 19 M Computers 37 19 Spatulas 300 4 Computers 5 1 Nominal GDP of year 1942 P1942 Spatulas x Q1942 Spatulas P1942 Computers x Q1942 Computers 20 M 19M 37 19 380 M 703 380 000 703 GDP for 1942 Nominal GDP of year 1842 P1842 Spatulas x Q1842 Spatulas P1842 Computers x Q1842 Computers 300 4 5 1 1201 GDP for 1842 Calculating Real GDP of 1942 using 1942 as the base year base year denotes the value of the dollar RGDPbase year RGDP1942 1942 P1942 Spatulas x Q1942 Spatulas P1942 Computers x Q1942 Computers note that this is the same as nominal because the year and base are the same year 380 M 703 380 000 703 RGDP1942 1842 P1942 Spatulas x Q1842 Spatulas P1942 Computers x Q1842 Computers 20 4 37 1 80 37 117 compare to the nominal GDP As seen before if the base year is the same as the year being calculated then the nominal and real GDP are equal Therefore RGDP1842 1842 1201 RGDP1842 1942 P1842 Spatulas x Q1942 Spatulas P1842 Computers x Q1942 Computers 300 19 M 5 19 5 700 000 095 GDP Growth g1942 RGDP1942 1842 RGDP1942 1942 3 80 M g1842 RGDP1842 1842 RGDP1842 1942 5 73 M Chain weighted average GDP growth rate g1 x g2 gCW Growth Rate 3 8 M x 5 73 M 4 666 M Implicit GDP Price Deflator index than either the CPI or PPI Implicit GDP Price Deflator IGDPPDbase year used to determine the price of a good in another years dollars a more complex price Nominal GDP Real GDP x 100 Reference Assignment 1 for calculating Implicit GDP Price Deflator equations are a bit more extended than the notes provided by …