EC 102 Watson Boston University EC 102 9 5 13 GDP Gross Domestic Product most fundamental concept of Macro All consumers all firms all markets How all consumers interact with all firms US GDP in 2012 15 7 trillion Macro Characteristics Time frame very imp short run vs long run Long run focuses on economic growth how does capacity to produce increase Short run quarterly yearly fluctuation Employment rate o Based on business cycle fluctuations expansion and recession aggregate demand or dampen when too strong o Aggregate Demand o Demand Management gov tries to manage during weak alt periods of economic Monetary Policy student loan interest rate auto loan home loan interest rate Fiscal Policy the deficit accumulates as federal debt is it bad or good These policies don t matter in long run Expectations school future career Greater complexity modeling expectations becomes difficult Highly Empirical emphasis on data Policy driven macro highly driven by applicable policies avocation for tax inc or dec GDP the market value of all final goods and services prod within a country in a year Measurement of everything bought and sold then added way to measure wealth of a country o Market Value if a good or service is not prod in a market it does not count Non inclusive parent child service Inclusive child care service Need to use dollars b c and heterogenous goods o Final all bought goods are gone through multiple stages Ex 1 Bread starts as wheat in KA 0 50 2 Miller runs into flour sells to bakery 1 50 3 Baker makes bread sells to retailer 2 00 4 Price on shelf 2 50 Total 6 50 for production of that loaf of bread Total is not included in GDP only final price 2 50 Stops overestimation Rubber does not count final tire counts o Produced in a year financial assets land bought nothing is produced Broker arranged sale commission 5k is part of GDP service for sale arrangement Something must thus be produced and within the last year Used goods do not count 1980 house bought today does not count did count in 1980 o Within a country good has to be prod in country s GDP we are counting Toyota factory in USA counts as USA GDP because cars are produced here Ford prod cars in Canada counts as Canada GDP Car prod in 2013 sold in 2014 added to inventory bought by ford itself added to 2013 GDP Counts in 2013 only even if sold in 2014 Measuring GDP National Income Accounting done by Bureau of Economic Analysis division of Dept of Commerce o Issue the NIPA National Income Product Accounts o Method expenditure method Done by adding up value of final transactions of goods and services in economy o Durable goods hardware o Non durable goods food o 70 of all expenditures are consumption us o 13 Investment 2nd 2 tril o 19 5 Gov purchases 1 2 1 8 3 tril o Exports of goods and services 2 1 tril o A lot of things are not produced here however chinese prod laptop counted as US production o Imports are subtracted 2 7 tril o NET exports goods 5 6 bil Y C I G NX Y real GDP o C consumption o I investment o G gov purchases social security transfer payment doesn t count in GDP tank and services count o NX net exports exports imports o Y value of total output C I G NX aggregate o GDP informally measured by 1 Expenditure 2 Income 3 Value expenditure added Per Capita GDP GDP Population o 2012 GDP 15 7 Pop 314 m 15 7 tril 314 M 50 000 o GDP is not a good measurement of wellbeing due to indiscrimination of averages between rich and poor Potential GDP is an estimate of what GDP would have been prod if all factors of production labor 8 hr days capital had been used at their normal rates If business cycle does not exist no expansion or total employment rates do not change what would be the GDP If business cycles didn t happen During recession lots of unemployment underemployed 4hr days Thus actual GDP would be below potential PGDP is a measure of economy s ability to produce is constant growth During WWII actual would be above potential due to high rate Recession when red line is below blue PGDP on graph Nominal GDP value of all goods and services measured at current prices Nominal v Real 1960 salary 2k year distinction is inflation nominal does not account for inflation real does Assume there are N goods produced in economy all numbered 2012 Nominal GDP P 1 12 Q 1 12 P 2 12 Q 2 12 Real GDP value of all goods and services measured at a constant price level Pick a base year and use those prices o 2005 base o 2012 Real GDP P 1 05 Q 1 12 P 2 05 Q 2 12 o 2012 Real GDP 13 6 tril indicates inflation o New goods iPhone 5 broken into components that were available in base year chips and processors GDP can change if quantity or prices go up etc o To figure that out you use the real GDP and fix the prices Y real GDP P price level P Y nominal GDP Nominal real in base year only Measuring the Price Level P CPI GDP deflator meas of P b c The GDP Deflator Measuring Inflation with the GDP Deflator Consumer Price Index CPI Measuring inflation with the CPI Y Real GDP adj for inflation P Price Level avg all prices in economy P x Y Nominal GDP The GDP Deflator Ratio of nominal GDP to real GDP x 100 Eq Nom Real x 100 GDP Deflator for 2012 1 15 x 100 115 Deflator 100 when Nom Real Or in the Base year nom real Exp o 2005 N 6000 R 6000 GDP Def 100 o 2006 N 8250 R 7200 GDP Def 114 6 o 2007 N 10800 R 8400 GDP Def 128 6 P vs P stands for the price level meas by CPi or GDP Def stands for inflations percentage change in P DP d delta P in later year P in earlier year P in earlier year x 100 o ex 2005 v 2006 o 114 6 100 114 6 x 100 14 6 o 2007 v 2006 12 2 The CPI Measures changes in the prices of things that an avg consumer buys relevant to our lives Bond market goes down if the CPI is awry Focuses on only what avg consumers buy Closely watched indicator of what is happening to prices Release of new CPI can have big impact Calc and Pub by Bureau of Labor Stats BLS released middle monthly Uses tracks changes in cost of living adjusts contracts for inflation Social o EXP Nominal income goes up but real purchasing power has not Comparison of dollar amounts over time 1 bought more back then still Sec COLA increased the same How BLS constructs the CPI cost of basket in that month cost of basket in base …