ECON 203 Lecture 7 Outline of Current Lecture I Main Idea II GDP III Issues with GDP Current Lecture Main Ideas Macroeconomics rose around the 1930s in response to worldwide depressions in order to try to define and control the national economy General Theory of Employment Interest and Money was written by Keynes and is considered the bible of Macroeconomists Main point was we have control over economic life Point of Economics is to control the economy through policy Keynesian theory and statistics defined the economy to help create policies in order to properly control the economy they created the GDP in order to define this GDP National Income Accounting tries to calculate the Gross Domestic Product GDP GDP is the key concept economists use when dealing with the economy Real GDP is a measure of the actual product goods services the physical product a pair of jeans The issue with Real GDP is you can t combine the Markets since it is a measure of the physical good 3 jeans 2 shirts DO NOT MIX To solve this issue they use an equation to decide the market production value of final goods and those combined numbers make up National GDP Nominal Value the value that comes from the GDP Calculation or the money value assigned to each product price x quantity nominal value National GDP is an attempt to add the monetary value of different final markets in a given period of time on a National Basis The GDP equation Price of Product x Quantity Market Production Final Value unit of time Then you would just add the Final Value unit of time of the other Markets to calculate National GDP so if you had a nation that produced only 20 jeans at 5 dollars and 20 shirts at 3 dollars in one year 5 x 20 100 1 year 3 x 20 60 1 year 100 1year 60 1 year 160 year Since your jean market was worth 100 and your shirt market was worth 60 you d combine them for a National GDP of 160 this can get complicated when trying to combine a Nation s economy which includes thousands of goods and services Lawyer Maid and Chef make sure to use the final good however Final Goods Services the final value of the final product which is consumed or used by the consumer Wheat Flour Bread Bread would be the final product even though wheat was the initial good because the bread is being used by the consumer you use final goods in an economy in order to prevent double counting of a product and over estimating GDP GDP theoretically is supposed to be a measure of economic welfare high is good low is bad However GDP per capita is a more accurate representation of this since it represents the GDP per person or GDP Population If we had two nations with the same GDP at 300 one had 3 people and the other had 100 300 3 people 100 per person 300 100 people 3 per person Obviously the country with 3 people has better economic welfare since it has a higher GDP per person think about Chinas high GDP but high population Issues with GDP Housewife Problem if GDP is supposed to include services Lawyers does a Homemaker s chores such as cleaning cooking taking the kids to school factor into the GDP In theory yes but in practicality no since homemakers don t have a true market we can t place a value on their time leading to an underestimate of GDP Nominal Value issue Nominal Value can change while Real Production Real GDP does not leading to an increase of GDP without an increase of Real GDP inflation Here we will take the same jeans and shirt example from earlier only we will factor in a population of 10 5 x 20 100 1 year 3 x 20 60 1 year 100 1year 60 1 year 160 year 160 10 16 per person each person can buy 2 jeans and 2 shirts Now if we double the price of jeans and shirts but not the Real GDP quantity of goods then only inflation will happen without any positive benefit to the society 10 x 20 200 1 year 6 x 20 120 1 year 200 1year 120 1 year 320 year 320 10 32 per person Even though theoretically the GDP has doubled as well as the GDP per Capita the population can still only buy 2 jeans and 2 shirts since the only thing that changed was the nominal value not the production