Econ 102 1st Edition Lecture 3 Outline of Last Lecture I Real GDP II 5 2 The Production Approach III Putting It All Together The GDP Equation Outline of Current Lecture Chapter 5 I Review from Last Lecture II Chapter 5 Definitions III What we can do with GDP Data IV 5 5 FLUCTUATIONS IN GDP V 5 6 GDP AS A MEASURE OF WELFARE Current Lecture I Review from Last Lecture a GDP is limited by the factors of production i Labor capital sum of net investments made over time technology These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute ii EX this building was built a long time ago the chairs were added more recently iii Diagram from Gwen Eudey s Chapter 5 Lecture Slides b GDP C i G NX i The opportunity cost of an increase in one Aggregate Expenditure category is a decrease in another 1 C consumption goods going up means buying more things ex TV s a thus doing less i investing 2 If NX is less than 0 falling the rest must be greater because it all adds up to GDP ii Imports are ADDED to consumption goods and are SUBTRACTED from net exports to cancel out because Imports are NOT included in G D domestic P 1 The flows have to balance Circular Flow II Chapter 5 definitions a Measuring National Income i national income The total income earned by a nation s residents both domestically and abroad in the production of goods and services ii gross national product GDP plus net income earned abroad 1 what we owe to them and what they owe to us 2 These data aren t used much in the U S iii personal income Income including transfer payments received by households 1 Transfer payments money given to you by the government a EX unemployment insurance iv Personal disposable income Personal income that households retain after paying income taxes 1 Subtract Taxes 2 Net of income and transfer payments is the amount you have the ability to spend III What we can do with GDP Data a Aggregate Expenditure Approach i GDP divided among purchasers 1 where is output going To future factors of production To household welfare To military spending b Value Added Approach i GDP is divided among producers 1 Which sectors are contributing most to GDP Which sectors are contributing the most to GDP growth 2 Manufacturing is the most value added to the approach ii Value Added 1 The sum of all the income wages interest profits and rent generated by an organization regardless of whether or not it is producing a final good or service c Application 1 i In 2008 Walmart had a low consumption year recession 1 3 of GDP usually 2 Walmart sells what other firms have produced a If they didn t sell it someone else would 3 Total Sales were 374 billion a but most of sales were things you could buy somewhere else b They are not producing the things they are selling i their Value Added is Retail Sales ii Subtract off the intermediate outputs the things they don t produce d We can create an estimate of Aggregate Prices i Aggregate Prices Nominal GDP Real GDP 100 1 Nominal GDP P apples x Q apples P oranges x Q oranges etc 2 the average price level a The quantities cancel more or less ii Since 1996 Real GDP has been measured using chainweighting e GDP deflator Nominal GDP Chain weighted GDP 100 i Nominal GDP is used to CALCULATE GDP DEFLATOR 1 We are looking for the GDP Deflator to compare to GDP Deflators elsewhere a EX Canada 2 use a trick set chain weighted GDP to Nominal GDP in what they confusingly call a base year a After the Base year Nominal GDP Real GDP i Because of rising prices 1 Prices rise over time during a recession they rise less dramatically a still always rising more detail on this later ii GDP Deflator is greater than one b Before the Base year Nominal GDP Real GDP i GDP Deflator is less than one ii It s common to normalize real data so that real nominal in one particular year Then we say we have real GDP in that year s prices even if we are chain weighting the data rather than using base year prices 1 Everything is chain weighted these days and then normalized so that real nominal in the base year IV 5 5 FLUCTUATIONS IN GDP a Definitions i Peak most recent high point 1 The date at which the recession starts and output begins to fall ii Trough most recent low point 1 The date at which output stops falling in a recession iii Recession Decline between Peak and Trough downward slope 1 Commonly defined as six consecutive months of declining real GDP iv Depression Common name for a severe recession v Expansion The period after a trough in the business cycle during which the economy recovers 1 Recovery Phase b Table 5 5 i November 1973 16 months when the US was cut off from Oil causing a severe recession 1 took 2 years to recover c Application 2 V 5 6 GDP AS A MEASURE OF WELFARE a Housework and Child Care i If you do it for yourself it doesn t count as GDP 1 EX Cleaning doing laundry etc ii IF you re doing it for someone else though considered production 1 EX Nannies childcare housework a often done underground thus making GDP look worse than it really is b Leisure i People on the upper end of the income distribution prefer more leisure ii Those on the lower end want less leisure to make more money c Underground Economy i Other countries add in their drug trade or underground economies ii NOT included in GDP in US 1 want to appear safe and that those problems are under control 2 However Estimated less than 20 of US s GDP yet not included in our taxes 3 comparing across countries data kinda stinks d Pollution i Increase in production directly related to increase in pollution 1 EX China a quality of life is down b High levels of cancer sickness and disease VI Aggregate Income might be important but arent some people very rich and others very poor a Let s look it up on Google i Search 1 Income of the Richest and Poorest 1 The gap is growing ii Search 2 US Income Distribution by decile image 1 Bottom quintile bottom 20 stays pretty flat 2 Middle quintile 3 Top Quintile top 20 those that are college educated 4 Top 5 dramatic
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