ECON Ch 19-22 Flashcards
Gross domestic product
The market value of all final goods and services produced in an economy in a given year.
Macroeconomics
The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.
Market value in GDP
Value each good and service in monetary terms. Price each good or service is sold for.
1 car valued at $50k –> GDP = $50k
Final goods or services in GDP definition
Good or service purchased by a final user. Used to calculate GDP.
Don’t include intermediate goods because we would double count
Ex. In 2016–> 50 tires at $10 each and 5 cars at $500. Of the 50 tires, 20 are used for the 5 cars (don’t include tires in GDP, just car (5005)). 20 are sold directly to consumer (count (2010)) and 10 are not sold (still produced, do count (10*10)).
If it is produced this year, include it. Doesn’t matter if sol or not.
In a given year part of GDP definition
If you buy a newly constructed home in 2015 for $450K and sell it in 2016 for $600K, then it only counts the $450K in 2015 and nothing in 2016. Since the GDP measures production, and the house isn’t produced in 2016, don’t include.
But if we hire a real estate broker in 2016, then you include that salary.
Only counts new goods and services, not resold.
What do we include in the GDP?
GDP (Y) = consumption (C) + investment (I) + government purchases (G) + (exports (X) - imports (M)).
Exports - imports is considered net exports (NX).
Consumption
Spending by households on goods and services, not including spending on new houses (counted in investment).
What you buy.
Investment
Spending by firms on new factories, office buildings, and additions to inventories, plus spending by households and firms on new houses.
Firms expedentures on goods (unsold)
Government purchases
Spending by federal, state, and local governments on goods and services, such as teachers’ salaries, highways, and aircraft carriers.
Doesn’t include transfer payments, since those don’t result in immediate production of new goods and services.
Net exports
The value of exports - value of imports.
Inputs are American expenditure on foreign goods.
We want domestic production (production in US), so we add up value of goods sold to foreigners and subtract value of goods sold to Americans by foreigners.
Has been negative for us recently
Do we include following in GDP?
- Tires ford buys to put on a car
- A used tire you buy for personal car
- A new tire you buy for personal car
- Value of car produced in us and exported to England
- Profit earned in 2004 fof a house you bought in 2001
- Commission earned by an employment counselor when she locates a job for a client.
- No because intermediate good
- No because used
- Yes
- Yes
- No because not this year
- Yes.
Why do we separate real and nominal GDP
Suppose the GDP rises. Is it because of production increasing or prices increasing?
Nominal GDP
The value of final goods and services at current year prices
Q 2011 * P2011
Real GDP
Value of final goods and services at base- year prices (typically 2009)
Q2017 * P2009
Nominal and real GDP general relation
After 2009, prices have gone up. So using today’s prices are larger, meaning nominal is bigger post 2009.
In 2009 they were equal
Before 2009, real was bigger.
Price level
A measure of the average prices of goods and services in the economy.
Stable prices are desirable because they allow households and firms to plan for the future appropriately.
GDP deflator
Used to measure the price level
(NOM GDP / real GDP) * 100
Since the same in the base year, GDP def is 100 in base year.
What is gdp of us
$18.5 trillion w base year of 2009
Since prices usually go up over time, if we used base year of 1980, GDP would be lower.
Need to be aware of the base year when we compare countries.
GDP of Iceland and china?
$20 billion (smaller than us but larger per- capita (per person))
$11 trillion in China.
Interpret the GDP deflator
Say we get the GDP deflator in 2012 is 116 (nominal/real in 2012)
This means that prices have gone up by 16% since the base year (2009)
Inflation
The percent change in deflator from the previous year.
100 * (GDP Def 2012- DEF 2011) / DEF 2011
(NEW-OLD)/OLD
Interpret–> say we get 1.5%. This means the price level rose by 1.5% over this year.
We can also do this with the consumer price index.
Indexing
Name the base variable and then be consistent. Care about the difference between years, not the values themselves.
Other measures of total production and total income
Gross national product (production performed by citizens of a nation, including overseas production (larger than GDP)
National income: GDP - consumption of fixed capital (GDP-depreciation)
Personal income: income received by households; includes transfer payments but excludes firms retained earnings
Disposable personal income: personal income - personal tax payments. This measures amount households are able to spend or save.
How unemployment is measured in the US
Household survey (~60,000 households and asks questions)
1. Have you worked for 1 hour in the past week?
If yes, you’re employed. If no, then a second question
Have you looked for a job in past 4 weeks?
Yes means unemployed.
No means not in labor force.
Employed
Worked 1+ hours in reference week (or were temporarily away from their jobs)
Unemployed
Someone who hasn’t worked in past week and has looked for a job during last 4 weeks and is available for work.
Unemployment rate
unemployed / labor force
How population is divided into different employment caterogires
Only look at people aged 16+
Of these people, some are not in the labor force (retired, students). Most of these people are not available for work
But some of them are available for work but haven’t looked for work. And even small portion are discouraged, stopped looking for job. In a prolonged recession, this number increases, but unemployment rate doesn’t account for this, so rate actually goes down
Labor force are rest of the working age population
Of these, either unemployed or employed. Rate = unemployed / labor force.
Labor force participation rate
Labor force / working age population * 100
Measures the percentage of the working age population in the labor force.
Employement-population ratio
Employment / working age population * 100
The percentage of the working age population that is employed.
Problems with unemployment ratio
Could underestimate unemployment
Because the distinguishing between people who are unemployed and not in labor force is tough (discouraged workers)
Only measures employment, not intensity of employment (full vs part time –> some are underemployed, not unemployed)
May overestimate:
May falsely claim to actively be looking for work
May claim to not be working to evade taxes or keep criminal activity unnoticed.
Types of unemployment
Frictional, structural, cyclical
Frictional unemployment
Short term unemployment that arises from the process of matching workers with jobs
Matching issues
For example, right after graduation, I get a job but haven’t started yet. Or I reject an offer from a company. Looking for good company. Not a problem, but rather, we encourage employee choice.
Job search, entering or re entering labor force or between jobs.
Seasonal unemployment
Part of frictional
Some jobs fluctuate in avlaiability due to seasonal demand, like ski instructor or farm work
Releases raw and seasonally adjusted employment figures
Structural unemployment
Economics change. We went from farming to manufacture to services to tech.
Say you were a farmer, need to learn how to manufacture and so on.
Not a bad thing, as the economy is moving forward
Unemployment that arises from a persistent mismatch between skills and attributes of workers and the requirements of jobs.
Natural rate of unemployment
Frictional + structural
When all unemployment is due to frictional and structural factors, economy is at full employment. Always some unemployment, not bad though. Somewhere around 4-5 percent
Cyclical unemployment
During recessions. Worry about this.
As you recover from recessions, unemployment from cyclical factors falls
Deflation
Prices going down across time. Bad thing. Not seen in US
Problem with GDP for inflation
GDP deflator reflects movement in GDP. Problem is we are looking at cost of living for average American. Americans consume in parts, not mentioned in GDP. For example, if I buy a BMW, it’s not in the GDP. Also, if we produce an export–> if that price goes up, GDP goes up. But we may never touch it as a consumer and it would be reported as inflation
So, we look at consumer price index.
Consumer price index
A measure of the average change over time in the prices a typical urban family of four pays for the goods and services they purchase.
Build an imaginary basket and fix the basket (no changes in quantity).
Compare the price of the basket in one month to the price in the next month.
How to calculate CPI
Base year is 1982, CPI is 100 then
CPI = expenditures in current year / expenditures in base year * 100
Keep quantity fixed, change prices.
How to interpret CPI
If CPI = 150
This means prices have increased 50% since base year.
Inflation measured by CPI
(CPI new - cpi old) / cpi old
The percentage change in the CPI.
Measures how much prices have gone up in the previous yea.
Problem with CPI
Overestimates inflation
Doesn’t account the increase in quality. May not be making life more expensive.
Subs bias– consumers may change their purchasing habits away from goods that have increased in price.
New product bias– basket changes only every 10 years. Delay to including new goods like cell phones
Outlet bias– uses full retail price, but people get discounts
Overestimates true CPI by .5 to 1 percent.
For example, if price of tea goes up and coffee stays same, I’m just not going to buy as much tea. But CPI doesn’t say that, overestimates.
Price level in year x in terms of price in set year (for example 2010):
How to get value in 2014 dollars given value in 1989 dollars
Price level in year x in terms of price in 2010 = CPI X/CPI 2010
Real receipt = nominal receipt * (CPI 2010/CPI X)
Value in 2014 dollars = value in 1989 dollars * (CPI 2014 / CPI 1989)
Long run vs short run
Long run is growth
Short run is expamsion and contractions, recessions.
Long run economic growth
The process by which rising productivity increases the average standard of living.
Use real GDP per capita to look at increase. Because this accounts for increased population– the amount of production in economy, per person, adjusted form changes in price level.
What causes long term real GDP per capita growth
Labor productivity– the quantity of goods and services that can be produced by one worker or by one hour of work.
Why can the average American consume eight times as many goods and services now than in 1900?
Because the average American produces 8 times as many goods and sverices in an hour now than in 1900
So, what determines labor productivity growth?
Technological change, increases in capital per hour worked, property rights, NOT SHORT TERM GOVERNMENT CHANGES
L –>labor/ education health
K –> capital
Technology / productivity
Capital affecting long term GDP growth
Increases in capital per hour worked
Capital is manufactured goods that are used to produce other goods and services.
The more capital a worker has available to use (including human capital, the accumulated knowledge and skills workers process), the more productive
Technological change influencing GDP growth
Improvements in capital or methods to combine inputs into outputs (new technologies) allow for workers to produce more in a given period of time.
Entrepreneurs pioneer new ways to bring together the factors of production to produce better or lower cost products.
Property rights influencing long term GDP growth
Market system cannot function unless fights to private property are secure
Governments can aid growth by establishing independent court systems.
How to graph long term and short term economic growth
Real GDP per capita on y axis and time on x axis
Trend line is linear, but really short term fluctuations around the line.
Business cycle
Alternating periods of expanding and contracting economic activity.
From peak to peak or trough to trough on the real GDP per capita vs time graph
Expansion
When graph increases. Going from trough to a peak.
Recession
When graph falls. Going from peak to trough. 2 consequence falling quarters are a recession.
How inflation rate relates to recession and expansion
During expansions, demand is high relative to supply, so prices increase. High inflation
During recessions, demand is low relative to supply, prices increase more slowly or even decrease, low inflation or deflation
Stabilization
Central bank and government reduce the fluctuation of output.
Makes the fluctuations closer to the trend line on the real GDP per capita vs time graph.
Great moderation
Period since the mid - 1980s where fluctuations around trend line have been smaller.
Occurred because of increasing importance of services. Decreases the effect of business cycle on GDP
Also unemployment insurance. Still buy stuff during recession
Unemployment during recession
Increases as GDP goes down.
How are unemployment, GDP, and inflation affected by recessions and expansions
Recession:
U up, GDP down, inflation down
Expansion:
U down, gdp up, inflation up
How severe was Great Recession
GDP down 4% Unemployment up (9-10%) As opposed to natural rate of 4-5% Inflation down. Desired was about 2%
Growth across countries
As real gdp increases, growth rate decreases
More developed economies don’t grow as much.
Different types of growth across type of economy
- Undeveloped / underdeveloped —> least real gdp, highest growth rate
- Emerging markets—> Russia, India, China. Centrally planned economy to a market economy. Growth rate of gdp is very high (>5%)
These markets are in the middle of real gdp and have middle growth rates - Industrialized. Larger economies with smaller growth rates.
Model for long term economic growth
Labor productivity—> quality of goods and services that can be produced by 1 worker or by 1 hour of work.
2 main factors influence this:
1. Quantity of capital per hour worked
2 level of technology
Promote research and development
Patent law. Education/health
Technological change
Change in the quantity of output a firm can produce using a given quantity of inputs.
3 main sources of technological change
- Better machinery and equipment
Inventions like the steam engine, machine tools, electric generators, and computers have allowed faster economic growth - Increases in human capital
Human capital is the accumulated knowledge and skills that workers acquire from education and training or from their life experiences - Better means of organizing and managing production
If managers can do a better job of organizing production, then labor productivity can increase. An example of this is the just-in-time system, first developed by Toyota. Thus involves assembling goods from parts that arrive at the factory exactly when they’re needed.
Long run capital change
First units of capital most effective. Allows output per hour to increase most. Subsequent increases result in diminishing returns. Smaller incremental increases in output.
Long run tech change
More effective way to increase output per hour in countries where capital is already high.
Short term focus
Stabilization policies
If we are above trend line, stabilize. Lower the gdp. We don’t want a big boom and bust.
If we are below the trend line, fight for policy to move the gdp up.
Savings
Private savings (by households) And public savings (by the government)
Private savings
Household income not spent.
Household incomes includes payments for factors of production (Y) and transfer payment (TR). Households consume (C) and pay taxes (T)
So Sprivate = Y + TR - C - T
Public savings
Government saves whatever it brings in but doesn’t spend. (May be negative, known as dissaving)
S public = T-G-TR
Total saving
S private + S public = Y-C-G
So, savings = investment.
When S public is 0, government spends as much as it brings in. Balanced budget
Positive value is budget surplus
Negative value is budget deficit.
Funds deficits with selling treasury bonds (borrowing). Takes away from money aValiavible for investment spending
Gross national product
Production performed by citizens of a nation, including overseas production (larger than GDP)
For example, ford production in Mexico is in GNP, not in GDP
Cars produced by Toyota in US is in GDP, not the GNP
