Ch2 Inter Macro

Corporate profits ( components)

Corporate profits = corporate taxes + dividends + retained earnings

Flow variable

quantity measured per unit of time (change in stock variable) Examples: person's income and expenditure, # of people losing their jobs, amount of investment in economy, gov budget deficit

Nondurable goods

goods that last only a short time, such as food, clothing

GDP deflator

- also called implicit price deflator for GDP, = Nominal GDP/Real GDP = P/Pbase - reflects what's happening to the overall level of prices in the economy - measures the price of output relative to its price in the base year

Two arithmetic tricks for working with % changes (p. 26)

1. % change of a product of two variables is approximately the sum of the percentage changes in each of the variables: % change (PxY) = % change P + % change Y 2. % change of a ratio is approximately % change in numerator minus % change in denominator: % change (Y/L) = % change Y - % change L

6 categories of national income

1. Compensation of employees 2. Proprietor's income 3. Rental income 4. Corporate profits 5. Net interest 6. Indirect business taxes

3 subcategories of Consumption

1. Nondurable goods 2. Durable goods 3. Services

3 subcategories of Investment

1. business fixed investment 2. residential fixed investment 3. inventory investment

2 types of quantity variables

1. stock 2. flow These variables are related among each other.

4 important adjustments that take us from national income to personal income

1. subtract indirect business taxes because these taxes never enter anyone's income 2. subtract amount that corporations earn but do not pay out, either because they are retaining earnings or because they are paying taxes to the government ( corporate profit) but we add back dividends 3. add net amount the government pays out in the transfer payments ( gov transactions to individuals minus social insurance contributions paid to the gov) 4. include the interest households earn rather than the interest that households pay (add personal income and subtract net interest).

2 ways to look at GDP

1. the total income of everyone in the economy (wages + profit) 2. the total expenditure on the economy's output of goods and services Why? Because income must equal expenditure, i.e. someones spending becomes another person's income.

Factoring intermediate goods into GDP

GDP includes only the value of final goods. Value of intermediate goods is already included as part of the market price of the final goods in which they are used. Adding value of intermediate goods to final goods is double-counting.

How to factor inventory into GDP

If more workers are hired to produce more product and the product will not be sold and won't be left as an inventory, GDP is not affected by increase in wages and decline in firm's profits. However, if leftovers of product are saved as inventory in order to be sold later(i.e firm buys own leftover product), GDP increases because wages and firm's expenditure increases. Note that when firm sells leftover inventory later, it is treated as used good because it was already factored into GDP (negative spending by the firm (disinvestment) offsets the positive spending by consumers).

Real GDP and GDP deflator

Real GDP = Nominal GDP / GDP deflator measures output valued at constant prices Deflator deflates Nominal GDP to yield real GDP

NNP

Net National Product reflects the net result of economic activity (output - cost of output). NNP =GNP - Depreciation NNP ≈ National income ( two varied by statistical discrepancy).

Nominal GDP and GDP deflator

Nominal GDP = Real GDP x GDP deflator measures the current dollar value of the output of the economy

Components of GDP

Y = C + I + G + NX Y - GDP C- Consumption I - Investment G - Government purchases NX - Net exports This equation is called national income account identity. The equality must hold. Each dollar of GDP fall into one of its components.

Fringe benefit

a form of pay for the performance of services. For example, you provide an employee with a fringe benefit when you allow the employee to use a business vehicle to commute to and from work. Performance of services. A person who performs services for you doesn't have to be your employee.

National income accounting

accounting system used to measure GDP and many related statistics; bookkeeping system that a national government uses to measure the level of the country's economic activity in a given time period.

Measures of income and seasonal changes

all measures of income exhibit seasonal changes. Output rises during the year, peak in 4Q, big decrease in 1Q ( GDP decreases ≈8 % from 4Q to 1Q). Seasonal changes are attributable to ability to produce (cold weather factor) and seasonal tastes of people. Therefore, when observe rise or fall in data, must look beyond seasonal cycle for explanation.

Disposable income

amount households and non corporate businesses have available to spend after satisfying their tax obligations to the government. Disposable income = Personal Income - Personal Tax and Nontax Payments Example of neonate payments are parking tickets.

Personal income

amount of income that households and non corporate businesses receive. Personal income = National Income - - Indirect business taxes - Corporate profits - Social Insurance Contributions - Net Interest + Dividends + Government transfers to Individuals + Personal interest income

Difference between personal interest and net interest

arises in part because interest on the gov debt is part of the interest that households earn but is not part of the interest that businesses pay out

GDP is imperfect measure of economic activity. Why?

because imputations necessary for computing GDP are only approximate and because the value of many goods and services is left out altogether. Makes it harder to compare standards of living across countries. However, GDP remains a useful measure as long as magnitude of these imperfections remains constant over time.

Indirect business taxes

certain taxes on businesses, such as sales taxes, less offsetting business subsidies. These taxes place a wedge between the price consumers pay for the good and the price the firm receives. ( 8% of national income)

Consumption (C)

consists of goods and services bought by households

Investment (I)

consists of goods bought for future use. Investment creates a new physical asset (capital), which can be used in future production.

Seasonally adjusted data

data have been adjusted to remove regular seasonal fluctuations (subtracting those changes in income that are predictable just from the change in season)

Value-added of a firm

equals the value of the firm's output less the value of the intermediate goods that the firm purchases. For the economy as a whole, the sum of all value added must equal the value of all final goods and services. Hence, GDP is total value added of all firms in the economy.

Imputed value

estimate of the value of the goods that are not sold in the marketplace and therefore do not have market prices. Example is homeowners who are considered to be paying rent to themselves in order to factor them into GDP. Department of Commerce estimates what the market rent for a house would be if it were rented and includes that imputed rent as part of GDP. This imputed rent is included both in home owner's expenditure and homeowner's income. Gov services get imputed by counting wages of gov employees (fire, police officers, senators). Imputed rent on durable goods (cars, jewellery, lawn mowers) are not included into GDP. Meals cooked at home is left out of GDP. No imputation on goods and services sold in underground economy.

Government purchases

goods and services bought by federal, state, an local governments ( military equipment, highways, services provided by gov. workers). Does not include transfer payments to individuals, such as Social Security and welfare, because transfer payments reallocate existing income and are not made in exchange for goods and services, they are not part of GDP.

Durable goods

goods that last a long time, such as cars and TVs

GNP

gross national product GNP = GDP + Factor Payments from abroad - Factor Payments to Abroad Factor payments are wages, profit rent. GNP measures total income earned by nationals (residents of nation). Factor Payments from abroad and Factor Payments to Abroad are usually close (≈ 3% of GDP), so GDP and GNP are quite close.

Services

include various intangible items purchased by consumers, such as haircuts or doctor visits

Corporate profits

income of corporations after payments to their workers and creditors (14% of national income)

Proprietor's income

income of non corporate businesses, such as small farms, mom-and-pop stores, and law partnerships (8% of national income)

Rental income

income that landlords receive , including the imputed rent that homeowners pay to themselves, less expenses, such as depreciation (3% of national income)

Net interest

interest domestic businesses pay minus the interest they receive, plus interest earned from foreigners (4% of national income

Inventory investment

is the increase in firm's inventories of goods. If inventories are falling, inventory investment is negative.

Residential investment

is the purchase of new housing by households and landlords

Business fixed investment

is the purchase of new plant and equipment by firms

National income

measures how much everyone in the economy has earned.

Consumer Price Index (CPI)

measures level of prices

Computing real GDP

multiply all goods produced by base year prices and add them together. Do that for each year over time period using only base prices for calculations.

Statistical discrepancy

occurs when variables are estimated using largely independent and less-than-perfect source data (which is usually the case because it is impossible to collect perfect data); different data sources may not be completely consistent.

Society's ability to provide economic satisfaction for its members depends

on quantity of goods and services produced.

Base-year prices

prices of a base year used for calculation of real GDP over particular time period. Because prices are held constant, real GDP varies from year to year only if the quantities produced vary. Base year is updated by BEA every 5 years to avoid misleading picture.

Stock variable

quantity measured at a given point in time (accumulation of flow variable) Examples: wealth, # of unemployed, gov debt, amount of capital in economy

Retained earnings

refer to the percentage of net earnings not paid out as dividends, but retained by the company to be reinvested in its core business, or to pay debt. It is recorded under shareholders' equity on the balance sheet. Retained Earnings (RE) = Beginning RE + Net Income - Dividends Also known as the "retention ratio" or "retained surplus".

Computing value of all final goods and services

sum the value added at each stage of production

Depreciation of capital

the amount of the economy's stock of plants, equipment, and residential structures that wears out during the year. In national income accounts, depreciation is called the consumption of fixed capital. It equals ≈10% of GNP. Depreciation of capital is a cost of producing the output of the economy.

GDP (how to compute)

the market value of all final goods and services produced (currently) within an economy in a given period of time. Used goods are not included in GDP calculation. Used goods are considered transfer of an asset not an addition to the economy's income.

GDP

the nation's total income and the total expenditure on its output of goods and services; dollar value of economic activity in a given period of time; best measure of how well the economy is performing. Measured every 3 months by BEA

Net Exports

the value of goods and services sold to other countries (exports) minus the value of goods and services that foreigners sell us (imports). NX > 0 when exports > imports NX < 0 when imports > exports NX represent the net expenditure from abroad on our goods and services, which provides income for domestic producers. Exporting is considered earning from foreigners by selling them domestic goods. If NX < 0, it means that difference was financed by taking out loans from foreigners or selling them assets (because earnings from selling exports less than from buying imports)

Chain-weighted measures of real GDP

used by BEA since 1995. Base year changes continuously over time, i.e. average prices in 2011 and 2012 are used to measure real growth from 2011 to 2012, and so on. Then, these various year-to-year growth rates are put together to form a "chain" that can be used to compare the output of goods and services between any two dates. These measure of GDP is better then base year measure because it ensures that prices are never far out of date. Both measures are highly correlated because they reflect the same thing - economy-wide changes in the production of goods and services.

Nominal GDP

value of goods and services measured at current prices. Nominal GDP can increase either because prices rise or because quantities rise. Not a good measure of economic well-being (prices double and quantities remain the same - misleading).

Real GDP

value of goods and services measured using a constant set of prices. Better measure of economic well-being. Shows what would happen to expenditure on output if quantities had changed but prices had not.

Compensation of employees

wages and fringe benefits earned by workers (63% of national income)