ECO-252: Ch. 6: GDP and the Measurement of Progress [Pgs. 101-124 in DIGITAL BOOK]

CHECK YOURSELF QUESTION: The Interstate Bakeries Corporation buys wheat flour to make into Wonder Bread. Does the purchase of wheat flour add to GDP? [Pg. 105]

The purchase of wheat flour used to make bread is the purchase of an intermediate good. Thus, it is not counted in GDP: Only finished goods are counted in GDP.

When analyzing an economy, it's often useful to split GDP into different subcategories. What are the two most common ways of splitting GDP?

The two most common ways of splitting GDP are: (1) The National Spending Approach (2) The Factor Income Approach

What are capital goods?

There are also goods that are used to make other goods but are still considered finished goods. These are called capital goods. For example, if Caterpillar produces a tractor and sells it to a farm, the tractor is considered a finished good. The tractor is finished and its value is added to the GDP. Although the tractor is used to make other goods, it won't be sold again as part of another good, so the tractor is still. finished good.

Investment: 1. How are the following items officially categorized? (a) Avis buys a car. (b) A government buys a car. (c) A consumer buys a car. (d)By nature, what are they? 3. Research and Development (R & D). (a) done by a firm. (b) done by a government. 4. Education paid by an individual. (a) By nature, what are they?

#1: (a) Investment (b) Government purchases (c) Consumption (d) Investment #2: (a) Intermediate service (b) Government purchases #3: Consumption. (a) Investment

Percentage Change Formula

((New value - old value)/old value) X 100

GOODS AND SERVICES: (1) What are Goods? Tangible or intangible? (2) What are Services? Tangible or intangible? (3) Are Goods, Services, neither, or both included in GDP?

(1) Goods are tangible. i.e., cars, food, clothes. (2) Services are intangible. i.e., transportation, haircuts, medical care. (3) Both are included in GDP. Entertainment? It's in there...

Are the following included in U.S. GDP: (1) The price paid by a German tourist when staying at a New York hotel. (2) The price paid by an American tourist when staying at a. Berlin hotel?

(1) Included. (2) NOT included.

TRUE or FALSE: Real GDP is always larger than real GDP per capita.

True.

CHECK YOURSELF QUESTION: If two countries have the same GDP per capita, do they necessarily have the same level of inequality? [Pg. 118]

Two countries that have the same level of GDP per capita do not necessarily have the same level of inequality. Let's take Country A and Country B, each of which has only two citizens. Country A's citizens earn $999 and $1, respectively, with GDP per capita of$500. Country B's citizens earn $500 and $500, respectively, with GDP per capita of $500 also. Note that the two countries have the same GDP per capita but they have different levels of inequality.

What are the two major themes of this course? What do we use to measure these two major themes?

Two major themes of this course: (1) Economic growth (long run); (2) Business fluctuations (short run) What do we use to measure the above: Gross Domestic Product (GDP)

FILL IN THE BLANK: A citizen of Mexico who works temporarily in the United States adds to ________. An American who works temporarily in Mexico contributes to ________.

U.S. GDP; Mexican GDP

How can we control for the population size? FORMULA. HINT: REAL GDP.

We can control for the population size by using Real GDP per capita, or per person. FORMULA: Real GDP Per Capita = Real GDP/ Country Population By dividing Real GDP by a country's population, we get a good, albeit imperfect, measure of the average standard of living in a country.

CHECK YOURSELF QUESTION: Why do we often convert nominal variables into real variables? [Pg. 108]

We convert nominal variables into real variables to account for price changes so that we can make comparisons over time.

Will the following change the value of GDP? If so, which component? 1. Is it a final good produced and sold in the U.S. market? 2. If so, who pays for it? (a) Your father receives interest on a U.S. government bond. (b) Your mother buys a brand-new car. (c) A gardener weeds her own garden. (d) Your brother buys a life insurance policy. (e) Your sister buys her friend's computer. (f)Your aunt buys a newly constructed house. (g) People in Canada visit Disneyland.

(a) No. (b) Yes. C pays for it. (c) No. (d) Yes. C pays for it. (e) No. (f) Yes. I pays for it. (g) Yes. NX pays for it.

Will the following change the value of GDP? If so, which component? 1. Is it a final good produced and sold in the U.S. market? 2. If so, who pays for it? (a) Dell produces computers but fails to sell them. (b) The government buys a newly produced airplane. (c) American Airlines buys a newly produced airplane. (d) The government pays government workers' salaries.

(a) Yes. I pays for it. (b) Yes. G pays for it. (c) Yes. I pays for it. (d) Yes. G pays for it.

NOTES: IN A YEAR.

*GDP is like annual income: it measures a rate of production during a given time period. *For the current quarter's GDP data, visit the U.S. Bureau of Economic Analysis at https://www.bea.gov/

GDP per capita, while useful, is not a perfect measure. WHY?

*GDP per capita misses the distribution of income. FOR EXAMPLE: GDP per capita is roughly the same in Nigeria, Pakistan, and Honduras. As such, you might think the three countries have about the same standard of living. But, a much larger portion of Nigeria's population (80%) lives on less than $2/day than the other two countries. -In Nigeria, it's about 80%. - In Pakistan, it's only 60%. - In Honduras, it's only 33%. This isn't a question of income, but of income distribution—a matter GDP per capita can't fully address. In a way, real GDP per capita is like a thermometer reading—it gives a quick look at temperature, but it doesn't tell us everything. It's far from the end-all, be-all of measuring our state of well-being. Still, it's worth understanding how GDP per capita correlates to many of the other things we care about: our health, our happiness, and our education. Over time, however, growth in Real GDP per capita, usually does indicate growth in everyone's incomes, including the incomes of the very poor.

NOTES-Positives of Real GDP Per Capita:

*Increases in real GDP per capita also correlate to improvements in those things money can't buy. Health. Happiness. Education. *What this means is, as real GDP per capita rises, a country may also see related benefits. As the figure increases, people's longevity tends to march upward along with it. Citizens tend to be better educated. Over time, growth in real GDP per capita also correlates to an increase in income for the country's poorest citizens. *When we have more goods and services, we can usually afford more of the other good things in life.

NOTES: WITHIN A COUNTRY. INCLUDED IN GDP!!

*Only production that takes place within the borders of a country is included in GDP. *EXAMPLES: (1) Cars produced in Mexico by American firms: NOT included. (2) Cars produced in the U.S. by Japanese firms: ARE included. *GNP (Gross National Product): The value of goods and services produced by U.S. residents no matter where they live.

NOTES: PRODUCED. NOT INCLUDED IN GDP!!

*Public Transfer Payments: (1) Social Security, (2) Welfare, (3) Veterans' payments. *Private Transfer Payments: (1) Cash gifts from your parents. *Secondhand Sales. *Stock Market Transactions: (1) Selling and buying of stocks and bonds. NOT INCLUDED IN GDP

Measurement Issues: GDP does NOT count

*The underground economy *Nonpriced production *Leisure *Bads: Environmental costs *Distribution of income There are other problems such as (1)Distinction between final and intermediate goods (2) Definition of investment Why do we want to know the level of GDP? We want to know our economic well-being. What does GDP actually measure?The level of output (production).

Which of the following transactions would be counted in GDP? For those counted, indicate whether they count as C (consumption), I (investment), G (government purchases), or NX (net export). 1. The purchase of a personal computer by a household. 2. The purchase of a personal computer by a used car dealership to keep track of sales 3. The purchase of heroin by a household. 4. The purchase of a security service by a private firm. 5. The purchase (by an American household) of an automobile produced by a Japanese-owned automobile company on American soil.

1. C 2. I 3. Not included 4. Not included 5. C

What happens to the official measure of GDP in each of the following situations? 1. A man marries his housekeeper, who then quits working for wages. 2. A drug addict marries his/her supplier. 3. Homemakers perform the same jobs but switch houses and charge each other for their services.

1. GDP decreases. 2. GDP stays the same. 3. GDP increases.

Are the following included in U.S. GDP? 1. Used textbooks sold at your college bookstore. 2. Used books sold at a garage sale. 3. Cars made in the United States at a Toyota factory. 4. Cars made in Germany at a General Motors factory. 5. A ticket for a Yankees game.

1. No 2. No 3. Yes 4. No 5. Yes

Will the following increase the value of GDP? 1. Your father receives interest on a U.S. government bond. 2. Your mother buys a brand-new car. 3. A gardener weeds her own garden. 4. Your brother buys a life insurance policy. 5. Your sister buys her friend's computer. 6. Your aunt buys a newly constructed house. 7. People in Canada visit Disneyland.

1. No 2. Yes 3. No 4. Yes 5. No 6. Yes 7. Yes

CHECK YOURSELF QUESTION: An immigrant from Colombia works as a cook in a New York restaurant. Are the goods and services he produced considered part of the GDP of the United States or Colombia? [Pg. 105]

Because the worker from Colombia earns his money in New York, this is considered part of the GDP of the United States, not Colombia. GDP counts what is produced within a country, whether by its citizens or others.

CHECK YOURSELF QUESTION: If GDP does not account for everything, does that make the GDP statistic useless? [Pg. 118]

Because they do not account for everything, GDP statistics are not perfect. Nevertheless, they are useful in giving a good sense of how the value of what a nation produces changes over time.

CHECK YOURSELF QUESTION: What are business fluctuations? [Pg. 110]

Business fluctuations are the short-run movements in real GDP around its long-term trend.

Vocabulary-definition: Business Fluctuations or Business Cycles [Pg. 109]

Business fluctuations or business cycles are the short-run movements in real GDP around its long-term trend.

Final and Intermediate Products

By definition, households and governments buy final goods and services. • By definition, businesses buy intermediate goods unless they are machines, equipment, tools, buildings, etc. Which is directly included in GDP? (1) Police services vs. Guards/watchmen hired by businesses. --> ANSWER: Police services. (2) Regular commercial TV programs vs. Cable/Satellite TV programs. --> ANSWER: Cable/ Satellite TV programs (3) Gas for commuting paid for by employers vs.Gas for commuting paid for by commuters. --> ANSWER: Gas for commuting paid for by commuters. National defense (Is this a final service?) High military expenditure (G) vs. High C and I Should they be included? • TV shows: Yes • Others: Probably no. They are intermediate by nature.

National Spending Approach: Consumption (C)

CONSUMPTION (C): *Anything that is purchased by consumers *Includes Medicare spending on medical care *EXCLUDES new houses $15, 741.6 billion (2021)

SPLITTING GDP: What is the National Spending Approach.

The National Spending Approach takes all the goods and services that go into GDP and splits them into (1) consumption - goods and services like cakes and massages bought by consumers; (2) investment - goods and services like computers or tractors usually bought by businesses; and (3) government purchases, which included consumption goods like paper and pens, and also investment goods like tanks and computers, which are bought by governments. We then need to make one correction: People in other countries might also have bought some go our goods, so we add exports. However, IMPORTS do NOT add to our GDP, so we want to subtract imports. Exports - Imports is sometimes also called Net exports. NATIONAL SPENDING APPROACH FORMULA: GDP = Consumption + Investment + Government Purchases + Net Exports.

CHECK YOURSELF QUESTION: If GDP in 1990 was $5,803 billion and GDP in 1991 was $5,995 billion, what was the growth rate of (nominal) GDP? [Pg.106]

The growth rate is found by subtracting $5,803 billion from $5,995 billion, and then dividing that number by $5,803 billion: ($5,995 - $5,803) + $5,803 = $192 + $5,803 = 0.033, or 3.3%

CHECK YOURSELF QUESTION: Why does the income approach to GDP give the same answer (in theory!) as the spending approach? (In practice, the answers are close but differ because of accounting errors and data omissions.) [Pg. 114]

The income approach is the flip side of the spending approach: Every dollar that someone earns in income is a dollar of income that someone else has spent.

TRUE or FALSE: Government purchases includes all of the following: social security payments, government employee wages, and tanks purchased by the government.

False

TRUE or FALSE: If a country's nominal GDP increases, it means the country is producing more goods and services.

False.

TRUE or FALSE: Nominal GDP is always larger than real GDP.

False.

What are finished goods or services?

Finished Goods and Services (counted in GDP). DEFINITION: Purchased for FINAL use by the consumers/governments or for business investment. A finished good or service is one that will not be sold again as part of some other good. Finished goods and services are sold to final users and then consumed or held in personal inventories. For example, if a consumer buys an egg to make an omelet, the egg is a finished good because it won't be sold again as part of some other good.

National Spending Approach: GDP FORMULA (NOMINAL)

GDP = C + I + G + NX (Nominal in billions) $22,996.1 = $15,741.6 + $4,120.0 + $4,052.7 - $918.2 (2021) Growth in Real GDP 2008: 0.1%, 2009: -2.6%, 2010: 2.7%, 2011: 1.5%, 2012: 2.3%, 2013: 1.8%, 2014: 2.3%, 2015: 2.7%, 2016: 1.7%, 2017: 2.3%, 2018: 2.9%, 2019: 2.3%, 2020: -3.4%, 2021: 5.7% The population was 332 million and real GDP was $22,996.1 billion in 2021, GDP per capita was about $69,265.36.

CHECK YOURSELF QUESTION: The text says that the value of finished goods is about $6.8 trillion. Where does this number come from? [Pg. 104]

GDP is 21.4 trillion. From Figure 26.2 about 68% of GDP is from services so finished goods are 21.4 * (1 - 0.68) = 6.8 trillion of GDP.

How is GDP calculated? [Pg. 103]

GDP is calculated by multiplying the price of finished goods and services by their quantities and adding the market values. FORMULA: Finished Good Price x Quantity = Market Value

CHECK YOURSELF QUESTION: Why does GDP not account for or try to measure certain things? What is the common thread throughout all of the uncounted variables? [Pg. 118]

GDP measures things for which market values can be obtained. It does not measure things such as illegal activities or clean air because it is difficult to deternune their market values.

Vocabulary-definition: GDP per capita [Pg. 103]

GDP per capita is GDP divided by population.

National Spending Approach: Government Purchases (G)

Government Purchases (G): *Anything purchased by governments *Does NOT include government transfer payments $4,052.7 billion (2021)

Vocabulary-definition: Government Purchases [Pg. 111]

Government purchases are spending by all levels of government on finished goods and services. Transfers are NOT included in government purchases.

Vocabulary-definition: Gross Domestic Product (GDP) [Pg. 103]

Gross domestic product (GDP) is the market value of ALL finished goods and services produced within a country in a year. GDP is meant to measure production, so sales of used goods, such as a used car, are not included in GDP.

Vocabulary-definition: Gross national product (GNP) [Pg. 105]

Gross national product (GNP) is the market value of all finished goods and services produced by a country's residents, wherever located, in a year.

National Spending Approach: Investment (I)

INVESTMENT (I): *Business spending on tools, plant, and equipment that are used to produce future output *All construction (including new houses for consumers) *Changes in inventories $4,120.0 billion (2021)

How to Compute Real GDP Growth Rate per Capita

If growth of real GDP= 3% and the population growth rate= 2%, then growth of real GDP per capita. 3% - 2% = 1%

The National Spending Approach:

Who spends money on goods and services? We have four sectors. 1. Consumers (C) 2. Businesses (I) 3. Governments (G) 4. Foreigners (NX)

To economists, which one is NOT considered as investment?

You buy IBM stock. What are investments: A farmer buys a tractor. Your university builds new classrooms and labs.

A government spending on building roads is considered as:

a government purchase.

MULTIPLE CHOICE: Which of the following does NOT directly add to GDP? CHOICES: a. computer chips b. tractors c. Dell computers d. a and b

a. computer chips

MULTIPLE CHOICE: Which of the following is counted in the calculation of GDP? CHOICES: a. sales of used cars b. sales of stocks and bonds c. sales of newly built houses d. b and c

c. sales of newly built houses

The Bureau of Economic Analysis categorizes private spending on education as:

consumption spending.

When Medicare pays your medical bill, it is considered to be:

consumption spending.

MULTIPLE CHOICE: Which of the following is NOT counted in the calculation of GDP? CHOICES: a. services of real estate agents who sell old houses b. services of used-car salespeople c. services of stock brokers d. All of them are counted in the calculation of GDP

d. All of them are counted in the calculation of GDP

The destruction of water aquifers, the accumulation of carbon dioxide in the atmosphere, or declining supplies of natural resources ________ the official GDP figure.

does not change

FILL IN THE BLANK: On eBay, you sell your collection of Pokémon cards. Your sale __________ GDP.

does not change the value of

FILL IN THE BLANK: The Interstate Bakeries Corporation buys wheat flour to make into Wonder Bread. The purchase of wheat flour ____________ GDP.

does not change the value of

FILL IN THE BLANKS: The primary topics of macroeconomics are {_______} and {_______}. The concept of {_______} was developed to quantify the ideas of those two.

economic growth; business fluctuations; GDP

Nations that have greater levels of corruption and higher tax rates usually have ________ levels of underground transactions. Therefore, their official GDP figures ________ the amount of production.

higher; understate

FILL IN THE BLANK: A real variable is one that corrects for ________.

inflation

FILL IN THE BLANK: Throughout most of human history, a failure to grow ________.

is normal

FILL IN THE BLANK: By definition, nominal GDP is ______ real GDP.

it depends on which year we choose as the base year.

In the United States, the portion of women who are in the official labor force has almost doubled since 1950, rising from 34% to about 60% today. As a result, mothers spend ______ time working at home than in 1950, but there are ______ nannies and house cleaners in the economy today. Therefore, the official GDP figure of 1950 ________ the amount of production relative to that of today.

less; more; understates

FILL IN THE BLANK: Real GDP calculations become trickier, the longer the period we compare. In 1925, for example, what was the price of a computer? Economists and statisticians involved in computing real GDP must worry about the value of ________ goods and changes in the ________ of old goods. The more years that pass, the more difficult it is to determine how to adjust for those changes.

new; quality

In India, women make up only 28% of the labor force, compared with 46% for the U.S. The output of the other 72% of Indian women is __________ in Indian GDP. Indian GDP statistics, therefore, __________ the real production of goods and services in India.

not included; understates

FILL IN THE BLANK: A tractor built in 2005 and still operating today is ________ of U.S. wealth ________ of today's GDP.

part; but not part

FILL IN THE BLANK: Growth in ___________ is usually the best reflection of changing living standards.

real GDP per capita

Leisure

• GDP measures output (production) • More leisure --> Less Output • Less leisure --> More Output Which is better? E.g., Japanese probably work more hours (though the data in the text state otherwise). What is the implication on Japanese GDP? It overstates economic well-being.

What are intermediate goods or services?

Intermediate Goods and Services (NOT counted in GDP). DEFINITION: Purchased for further production processes. WHY? To avoid multiple counting. Some goods and services are sold to firms and then bundled or processed with other goods or services for sale at a later stage. These are called intermediate goods and services. For example, when a bakery buys flour, eggs, and butter, we don't count these sales in GDP because these goods aren't finished. They are intermediate goods that, when combined, will become a finished good, for example, a cake.

Vocabulary-definition: Investment [Pg. 111]

Investment is private spending on tools, plant, and equipment used to produce future output.

CHECK YOURSELF QUESTION: Why is it sometimes difficult to determine if an economy is in a recession? [Pg. 110]

It is sometimes difficult to determine if an economy is in a recession because of simple data problems. It takes time to collect data; then the conclusions drawn from the data may be revised once additional data become available after additional time has passed.

SPLITTING GDP: What is the Factor Income Approach.

It measures GDP by adding up employee compensation, rent, interest, and profit. FACTOR INCOME APPROACH FORMULA: GDP/ GDI (Gross Domestic Income)= Employee Compensation + Rent + Interest + Profit. When a consumer spends money on final goods and services, that money ultimately is received by someone, namely by workers, landlords, lenders, and entrepreneurs. So, we can measure GDP by looking at the spending, or the other side of the ledger, by looking at the receiving.

FILL IN THE BLANKS: The national spending approach to calculating GDP requires a step in which we subtract imports. It {_______} that imports are bad for GDP. Let's consider a simple economy, one where I, G, and Exports are all zero and C = $100 billion. Our only imports come from a container ship that once a year delivers $10 billion worth of iPhones. Thus when we calculate GDP we add up national spending and subtract $10 billion for the imports: $100 billion - $10 billion = $90 billion. But suppose that this year the container ship sinks before it reaches our port in New York. When we calculate GDP this year, then, there are no imports to subtract. GDP {_______}. Remember that part of the $100 billion of national spending was $10 billion spent on iPhones. So this year when we calculate GDP we will calculate {_______}. That shouldn't be surprising since GDP is about domestic production and the sinking of the container ship {_______} domestic production.

It {doesn't mean } that imports are bad for GDP. When we calculate GDP this year, then, there are no imports to subtract. GDP {doesn't change }. So this year when we calculate GDP we will calculate {$90 billion - $0 = $90 billion }. That shouldn't be surprising since GDP is about domestic production and the sinking of the container ship {doesn't change } domestic production.

What does measuring GDP using the factor income approach include? HINT: There are 4 correct answers.

Measuring GDP using the factor income approach includes: (a) Employee compensation; (b) Rent; (c) Interest; and (d) Profit

What does measuring GDP using the national spending approach include? HINT: There are 4 correct answers.

Measuring GDP using the national spending approach includes: (a) Consumption; (b) Investment; (c) Government purchasing; and (d) Net exports

Which one of the following is included in the calculation of GDP?

Medicare

The movement for "green accounting" has tried to reform GDP statistics to cover the environment more explicitly.

Most economists agree with the logic behind green accounting, but it is not done because environmental amenities are difficult to value.

National Spending Approach: Net Exports (NX)

Net Exports (NX): *Net Exports (NX) = Exports (X) - Imports (M) = $2,478.3 billion - $3,396.5 billion = - $918.2 billion (2021)

Vocabulary-definition: Net Exports [Pg. 111-112]

Net exports are the value of exports minus the value of imports.

The underground economy and other non-priced production make it hard to accurately measure the precise level of GDP. If Jerome Powell, the Federal Reserve head, is trying to find out whether the U.S. economy has gone into a recession, are the difficulties of measuring non-priced production likely to be important problems for her purposes?

No, they do not matter as much in measuring changes. (As long as it is about the same fraction of GDP year in and year out, it does not pose a problem measuring "changes." It's like going on the bathroom scale with your shoes on: As long as you always wear your shoes, you can still tell whether you're gaining or losing weight every week).

Vocabulary-definition: Nominal variables, such as nominal GDP [Pg. 106]

Nominal variables, such as nominal GDP, have NOT been adjusted for changes in prices. Nominal GDP is calculated using prices at the time of sale.

CHECK YOURSELF QUESTION: Name a country with a low GDP but a high GDP per capita. [Pg. 108]

Of the top 10 countries ranked by GDP in Table 6.1, the United Kingdom and France have GDP under $2.5 trillion but have considerable GDP per capita.

CHECK YOURSELF QUESTION: On eBay, you sell your collection of Pokemon cards. Does your sale add to GDP? [Pg.105]

Pokemon cards were counted in GDP when they were first produced. Selling used Pokemon cards on eBay does not contribute to GDP.

What does Real GDP control for? HINT:

Real GDP controls for changes in prices.

1. Is Real GDP per capita perfect measure? 2. Is Real GDP per capita the best single measure of the average standard of living in a country? Why or why not?

Real GDP per capita is not a perfect measure. However, it is probably the best single measure of the average standard of living in a country. And that's not because material goods are the most important goods. It's because Real GDP per capita is correlated with many of the other things that we care about.

What is Real GDP per capita usually used to compare? HINT: There are 2 correct answers.

Real GDP per capita is usually used to compare the standard of living of: (a) the same country at different points in time. (b) two different countries at one point in time.

Vocabulary-definition: Real variables, such as real GDP [Pg. 107]

A real variable is one that corrects for inflation, namely a general increase in prices over time. Real variables, such as real GDP, have been adjusted for changes in prices by using the same set of prices in all time periods. Real GDP tells us- if the prices of goods and services hadn't changed, how much would GDP have increased, or decreased? Real GDP per capita declines during recessions. In fact, a decline in Real GDP is part of what defines a recession. Declines in Real GDP also tend to be accompanied by increases in unemployment.

Vocabulary-definition: Recession [Pg. 109]

A recession is a significant, widespread decline in real GDP and employment.

Nonpriced Production

Although the following pairs offer similar services, only one of the services contributes to GDP (either as a final service or an intermediate one). Which one does NOT contribute? • Services of domestic servants vs. Services of housewives/ husbands --> ANSWER: housewives/ husbands. • Cooking at home vs. Cooking at a restaurant --> ANSWER: Cooking at home. • Driving in public transportation vs. Driving by yourself --> ANSWER: Driving by yourself. What is the implication on GDP? • It understates the amount of production. Should they be included? • Yes, unless they are intermediate.

The Underground Economy

Are the following counted? (1) Illegal drugs (2) Illegal Prostitution (3) Illegal Gambling (4)Unreported activities ANSWER: No. -No one's going to report this production (illegal drugs). - The babysitter probably won't report this production (unreported activities). What is the implication on GDP? • It understates the amount of production. Should they be included? • Unreported otherwise legal activities: Yes • Others: Maybe...

NOTES: Market Value (Prices)

A Monetary Measure Year 1: 2 Economics textbooks and 2 Computers. Year 2: 3 Economics textbooks and 1 Computer. Why do we use prices to measure the "Values" of goods and services?

Which goods and services are included in U.S. GDP? 1. HOUSE. Your parents sold your childhood home this year. (You live in the U.S.) 2. CANDLE. Your friend bought a U.S. made candle at Target this year. 3. GAMING CONSOLE. Your friend bought a gaming console at your local Walmart but the gaming console was manufactured overseas. 4. UBER. Your mom took an Uber. 5. NETFLIX. You bought a subscription to Netflix this year. 6. GOVERNMENT SPENDING. Your parents received a stimulus check from the U.S. Federal Government. 7. CAMP. You pay $1,000 for a 1-week adventure camp in Montana. 8. HAIRCUT. You cut your dad's hair this month because of the pandemic. 9. INSTAGRAM. Your little sister joined Instagram this year. 10. POSTER. A Canadian resident bought an art poster created in the U.S.

1. No, Not included in U.S. GDP. This is considered a used good and reselling a used good does NOT count towards U.S. GDP. 2. Yes, Included in U.S. GDP. This is a final good made in the U.S. and sold this year, so it definitely counts towards GDP. 3. No, Not included in U.S. GDP. The gaming console is imported from another country, so this will not count towards U.S. GDP. However, technically, a small portion go the cost of the gaming console will count towards U.S. GDP. Specifically, the markup that Walmart charges in order to provide the service of stocking and selling the console in the U.S. will count towards U.S. GDP. 4. Yes, Included in U.S. GDP. This is a U.S. service that your mother paid for, so this counts towards U.S. GDP. 5. Yes, Included in U.S. GDP. Netflix is a U.S. company that provides a service, so it counts towards U.S. GDP. 6. No, Not included in U.S. GDP. A stimulus check is a government transfer. Only a government purchase of goods or services counts towards U.S. GDP. 7. Yes, Included in U.S. GDP. An adventure camp is a service, so it counts towards U.S. GDP. 8. No, Not included in U.S. GDP. If your dad would have gotten his haircut at a local barbershop, this would have counted towards U.S. GDP. However, because you cut it, it does not count. 9. No, Not included in U.S. GDP. Because having an account on Instagram is free, it does NOT affect U.S. GDP. 10. Yes, Included in U.S. GDP. Since this poster was made in the U.S., it counts towards U.S. GDP no matter where the buyer is.

Are the following included in GDP? 1. An import of an automobile produced in Japan and sold to a consumer in 2018. 2. A refrigerator was produced by its manufacturer in 2017, sold to a retailer in 2017, and sold by the retailer to a final consumer in 2018.

1. No. [C ↑ NX ↓] 2. Yes in 2017 [ I ↑], no in 2018 [C ↑ I ↓]. Accounting

What are the two ways GDP can increase?

1. Prices can increase. In this case, the GDP number goes up, but the economy isn't actually producing more goods and services. It's inflation which is driving the higher GDP. The increase in GDP is a mirage, a nominal increase only. [NOMINAL GDP] 2. If we DO produce more valuable goods and services. That could mean simply more goods and services, or better goods and services, more highly-valued goods and services. We WANT this type of Increase in GDP. This isn't a mirage, this is a real increase in GDP. Real GDP measures the second type of growth. And the Real GDP statistic - it controls for inflation by adding up all the goods and services produced in an economy using the same set of prices over time. [REAL GDP]

1. What is Real GDP per capita is positively correlated with? HINT: There is 3 correct answers. 2. What is it NOT positively correlated with?

1. Real GDP per capita is positively correlated with: (a) Life Expectancy; (b) Happiness; and (c) Education. 2. Real GDP per capita is NOT positively correlated with malaria cases per capita.

Is there a positive or negative correlation between Real GDP Per Capita and 1. Life Expectancy 2. Happiness 3. Education

1. There's a positive correlation. Countries that have a higher real GDP per capita also have a higher life expectancy. 2. There's a positive correlation. Countries that have a higher real GDP per capita also tend to have happier people, on average. 3. There's a positive correlation. As GDP per capita increases, so does human development.

Investment: 1. Is a tractor, purchased by a farmer, investment? 2. Isn't it an intermediate good that is used to produce corn, soybeans, wheat, etc.? Why or why not?

1. Yes. 2. No. The price of a tractor is NOT reflected in the final price of corn, soybeans, wheat, etc. WHY NOT? The cost of a tractor is a FIXED COST. Fixed costs don't affect the price in the short run.

FILL IN THE BLANK: Since a series of liberalization reforms were put in place in the late 1980s and early 1990s, India's real GDP per capita has been growing rapidly. In the 10 years between 2000 and 2010, for example, real GDP per capita grew at approximately 7% per year, leading to a {______} increase in real GDP per capita. OPTIONS: -70% -100% -200%

100%

IN A YEAR EXAMPLE:

A 2% increase a year. 100 -------------> 102 GDP increased (at the rate of) 2% (per year) in 1Q. GDP increased (at the speed of) 2% (per year) in 1Q. [LOOK AT NOTEBOOK]

CHECK YOURSELF QUESTION: Name a country with a high GDP but a low GDP per capita. [Pg. 108]

China has a high GDP but a low GDP per capita.

CHECK YOURSELF QUESTION: Which is the largest of the national spending components: C, I, G, or NX? [Pg. 114]

Consumption (C) is the largest component of national expenditure, averaging 63.1%.

CHECK YOURSELF QUESTION: Which is more stable, consumption spending or investment spending? [Pg. 114]

Consumption expenditures are more stable than investment expenditures. It's usually easier to delay investment than consumptions, so consumption normally varies only slightly, but investment expenditure can vary dramatically, especially in an economic downturn, as businesses hold off on investment. For these reasons, the part of consumption that is most volatile is consumption of durable goods such as cars and major appliances, because the purchase of these goods can usually be easily delayed.

Vocabulary-definition: Consumption [Pg. 111]

Consumption is private spending on finished goods and services.

FILL IN THE BLANK: Real GDP per capita in the U.S. ____________ during the Great Recession of 2009.

Decreased.

There is debate about when the 2001 recession started. The official NBER starting date is March 2001, but data revisions have led many people to conclude that the recession actually started in late 2000. Why all the fuss about the timing?

Democrats wanted to show that the recession started in March 2001 while Republicans wanted to show that it started in late 2000.