Macroeconomics Chapter 6

If 2016 nominal GDP = $18.57 trillion and 2016 real GDP (in 2009 dollars) = $16.66 trillion

GDP Deflator = 18.57 trillion/16.66 trillion x 100 = 111.46 This tells us that 2016 prices were 11.46% higher (111.46-100) than 2009 prices

National spending approach

Y = C + I + G + NX

C

consumption Private spending on finished goods and services

What does the investment component in GDP include?

spending on goods to be used in future production

I

investment Private spending on tools, plant, and equipment used to produce future output.

Nominal variables

variables such as nominal GDP that have not been adjusted for changes in price

Problems with GDP

*GDP adds up the value of finished goods and services but does not subtract the value of bads: -Pollution -Changing supplies of natural resources -Loss of animal or plant species -Crime •"Green Accounting" attempts to cover the environment more explicitly. •Environmental amenities are difficult to value.

Problems with GDP

*GDP does not count nonpriced production when valuable goods and services are produced but no monetary payment is made. -Doing housework, reading free blogs, volunteering *This introduces two biases into GDP statistics: biases over time and biases across nations. -As more women in the United States entered the workforce, housework shifted from unpaid to paid. -Women's participation in the workforce varies across countries, underestimating the proportion of work included in GDP.

Summary CH. 6

*GDP is an estimate of the economic output of a nation over a year. *GDP can be summed up in different ways.•The national spending identity, Y = C + I + G + NX, splits GDP according to different classes of income spending. *The factor income approach - Y = Employee compensation + Interest + Rent + Profit - splits GDP into different classes of income receiving *GDP per capita is a rough estimate of the standard of living in a nation. *Real GDP is corrected for inflation by using the same set of prices in every year. *GDP does not include: -Goods in the underground economy -The value of goods that are difficult to price. -The value of "bads" -The health of nations. -The distribution of income.

What is GDP?

-An economy's total output includes millions of different goods and services. -Some goods are more valuable than others, so we can't just add up quantities. -GDP uses market values to determine how much each good or service is worth and then sums the total -To avoid double counting, only finished goods are included in GDP. -However, machinery and equipment used to produce other goods are included in GDP.

Problems with GDP

-GDP does not count the health of nations. -To allocate resources, we must put numbers on the value of health. -Between 2007 and 2014, life expectancy increased in the U.S. by about 1 year. -Economists have estimated that people value an additional year of life at about $150,000. -An extra year of life valued at $150,000 for 300 million people is worth $45 trillion.

Cyclical and Short-Run Changes

-GDP is used to compare economic output across countries and over long periods. -GDP is also used to measure short-run fluctuations in an economy. -According to the National Bureau of Economic Research (NBER), a recession is "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."

What is GDP?

-GDP measures production, so sales of old houses, used goods, and financial assets do not add to GDP. -U.S. GDP includes goods and services produced by labor and capital located in the United States, regardless of the nationality of the workers or property owners.

Real GDP Growth per Capita

-Growth in real GDP per capita is usually the best reflection of changing living standards. -Growth in real GDP does not account for changes in population. -There can be large differences for countries with rapidly growing populations.

Problems with GDP

-Illegal or underground-market transactions are omitted from GDP. -Underground transactions are especially significant in countries with higher levels of corruption and taxes. -The informal sector in Latin America is estimated at 41% of officially measured GDP. -In the United States or Western Europe, the underground economy is likely 10%-20% of GDP.

What is GDP?

-National wealth refers to the value of a nation's entire stock of assets. -GDP tells us how much the nation produced in a year, not how much it has accumulated in its entire history. -GDP is calculated by the Bureau of Economic Analysis (BEA), part of the Department of Commerce.

GDP Deflator

-The GDP Deflator is a price index that can be used to measure inflation. -It is the ratio of nominal to real GDP: GDP Deflator = Nominal GDP/Real GDP x 100

Nominal vs. Real GDP

-To remove the effect of price changes, we calculate GDP in constant prices. 2016 Nominal GDP: 2016 prices × 2016 quantities = $18.6 trillion 2000 Nominal GDP:2000 prices × 2000 quantities = $10.3 trillion 2000 Real GDP (in 2016 dollars): 2016 prices × 2000 quantities = $14.0 trillion •If prices in 2000 and 2016 were the same, GDP in 2000 would have been $14.0 trillion.

Recession

A downward fluctuation in the economy like this is known as

Recession

A significant, widespread decline in real GDP and employment.

Recession is a key component of A)Macroeconomics B)Microeconomics C)Both macroeconomics and microeconomics

A) Macroeconomics

Which of the following statements best describes a business cycle? A) alternating periods of increasing and decreasing economic output B)the time it takes a firm to convert raw materials into a final good or service C) a calendar year divided into four years each containing three months D) the relationship between the returns on Treasury securities and the time to maturity

A) alternating periods of increasing and decreasing economic output

Which of the following splits GDP according to the national spending approach? A) C+I+G+NX B) Revenues - expenses C) Employee compensation + rent + interest + profit

A. C + I + G + NX

Real GDP is: A) Adjusted for changes in the price level B) Not adjusted for changes in the price level C) Adjusted for price increases but not decreases

A. Real GDP is adjusted for changes in the price level

Please sort the items below into the appropriate box based on whether the change signals: 1) An increase in GDP and improved standard of living 2) An increase in GDP without improved standard of living, or 3) No increase in GDP and/but improved standard of living

An increase in GDP and improved standard of living -improvements in production technologies -school quality increases from procurements of new equipment An increase in GDP without improved standard of living -household unpaid work becomes formalized in GDP -the black market shrinks because firms shift to the formal sector but production remains the same No increase in GDP and improved standard of living -workers work less but produce same amount -volunteers clean a river used to swimming -income inequality decreases and people dislike inequality -school quality increases from parental involvements

G

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

A widespread decline in real GDP and employment is called: A) Inflation B) A recession C) A business cycle

B. A decline in real GDP and employment is called a recession.

If GDP in 1990 was $5,803 billion and GDP in 1991 was $5,995 billion, what was the growth rate of GDP? A) 1.92% B) 3.20% C) 3.31%

C. The growth rate was ($5,995-$5,803)/$5,803) x 100 = 3.31%

Which of the following is a finished good? A) a book in Amazon's inventory B) Tires purchased by a Toyota plant C) Tires purchased by you for your car

C. Tires purchased by you are a finished good because they are for your own use (consumption), not for resale (sold to final user)

In Spectacula, sanitation engineers are being replaced with garbage robots, which have fewer negative effects and many more significant benefits. However, the labor cost efficiency of garbage robots has driven down the price of collecting garbage so significantly that sanitation engineers can no longer compete. After six months, everybody has switched to the cheaper and better garbage robots. Please select the choice below that best describes the short-run effects of this industrial change on Spectacula's GDP and its standard of living. Assume that Spectacula consumes the same quantity of collecting garbage now as they did six months ago. GDP decreases and standard of living increases GDP and standard of living both increase GDP and standard of living both decrease GDP increases and standard of living decreases

GDP decreases and standard of living increases

GDP per capita

GDP divided by population. (an average)

In what way does GDP not give an accurate representation of standard of living?

GDP does not account for how people distribute their time between work and leisure. GDP doesn't account for changes in environmental quality. GDP does not measure production that occurs outside of the market economy.

Growth Rates

Growth rate of GDP for 2016 =((GDP2016 - GDP2015) / GDP2015) × 100 Using actual numbers (in billions):(($18,567 - $18,037) / $18,037) × 100 = 2.9%

The many ways of splitting GDP, two common ways.

National spending approach and factor income approach

NX

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

Y

Nominal GDP The market value of all finished goods and services

Business Fluctuations (or business cycles)

Short-run movements in real GDP around its long-term trend.

Gross Domestic Product (GDP)

The market value of all finished goods and services produced within a country in a year.

Real variables

Variables such as real GDP that have been adjusted for changes in prices by using the same set of prices in all time periods.

Factor Income Approach

Y = employee compensation + rent + interest + profit -When a consumer spends money, the money is received by workers, landlords, owners of capital, and businesses. -We can therefore calculate GDP by adding up all of the incomes received. -When using the factor income approach, we need to make adjustments for things like sales taxes.

National spending approach

add up the components of spending: Y=C+I+G+(exports - imports)

Factor income approach

add up the income generates by producing goods and services: Y= wages + rent + interest = profit

Finished goods and services

are sold to final users and then consumed or held in personal inventories

Intermediate goods

are sold to firms and then bundles or processed with other goods or services for sale at a later stage.

Real GDP per capita is NOT an adequate measure of a)a country's average aggregate output per person. b)average real GDP per person in the economy. c)a country's average aggregate spending per person. d)the well-being of each person in an economy.

d) the well-being of each person in an economy

Nominal GDP

is calculated using prices at the time of sale -GDP in 2016 is calculated using 2016 prices -GDP in 2000 is calculated using 2000 prices *creates problems when comparing GDP over time -can't tell if an increase in nominal GDP was due to greater production or increased prices. *increases in production, not increases in prices, improve the standard of living.

A good produced in the current time period but put into a firm's inventory instead of being sold ___.

is considered unsold inventory and counted as a part of investment in current GDP.

Gross national product (GNP)

is similar to GDP but measures what is produced by the labor and property supplied by U.S. permanent residents. The market value of all finished goods and services produced by a country's permanent residents, wherever located, within a year.