Chapter 19: Introduction to Macroeconomics and GDP

Parts of a business cycle:

-Expansion (from the bottom of a trough to the next peak) -Contraction (from the peak downward to the trough)

Total GDP:

-Not as accurate for cross-country comparisons -Does not adjust for population size of country

Macroeconomics

-the study of the economy of an entire nation or society. -Aggregate-level -Inflation -Unemployment -Economic growth

the three primary uses of GDP data:

-to measure living standards -to measure economic growth -to determine whether an economy is experiencing recession or expansion.

To compute real GDP, we use the current prices of goods and services and then adjust them to prices from an agreed-upon common time period, or base period. We do this in two steps:

1. Divide nominal GDP by the price level. 2. Multiply the result by the price level (100) from the base period.

A ___________ is a short-run fluctuation in economic activity.

A business cycle is a short-run fluctuation in economic activity.

A __________ is a short-term economic downturn.

A recession is a short-term economic downturn.

What Does GDP Tell Us about the Economy?

Economists measure the total output of an economy as a gauge of its over- all health. An economy that produces a large amount of valuable output is a healthy economy. If output falls for a certain period, there is something wrong in the economy. The same is true for individuals. If you have a fever for a few days, your output goes down—you don't go to the gym, you study less, and you might call in sick for work. We care about measuring our nation's economic output because it gives us a good sense of the overall health of the economy, much like a thermometer that measures your body temperature can give you an indication of your overall health. In this section, we introduce and explain our measure of an economy's output.

The Bureau of Economic Analysis (BEA)

GDP = C + I + G + NX

Real GDP

GDP adjusted for changes in prices.

What are some shortcomings of GDP data?

GDP data do not include the production of nonmarket goods, the underground economy, production effects on the environment, or the value placed on leisure time.

nominal GDP

GDP measured in current prices and not adjusted for inflation.

The combined prices of all goods in an economy?

Macroeconomics

The income of an entire nation or a national economy?

Macroeconomics

The job status of a national population, particularly the number of people who are unemployed?

Macroeconomics

The production of an entire economy?

Macroeconomics

Nonmarket Goods

Many goods and services are produced but not sold. Those goods and services are not counted in GDP data even though they create value for society. For instance, work done at home such as an individual caring for their children, washing their dishes, mowing their lawn, or washing their car are services produced but not counted in GDP.

The income of a person or the revenue of a firm?

Microeconomics

The job status and decisions of an individual or firm?

Microeconomics

The price of a single good?

Microeconomics

The production of a single worker, firm, or industry?

Microeconomics

Nominal vs Real GDP

Nominal GDP typically rises faster than real GDP because nominal GDP reflects both growth in real production and growth in prices (inflation). From 2009 to 2015, nominal GDP in the United States rose by 24%, but nearly half of that increase was due to inflation. The increase in real GDP during the same period was 13%.

Sum of output from all economic activity

Output = GDP = Income

How does the difference in nonmarket household production affect a comparison of GDP between Zimbabwe and Canada?

The GDP statistics for Zimbabwe are biased downward more than the statistics for Canada, since a larger portion of Zimbabwe's actual production goes unreported. While Zimbabwe is actually a poorer nation than Canada, official statistics exaggerate the difference slightly, making Zimbabwe seem poorer than it is.

Underground Economy

The shadow economy encompasses transactions that are not reported to the government and therefore are not taxed. Usually, these transactions are settled in cash. Many of these exchanges are for illegal goods and services, such as narcotics and illegal gambling. However, some transactions are for legal goods and services, but these activities are not reported in order to avoid taxes. Legal activities that go unreported include tips for waiting tables and tending bar, lawn services, and even home renovations. Because underground transactions are not reported, they are not easily measured and so they are not included in U.S. GDP calculations.

In 2011, many analysts claimed that the economy of India began slowing as GDP growth declined from 8.4% in 2010 to 6.9% in mid-2011.

This case reflects the use of GDP data to identify and measure business cycles and indicates a potential recession. The statement describes a short- run window of data.

The economy of Italy has slowed considerably over the past two decades, as evidenced by an average growth of real GDP of only 1.25% per year from 1990 to 2010.

This observation considers growth rates over 20 years, which means that GDP was applied to look at long-run economic growth.

Nicaragua and Haiti are the poorest nations in the Western Hemisphere, with annual 2013 per capita GDP of only $1,851 and $820, respectively.

This statement uses data to show living standards. The numbers indicate that average Nicaraguans and Haitians have to live on very small amounts of income each year.

Conclusion

We began this chapter with the misconception that there is no reliable way to determine how well an economy is performing. But GDP is a measure that works well. In the short run, it helps us recognize business cycles, including the ups of an expansion and the downs of a recession. GDP also serves as a reasonably good indicator of living standards around the globe and over time. Nations with better living conditions are also nations with higher GDP. Thus, even though it has some shortcomings, GDP is a sound indicator of the overall health of an economy. In the next chapter, we look at another macroeconomic indicator—the unemployment rate. The unemployment rate and other job indicators give us an additional dimension on which to consider the health of an economy.

The GDP deflator

a measure of the price level that is used to calculate real GDP.

Gross domestic product (GDP) also measures

a nation's income.

economic contraction

a phase of the business cycle during which economic activity is decreasing.

economic expansion

a phase of the business cycle during which economic activity is increasing.

Gross national product (GNP), an alter- native measure of national output, is the out- put produced by workers and resources owned by residents of the nation.

an alternative measure of national output, is the out- put produced by workers and resources owned by residents of the nation.

price level

an index of the average prices of goods and services throughout the economy.

Durable consumption goods

consumed over a long period

Nondurable consumption goods

consumed over a short period

The BEA breaks GDP into four major categories: consumption (C), investment (I), government purchases (G), and net exports (NX).

consumption (C), investment (I), government purchases (G), and net exports (NX).

The peaks and troughs divide the business cycle into two phases:

expansions and contractions.

Final goods

goods that are sold to final users.

Intermediate goods

goods that firms repackage or bundle with other goods for sale at a later stage.

Economic growth

measured as the percentage change in real per capita GDP.

Today, a majority of U.S. GDP is service output such as

medical, financial, transportation, education, and technology services.

When GDP goes up...

national output and income are both higher.

Consumption goods can be divided into two categories: .

nondurable and durable.

Services

outputs that provide benefits without producing a tangible product

investment

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

The Great Recession

the U.S. recession lasting from December 2007 to June 2009.

intermediate goods example

the cell phone's outer case and keyboard are intermediate goods because the phone manufacturer combines them with other intermediate goods, such as the operating system, to produce the cell phone, which is the final good.

When GDP falls...

the economy is producing less than before, and total national income is falling.

inflation

the growth in the overall level of prices in an economy.

Gross domestic product (GDP)

the market value of all final goods and services produced within a nation during a specific period of time—typically, a year. GDP is the primary measure of a nation's output.

Consumption (C)

the purchase of final goods and services by households, with the exception of new housing.

Macroeconomics

the study of the broader economy.

GDP

the sum of all the output from coffee shops, doctor's offices, software firms, fast-food restaurants, and all the other firms that produce goods and services within a nation's borders.

net exports

total exports of final goods and services minus total imports of final goods and services

Not counted in GDP:

washing your own car.

Macroeconomics example

we examine total output in an economy rather than just a single firm or industry. We look at total employment across the economy rather than employment at a single firm. We consider all prices in the economy rather than the price of just one product, such as salmon.

per capita GDP

which is GDP per person.

Macroeconomics

you consider what happens when the national output of goods and services rises and falls, when overall national employment levels rise and fall, and when the overall price level goes up and down.

Microeconomics example

you study the markets for salmon fillets (an example from Chapter 3). You study the behavior of people who consume salmon and firms that sell salmon—demanders and suppliers. Then you bring them together to see how the equilibrium price depends on the behavior of both demanders and suppliers.

Microeconomics

you study what people buy, what jobs they take, and how they distribute their income between purchases and savings; you also examine the decisions of firms and how they compete with other firms.

How is GDP computed?

✷ GDP is the total market value of all final goods and services produced in an economy in a specific time period, usually a year. ✷ Economists typically compute GDP by adding four types of expenditures in the economy: consumption (C), investment (I), government spending (G), and net exports (NX). Net exports are total exports minus total imports. ✷ For many applications, it is also necessary to compute real GDP, adjusting GDP for changes in prices (inflation).

What does GDP tell us about the economy?

✷ GDP measures both output and income in a macroeconomy. ✷ It is a gauge of productivity and the overall level of wealth in an economy. ✷ We use GDP data to measure living standards, economic growth, and business cycle conditions.

How is macroeconomics different from microeconomics?

✷ Microeconomics is the study of individuals and firms, but macroeconomics considers the entire economy. ✷ Many of the topics in both areas of study are the same; these topics include income, employment, and output. But the macro perspective is much broader than the micro perspective.