lesson 1: GDP

growth rate formular

(Xt - X t-1 )/ (Xt-1) x 100

how often is gdp calculated

-calculated every quarter of the year by the bureau of economic analysis (BEA) which is part of the department of commerce and is based in D.C. -but we focus on yearly numbers

if something is not part of the finished product or service, it should be counted as part of gdp in year produced

-capital goods (ie machinery and equipment, sewing machines, tractors, forklifts, etc. ) are all used to produce other finished goods, but they don't disappear during the process, so are counted in their own production

how to interpret gdp deflator

-gdp def = 100 means that there was no inflation -gdp def <100 means that the general level of prices decreased in (100-gdp deflator)% -gdp def > 100 means tha tthe general level of prices increased in (gdp deflator -100)%

cyclical and short-run changes in gdp

-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 -recessions

Problems w/ GDP

-gdp measures the market value of finished goods and services, but we do not know the market value of many goods and services -GDP doesn't count: 1. nonpriced production: household activities, such as child rearing and gardening 2. the underground economy: illegal or hidden activities, such as the production of illicit drugs, that are difficult or impossible to measure 3. health: the value of health isn't included in GDP even tho society clearly values it 4. bads: environmental costs such as pollution produced as a result of economic activity 5. distribution of income: differences in each individual's income that aren't shown by the economy-wide GDP measure (don't know where increase in gdp is going)

what does it mean to split gdp?

-gdp serves as a measure of production, expenditure, and income for the aggregate economy -each of the ways of splitting throws a different light on the economy -no way is better than another - it all depends on the questions being asked

gdp can increase if prices increase and output increases

-if prices only increase, then gdp could increase w/ people no better off -inflation can increase nominal gdp only b/c real gdp adjusts inflation

how does GPD measure an economy's total output which includes millions of different goods and services??

GDP multiplies quantity produced x price for every good/service and then adds them up -uses market values to express different goods and services in the same unit of measurement and then sums the total

GDP per capita

GPD/ country's population -often used to describe std of living

are sales of financial securities like stocks and bonds included in gdp?

NO, they are claims to financial assets, they are not themselves produced good or services -same logic as used goods applies -services of brokers do however add to gdp

remember gdp is within a country

US GDP is market value of the finished goods and services produced by labor and capital LOCATED in the US regardless of the nationality of the workers or property owners of capital goods

total spending to purchase production or national spending approach

Y = C + I + G + NX -GDP can be measured as the sum of expenditures, or purchases, by final users -finished goods and services (Y) can be consumed (C), invested (I), and chased by governments (G) or foreigners (NX) -accounting identity useful to analyze short-run economic fluctuations

Total production in the economy or value added approach

Y = VA (value added) = total sales - value of intermediary inputs -gdp can be measured as either total sales less the value of intermediate inputs or as the sum of the "value added" at each stage of the production process -central to us industry accounts and is used to analyze the industrial composition of US output

Total Income Generated by Production or Factor Income Approach

Y = Wages + Rent + Interest + Profit -b/c the market price of a good or service will reflect all of the incomes earned and costs incurred in production, GDP can also be measured as the sum of these charges -when a consumer spends money, the money is received by workers, landlords, owners of capital, and businesses -sales taxes are an exception, so need to add -we can therefore calculate GDP by adding up all of the incomes received -acct identity useful to analyze economic growth

don't forget services for gdp

a service provides a benefit to individuals w/o production of tangible goods -ex. paying a consultant to fix a software problem on a computer, haircuts, transportation, entertainment, and spending on medical care -services are biggest in us economy (70%)

recession

according to National Bureau of Economic Research (NBER), a recession is : "a significatn decline in economic activity spread across the economy, lastig more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales -widespread geographically and also across different sectors of the economy -we measure a decline or an increase in economic variables using the growth rate -have been 11 recessions in us b/w 1948 and 2015 (shaded bars), as well as expansions or booms (GDP grows at a faster rate than normal

why do we divide by old value?

b/c countries can have some absolute deviation, but it can mean v different things based on size of their country

average std of living could fall even if real gdp remains stable

b/c if real gdp remains stable, population could still grow

why don't we include intermediate prices in gdp?

b/c value of the intermediate goods is already taken into account as part of production cost of finished good

nominal gdp

calculated using price at time of sale -GDP in 2016 is calculated using 2016 prices -GDP in 2000 is calculate using 2000 prices -creates problems when comparing GDP over time because we can't tell if an increase in nominal gdp was due to greater production or increased prices -but increases in production, not increases in prices, improve the std of living , so we use real gdp to compare

rough way to summarize changes in economic output and std of living

economists use the country's gdp and gdp per capita

if pressed to choose a single indicator of current economic performance

economists would probs choose real GDP growth -uses percent change in real gdp b/c i susually best reflection of changing living stds

net exports

exports minus imports C+I+G includes spending on imports and foreigners bought part of the domestically produced goods and services -we must subtract imports and add exports to obtain the domestic product

business fluctuations

fluctuations of real gdp around its long-term trend, or normal growth rate -business cycles

gdp in a year

gdp tells us how much the nation produced in a year, not how much the nation has accumulated in its entire history -gdp measures a flow; wealth is a stock -think of it like wages-weages aren't the same thing as wealth

finished goods/services

goods or services that are sold to final users and then consumed or held in personal/enterprise inventories

intermediate goods

goods or services that are sold to firms and then bundled or processed with other goods/services for sale at a later stage

when gdp is measured using factor income approach is also called?

gross domestic income -which is similar but not equal to result from nat'l spending approach since they're calculated in different ways -in recession, will look at both if one will give us clearer or more accurate picture

investment

is private spending on tools, plant, and equipment (capital) that are used to produce future output; made mostly by businesses

determining when recession ends and begins

isn't always obvious in part b/c economic data are often revised over time -govt often makes significant changes in gdp estimates b/w the og estimate and final -since updates can occur years after the first estimates are released, the usefulness of gdp as a timely indicator is dampened and our understanding of recessions can change over time

are used goods counted in gdp?

no because gdp measures production; and production is a flow measure, adding to the wealth stock -sales of used cars and old houses don't add to gdp b/c they weren't produced in the year in which they are sold -we wouldn't want to count them twice (double-dipping) and it's really just transfer of property (wealth stock) -services of real estate agents, used-car salespeople, and brokers do however add to gdp because their services are produced in year sold

real increases in gdp

occur when economy produces more or better goods

investment

output that is not consumed, used to make more goods and services in future

gdp deflator

price index that can be used to measure inflation = nominal gdp/real gdp x 100

consumption

private spending on finished goods and services; made mostly by households -also includes speending on health care whether comes from pocket, insurance co., or govt -education also included

std of living

real gdp per capita is a rough measure

what does real growth rate and nominal growth rate express?

real growth rate reflects increases in production (more goods and services), but nominal growth rate expresses increases in production AND prices

difference b/w gdp and gdi

result of calculation issues

business fluctuations (business cycles)

short-run movements in real GDP around its long-term trend

gross national product (GNP)

similar to gdp, but measures what is produced by the labor and property supplied by US residents wherever in the world that labor or capital is located

government purchases

spending by all levels of govt on finished good and services for consumption and investment; includes spending on tanks, airplanes, office equipment, roads; doesn't include transfers (Medicare, unemployment insurance)

GDP

the market value of all finished goods and services produced within a country in a year -gross domestic product

three ways of splitting gdp

there are three ways of thinking abt what gdp measures: -total production in the economy -total spending to purchase that production -total income generated by that production

nominal variables

variables such as nominal gdp that haven't been adjusted for changes in price

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 -doesn't matter which price you use, just has to be the same

if real gdp per capita falls and civilian unemployment rises

we're in a recession

gdp measures production in a year

while national wealth measures a stock of assets