Macroeconomics Chapter 6 (Introduction to Macroeconomics and GDP)

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Gross Domestic Product (GDP)
-The market value of all final goods and services produced within a country during a specific period

-The production of an entire economy
-A measure of total output
-GDP is an indication of the overall health of an economy

Measuring GDP
Measuring GDP
Intermediate Goods
-Intermediate goods are goods that a firm repackage or bundle with other goods for sale at a later stage

-Examples: microchips, motherboards, wires

Final goods
-are goods sold to consumers

-Example: laptop

Intermediate vs. final goods
-To get an accurate GDP estimate and avoid double counting

-Finals goods are included in GDP
Intermediate goods are not

Goods vs. Services
-Goods are tangibles (final goods)

-Services are intangibles: an output that provides benefits without the production of a tangible product

Services as a Share of U.S. GDP
-Have risen steadily since 1960
– Minor fluctuations but it has an increasing long term trend
GDP Produced within a Country
-GDP includes only goods and services produced domestically, or within the physical borders of a nation
-Example: Nike is a US firm (owned by US citizens) that produces shoes in Thailand. The shoes produced in Thailand count as GDP for Thailand
Gross National Product (GNP)
-The output produced by workers and resources owned by residents of the nation
GDP has to be during a specific time period
-Don’t want to recount a good that was produced last year
-Has to do with double-counting again
4 Major Categories of GDP
1. Consumption
2. Investment
3. Government Purchases
4. Net Exports
1. Consumption
-The purchase of final goods and services by households, with the exception of new housing
Two Divisions of Consumption
1. Durable Goods
2. Non-Durable Goods
Durable goods
-Goods consumed over a long period of time

-Cars, appliances, computers, furniture

Non-durable goods
-Goods consumed over a short period of time

-Groceries, cigarettes, medicines, cosmetics, clothes

2. Investment
-Private spending on tools, factories, and equipment used to produce future output

Examples: Factory, shovel

GDP also includes purchases by businesses that add to their inventories
-Inventories represent a stock of goods that firms can use to produce their product in the future. An increase in inventory allows the firm to make more and is an investment for the future.
3. Government Purchases
-Government purchases includes spending by all levels of government on final goods and services

-Government employee salaries, Gov. buildings and equipment produced, national defense, etc.

Does NOT count
-Transfer payments, such as welfare or social security since when households spend this income, it will enter GDP as part of consumption or investment
4. Net Exports
-Net Exports are exports minus imports of final goods and services
-If imports > exports, then NX < 0
Is it bad that NX is negative?
-It seems to reduce GDP, but more imports means more goods and services for people in this country
GDP Equation
Relationship of GDP(output) and Income
-Output and income are essentially the same (Output=GDP=Income)
-The output you produce is sold and you receive income for what you sell
-The more you produce, the more your income. Nations that produce a large amount of high-value output are relatively wealthy
Three uses of GDP Data
1. Estimate living standards across time and nations
2. Measure economic growth
3.Determine whether an economy is experiencing a short-run expansion or recession
1.Measuring Living Standards
See below
Total (Nominal) GDP
-When an economy produce more, the income is higher. This means that people can consume more, they can afford to go to college, they can travel more, etc.

-However the total GDP may not be an indicator of living standards for a typical person. Why?

-Does not adjust for population size of country

Per capita GDP
– GDP per person (GDP divided by population)

-Average living standards in a nation

2.Measuring Economic Growth
-When economies grow, GDP as a number is greater and the living standards rise.
-Thus, you can think of changes in economic growth as changes in living standards over time.
Nominal GDP
-GDP measured current prices
Real GDP
-GDP adjusted for changes in prices i.e. measure with prices held constant over time

-Prices of goods and services almost always rise over time because of inflation

Revisit Inflation:
-The growth in the overall level of prices in an economy
Price level
-An index of the average prices of goods and services in an economy

-Used to evaluate GDP over time

GDP Deflator
-A measure of the price level that includes prices of final goods and services in GDP

-Used to “deflate” out inflation from nominal GDP so we can find Real GDP

Finding Real GDP
Real GDP= (Nominal GDP/Price Level) *100
GDP Growth Rates
-Tell us how fast our economy is growing
-A negative growth rate means the economy is contracting
-Can be calculated using a percent change formula
Price level growth rate
-Can be calculated using a percent change formula
Look up the formulas (Slide 39)
2.Measuring Economic Growth
– Economic Growth is a percentage change in Real per capita GDP
-Whenever you consider changes in GDP over time, you should use Real GDP in order to ensure that your data is not biased by price changes
Economic Growth Rate
=%Delta Nominal GDP-%Delta Price Level-%Delta population
3.Measuring Business Cycles
See Below
Business Cycle
-GDP data is used to determine whether an economy is expanding or contracting in the short term
Economic Expansion
-is a phase of the business cycle during which the economy is growing faster than usual
Economic Contraction (recession)
– is a phase of the business cycle during which the economy is growing slower than usual
the height of an economic expansion, when real GDP stops rising
The low point of a wave.
The Business Cycle, Graphically
The Business Cycle, Graphically
Shortcomings of GDP
1. Nonmarket goods
2.Underground Economy
3.The Quality of the Environment
4.Leisure time
1. Nonmarket Goods
-Think about goods and services produced, but never sold, even though they create value for society

-Example: Wash your car is a service produced but not included. In contrast, if you pay someone else to wash your car, then, it is included

-In less-developed societies where women produce lots of home production (food, growing vegetables, livestock, diaries, ….) , GDP may be a poor measure of economic output

2. Underground economy
-Hidden, uncounted transactions
-Sometimes legal
(Waitress collect tips which are not included)
-Sometimes illegal (Drug transactions)
Size of underground economy
-10% of GDP (estimated) in United States

-45% in developing countries

-Smaller in United States due to stronger economy and less corruption

3. The Quality of the Environment
-GDP is unable to distinguish how goods are produced
4. Leisure time
-GDP does not capture how long it takes to produce goods and services
-The more you work, the less the leisure time
Average work week
-South Korea: 46 hours per week
-Netherlands: 28 hours
-USA: 36 hours
-Japan: 36 hours
Categories: Macroeconomics