ECON 100B Class 2: Measuring the Macroeconomy

Course Logistics and Announcements

• Final Exam Details:     * Date and Time: Tentatively scheduled for Monday, May 11, from 3:00 PM to 6:00 PM.     * Duration: The exam will utilize 90 minutes of the scheduled block.     * Note on CalCentral: Information on CalCentral may be missing or incorrect; the instructor's schedule takes precedence.

• Midterm Exam Details:     * Date: Thursday, March 5.     * Format: Held in-class.     * Duration: The exam will utilize 60 minutes.

• Disabled Students Program (DSP):     * Students should schedule proctoring or utilize the separate 150% time classroom if required. Further details are forthcoming.

• Course Materials and Resources:     * Course Videos: Media Gallery on bCourses contains Course Capture recordings of the lectures.     * Ed Discussion (ECON 000): A platform similar to a subreddit for ECON majors, departmental advisors, and staff. It is open to anyone with a CalNet ID via the link: https://edstem.org/us/join/JSg8Dw.

Macroeconomics Course Outline

• Chapter 2: Measuring income and the fundamental identity $Y = C + I + G + NX$.
• Chapters 3–6: Examination of long-run growth.
• Chapters 7–8: Analysis of inflation and unemployment.
• Chapters 9–14: Short-run fluctuations, fiscal policy, monetary policy, the Phillips Curve, and the Federal Reserve.
• Chapters 16 & 17: Focus on Consumption and Investment.
• Chapter 18: Study of the role of Government.
• Chapters 19 & 20: International trade, finance, and exchange rates.

Fundamental Lessons in Economic Growth

• Lesson 1: Determinants of Long-Run Well-Being:     * Economic well-being in the long run is determined by factor inputs: Labor, Capital, and Technology.     * Production of these factors typically requires specific "institutions" or "social infrastructure," including:         * Rule of law.         * Property rights.         * Protection from government.

• Lesson 2: Source of Growth:     * Improvements in average labor productivity are the primary source of long-run growth.     * Capital accumulation and technological progress are the key drivers for improving average labor productivity.

Measuring the Macroeconomy: Key Objectives

• Income as a Metric: Income is considered a proxy for human well-being.
• Average Income: Defined as income per person.
• Gross Domestic Product (GDP): Foundational measure of income for geographic regions, particularly useful as it is easier to measure in developing regions.
• Primary Goal: To measure real GDP per person ($y$), calculated as:     $y = \frac{Y}{L}$
• Expenditure Approach: GDP is commonly measured through expenditures using the identity:     $Y = C + I + G + NX$
• Real vs. Nominal: Real GDP ($Y_R$) is nominal GDP ($Y_N$) divided by a price index ($P$):     $Y_R = \frac{Y_N}{P}$
• Price level measurement: Measuring the price index is complex and requires tracking changes across both time and space.

National Income Accounting and GDP

• Definition of GDP: The total value of production in an economy within a single year.
• Core Principle: Everything produced must be purchased or placed in inventory. Therefore, total production equals total expenditures, which equals total income.
• Distribution of Proceeds: When goods are purchased, proceeds are divided among workers, managers, and landlords.
• Historical Context: National Income Accounting (NBER, Simon Kuznets) emerged after the Great Depression to track total and average income before the advent of modern surveys like the Current Population Survey (CPS).

The National Income Identity: Components of Expenditure

• Fundamental Equation: $Y = C + I + G + NX$     * Consumption ($C$): Market value of final goods and services (e.g., new cars, soybeans).     * Investment ($I$): Purchases of goods used to produce other goods, representing saving (e.g., new construction equipment).     * Government Purchases ($G$): Spending by government on goods and services (e.g., new roadways).     * Net Exports ($NX$): Exports minus imports (e.g., soybean exports minus imported cars).
• Simplified Identity: In an economy without government or foreign trade, the identity simplifies to Income = Spending + Saving ($Y = C + I$).

Statistical Analysis of U.S. GDP (2008 and 2022)

• U.S. GDP Data 2008:     * Total GDP: $\$14,440$ billion ($\$47,010$ per person).     * Consumption: $\$10,130$ billion ($70.2\%$ of GDP).         * Housing: $\$1,840$ billion (Largest consumption share at $12.7\%$).         * Medical Care: $\$1,550$ billion ($10.7\%$).         * Food: $\$780$ billion ($5.4\%$).         * Motor vehicles and parts: $\$340$ billion ($2.4\%$).     * Investment: $\$2,140$ billion ($14.8\%$ of GDP).         * Equipment and software: $\$1,080$ billion ($7.5\%$).         * Structures (nonresidential): $\$610$ billion ($4.2\%$).         * Residential: $\$480$ billion ($3.3\%$).     * Government Purchases: $\$2,880$ billion ($19.9\%$ of GDP).         * National Defense: $\$740$ billion ($5.1\%$).     * Net Exports: $-\$710$ billion ($-4.9\%$ of GDP).         * Exports: $\$1,830$ billion.         * Imports: $\$2,540$ billion.

• U.S. GDP Data 2022:     * Total GDP: $\$25.5$ trillion ($\$76,300$ per person).     * Personal Consumption Expenditures: $\$17.4$ trillion ($68.2\%$ of GDP).         * Housing: $\$3.0$ trillion ($11.8\%$).         * Medical care: $\$2.7$ trillion ($10.6\%$).         * Food: $\$1.3$ trillion ($5.1\%$).         * Motor vehicles and parts: $\$0.7$ trillion ($2.7\%$).     * Gross Private Domestic Investment: $\$4.6$ trillion ($18.0\%$ of GDP).         * Intellectual property products: $\$1.4$ trillion ($5.5\%$).         * Equipment: $\$1.3$ trillion ($5.1\%$).         * Residential: $\$1.1$ trillion ($4.3\%$).         * Structures (nonresidential): $\$0.6$ trillion ($2.4\%$).     * Government Purchases: $\$4.4$ trillion ($17.3\%$ of GDP).         * National defense: $\$0.9$ trillion ($3.5\%$).     * Net Exports: $-\$1.0$ trillion ($-3.9\%$ of GDP).         * Exports: $\$3.0$ trillion.         * Imports: $\$4.0$ trillion.

Labor vs. Capital: Income Shares

• Stability: Income shares of GDP have remained relatively stable over time.
• Primary Factors of Production:     * Labor: Workers earning wages, including business owners.     * Capital: Machinery, buildings, and equipment.
• Proportion: Labor typically earns approximately two-thirds of GDP.

GDP Measurement nuances: Value Added and Limitations

• Value Added: To avoid double counting, only final goods or the sum of "value added" at each stage of production is counted.     * Example: If a steel company produces $\$10$ million in steel and a car company uses that steel to produce $\$100$ million in cars, the GDP is $\$100$ million. This is calculated as the final product value ($\$100$ million) or the sum of value added ($\$10$ million from steel + $\$90$ million from car manufacturing).
• Limitations of the GDP Measure:     * Market Transactions Only: Excludes non-market activities like housekeeping, self-provided child-care, and black market activities.     * Used Goods: Not counted because they are transfers of existing wealth, not new production.     * Well-being gaps: Does not account for changes in health or environmental quality.

Real GDP, Price Levels, and Purchasing Power Parity (PPP)

• Accounting Principle: Nominal GDP equals the Price Level multiplied by Real GDP:     $Y_N = P \times Y_R$
• The Price Level Problem: Different goods experience different price changes (e.g., computers falling by $2\%$ while food rises by $5\%$). Economists often use a geometric average of past and current prices to determine the price level.
• U.S. Historical Real GDP Comparison:     * 1950: Real GDP per capita was approximately $\$10,000$ (Nominal was $\$2,000$).     * 2000: Real GDP per capita was approximately $\$30,000$.     * Conclusion: The standard of living was roughly 3 times higher in 2000 compared to 1950 after removing inflation effects.
• International Comparisons and PPP: Exchange rates alone can misrepresent economic power.     * China Example: Based on exchange rates in 2019, China's GDP appeared $33\%$ smaller than the U.S. However, when adjusted for PPP (accounting for lower domestic prices in China), China's GDP was estimated to be only $2\%$ smaller than the U.S.

Historical Perspective: Growth and Quality of Life

• U.S. around 1900:     * Life expectancy at birth: Approximately 50 years.     * Infant mortality: 1 out of 10 infants died before age one.     * Infrastructure: $90\%$ of households lacked electricity, refrigerators, telephones, or cars.     * Education: Fewer than $10\%$ of adults graduated high school.

• Comparative Data Table:

• Health and Wealth Correlation: Data indicates a strong correlation where healthier populations (higher life expectancy) tend to be wealthier (higher GDP per person), though heterogeneity exists across different nations.