ECN 102

• Inflation: still too high, post 2020 spike (previous one in 1970-80’s)

• National debt: overblown but 130% of GDP-Income Ratio

• Unemployment: historically low

• Inequality: All time high, the top 1%: 30%, top 10%: 70%, bottom 20%: -0.8%

• $117 Trillion Global Economy

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Macroeconomic Equilibrium

• Y = C + I + G + NX

• Y = Total Income Earned

• C = Consumption (Individuals/Households)

• I = Investment (Firms)

• G = Government Expenditure

• NX = Net Exports

• All income earned must be spent (not necessarily by the agent that earns it)

BOX = Individual                     Inputs   →              ← Income                  BOX = Firms

                                       Expenditures →                                  ← Goods and Services

• 4 Inputs

  • Capital (K): Physical Tools/Machinery; Rental Rate ~ Interest Rate

  • Labor (L): Time and Effort of the Worker; Wage

  • Entrepreneurship: Organization of other inputs; Profits

  • Land: Natural Resources;                                      Rent

• Goods: Physical Object

• Services: Intangibles

• Agriculture → Manufacturing (China) → Services (US)

Y = Taxes + Y-Taxes (disposable income)

        G           C        Savings

                           Financial Market = Investment Spending

Defining GDP

• The market value of all goods and services produced within country in an economy during a specific time period=

• Market Value = P x Q

• Final Goods/Services = Sold to end user

  • Excludes intermediate goods (to avoid double counting)

• Within a country = Location of Production

  • Includes foreign firms operating in US

• Time Period = GDP Measured Annually

• Nominal GDP: priced in current yr prices

  • P(2025) - Q(2025)

• Both P and Q change over time

  • can’t determine driving force

  • since we care about change in Q, hold P constant (delta change)    

    • real measure: purchasing power

• Real GDP: priced in constant (base) yr prices

  • allows comparison of standard of living

  • Nominal GDP / P(1) x Q(1)

  • P(t+1) x Q(t+1)

  • P(t+2) x Q(t+2) | Pt: Base Year | P(t) x Q(t+2)

  • In base year nom. = real

  • assume prices grow

    • post base year: nom > real

    • pre base year: nom < real

• Limitations of GDP

  • Environment Quality

  • Quality of life

  • Inequality

  • Health (does not count for medicaid)

  • Leisure

  • Home production

  • Volunteering

  • Illegal market transactions

• Gross Domestic Product (Y)

• Income = Expenditure = Total Value of Output Produced

• Y/L = Income Per Work = Standard of Living

  • Output Per Worker = Productivity

• GDP (domestic) vs GNP (national)

  • Location            Ownership

  • Jobs                    Influence

Components of GDP

• Y = C + I + G + NX

• C: Consumption (indv. purchase of goods and services) (68% of GDP)

  • Durable Goods = Luxury

  • Nondurable Goods = Necessities

  • Services

• I: Investment = Firms buy NEW capital (K) (18% of GDP)

  • I → K Stock

  • (flow) (stock)

  • Firms grow = economy grows

• G: Government Expenditure (17%)

  • Defense

  • Healthcare

  • Consulting

  • Day to Day

  • Interest Payment

  • Transfer Payments (don’t count in GDP but factor in budget deficit)

    • Social security

    • Was originally 16-1, now 2-1 ratio of retired to working

  • Financed by: tax revenue

    • Borrow to finance budget deficit (tax < G)

• Net Exports = Exports - Imports (-3%)

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