Chapter 6: Intro to Macroeconomics & GDP

Microeconomics:

• Considers behavior of individual people, firms and industries 

• Income of a person of revenue of a firm

• Production of a single worker or firm

• Price of a single good

Macroeconomics:

• Study of the economy of an entire nation or society

• Income of an entire nation

• Production of an entire country

• Combined prices of all goods in an economy

• Overall number of people who are employed

What is GDP?

• Gross Domestic Product (GDP): the market value of all final goods and services produced within a country during a specific period.

  • Primary indicator of a nation’s output and income

  • Production = income

• Market value: price per unit multiplied by the quantity produced

Final Goods and Services:

• Services are intangible outputs

  • Examples: dentist, doctor, streaming services, banking

• Final goods are good sold to final users

  • Examples: tires (personal purchase, not company)

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

Within a country:

• Includes only G&S produced domestically (within physical borders)

  • Examples: nike, toyota

• An alternative to GDP is Gross National Product (GNP)

  • Output produced by workers and resources owned by residents of the nation.

During a specific period:

• G&S produced in earlier years do not count in the current year's GDP.

  • Avoids double counting

The Bureau of Economic Analysis (BEA) is the U.S. government agency that computes GDP data through a process called national income accounting.

• Y = C + I + G + NX

  • Y = output (GDP)

  • C = consumption, purchase of final goods and services by households, excluding new housing

  • I = investment

  • G = government purchases

  • NX = net exports

• Consumption: Separated into categories - durable goods, non-durable goods, and services

  • Durable goods: consumed over a long period of time

    • Examples: vehicles, appliances, & computers

  • Non-durable goods: consumed over a short period of time 

    • Examples: food, clothing, gas

  • Services

    • Examples: haircut, doctor, dentist

• Investment:

  • Private spending on capital and new residential housing

    • Shovel, tractor

    • Construction of factories/warehouses

    • Inventory (christmas buying season) - does not include purchases of stocks and bonds

• Government purchases:

  • Spending by all levels of government on final goods and services

    • Government employee salaries

    • Roads and schools

    • Equipment, vehicles 

      • Transfer payments are NOT included

        • Examples: Welfare payments, social security, unemployment benefits

• Net exports:

  • Total exports minus total imports

    • If imports > exports → NX will be negative → trade deficit

      • Tends to be the case for the US

    • If imports < exports → NX will be positive → trade surplus

      • Tends to be the case for China

GDP offers a way of estimating living standards across both time and place

• Measuring living standards 

  • Does NOT take population into account

    • Per capita GDP: GDP per person (GDP/population)

      • Average living standards in a nation

• Measuring economic growth

  • Changes in average living standards over time

  • Nominal GDP: GDP measured in current prices, not adjusted for inflation

  • Economic growth: the percentage change in real per capita GDP

    • Have to adjust GDP for inflation

      • Inflation: the growth in the overall level of prices in an economy

  • Real GDP: GDP adjusted for changes in prices

• Measuring business cycles

  • Business cycle: a short-run fluctuation in economic activity (Real GDP)

    • Economic expansion: increase in economic activity (Real GDP)

    • Economic contraction: decrease in economic activity (Real GDP)

      • Recession: a short-term economic downturn, typically lasts about six to eighteen months

        • Generally identified as a fall in real GDP in two consecutive quarters

    • INSERT LINE GRAPH FROM LECTURE SLIDES

Real GDP: Adjusting for Price Changes

• Price level: is an index of the average price of G&S throughout the economy

  • > 100 = prices went up

  • < 100 = prices went down

• GDP deflator: is a measure of the price level used to calculate real GDP 

  • Real GDP = (Nominal GDP/Price Level)*100

Real GDP will always be smaller than nominal GDP if the price level is greater than 100.

Growth Rates

• Calculated using a percent change formula

  • %=valuet - valuet-1valuet-1x 100

Nominal growth in 2021 = (22,997-20,893)/(20,893) * 100 = 10.07

% change in real GDP = %  change in nominal GDP - % change in price level

• % change in real GDP = 10.07% - 3.51% = 6.56%

What are some shortcomings of GDP Data?

• Non Market Goods 

  • G&S produced but not sold in a market 

    • Work done at home

• Underground economy

  • Legal & illegal G&S produced and sold, but not reported to the government

    • Sex, drugs, baby/pet-sitting, lawn care

• Quality of the Environment

  • Does not take into account for the negative environmental side effects from producing G&S

• Leisure Time

  • Fails to capture how long workers labor to produce G&S