Macro 2/24

Introduction to GDP Measurement

• GDP (Gross Domestic Product) can be measured using three main approaches:

• Output Approach: Measures the value of final goods produced in an economy.

• Income Approach: Distinguishes between income earned by workers and income earned by capitalists.

• Expenditure Approach: Focuses on total spending in the economy by households, businesses, and government.

Expenditure Approach and the Multiplier Effect

• The focus of upcoming classes will be on the Expenditure Approach and its implications for the Keynesian multiplier.

• The multiplier effect expands upon how shifts in spending affect the broader economy, especially in terms of macroeconomic equilibrium.

• Understanding the multiplier is essential for analyzing economic fluctuations when the economy is pushed out of equilibrium.

Limitations of GDP as a Measurement Tool

• GDP Per Capita does not indicate income distribution, which can misrepresent living standards.

  • Example: In the U.S., GDP per capita can be high while many individuals live below this average.

• Case Study: Equatorial Guinea:

• GDP per capita is misleading due to unequal wealth distribution.

• Oil revenue is captured primarily by a few wealthy individuals and the government, leaving most citizens with low living standards.

• Example of a disparity: Equatorial Guinea's GDP per capita (~$30,000) is misleading compared to that of neighboring countries like Gabon and Cameroon.

Other GDP Measurement Shortcomings

• Household Work: Household labor is often unaccounted for, despite its essential role in supporting productive economic activities.

• Undocumented Labor: Much economic activity occurs in the informal or undocumented sector, affecting labor market statistics.

• Such workers often do critical tasks but do not factor into GDP statistics.

• Impact of Economic Precariousness:

• Many Americans live paycheck to paycheck, with limited savings, highlighting vulnerability in economic stability.

Effects of Economic Shock

• Exploration of what happens to the economy when it is out of equilibrium.

• If variables such as investment decrease, this influences aggregate demand, which tends to shift inwards, leading to declines in production and employment.

Consumption and the Marginal Propensity to Consume (MPC)

• Aggregate Demand Components:

  • Autonomous consumption (c₀): Essential spending independent of income.

  • Marginal propensity to consume (c₁): Portion of income spent on consumption, typically between 0 and 1.

  • Consumption behavior varies significantly across income levels (i.e., lower-income individuals spend a higher percentage of their income).

Graphical Analysis of Economic Equilibrium

• Equilibrium is represented where output equals demand, illustrated on a 45-degree line.

• If aggregate demand decreases, producers respond by reducing output, leading to excess inventory.

• Alternatively, if aggregate demand increases, businesses may raise production or adjust prices accordingly to meet demand.

Summary of Investment and Demand Changes:

• Decrease in Investment: Leads to reduced overall demand and a cascading effect where production decreases progressively.

• Increase in Autonomous Demand: Results in a rightward shift in the consumption demand curve, reflecting higher consumer expectations.

• Income and Poverty Dynamics:

• Increased poverty shifts demand curves downward but raises MPC as individuals spend more of their income on necessary items.

Conclusion and Exam Preparation Tips

• Students should familiarize themselves with graphical representations of the expenditure approach and how shifts in investment and consumption affect overall economic equilibrium.

• Preparing to interpret graphs effectively when analyzing the impacts of changes on demand and output will be essential for quizzes and exams.