Measuring Broad Economic Goals GDP, Inflation, Unemployment Unit 2

Measuring Broad Economic Goals

GDP, Inflation, Unemployment

Unit 2

Microeconomics and Macroeconomics – What is the

difference?

• Microeconomics – studies the economic behavior of individuals and firms (businesses)

• Macroeconomics – studies the economy as a whole – it is concerned with the Aggregates of the following indicators:– Gross Domestic Product (GDP)– Unemployment– Inflation

Gross Domestic Product(GDP)

• “The total market value of all final goods and services produced within a country in a

given year” – (also known as OUTPUT or Income)

What does this mean?“Total Market Value”

The price of a good or service at the time it is

sold multiplied by the number produced.

Example: Price of my Dry

Erase Marker


• “The total market value of all final goods and services produced within a country in a given year” - OUTPUT

“Final goods and services” The intended end condition

of the good or service.Example: The Dry Erase Marker itself



“Produced within a country”

• The Goods and Services included in the GDP must have been produced within the borders of the United States (or the country you are talking about, for example Canada, France, China)



– “in a given year”Either a fiscal or calendar year – 365days


“The total market value of all final goods and services produced within a country in a

given year” - OUTPUT

• GDP is a Monetary measure – it has a dollar value $$$$$$.

• All countries have a GDP

GDP Comparison

Data source: 2007 CIA World Factbook 1. World $46,660,000,000,000

2. European Union $13,620,000,000,000

3. United States $13,220,000,000,000

4. Japan $4,911,000,000,000

5. Germany $2,858,000,000,000

6. China $2,512,000,000,000

7. United Kingdom $2,341,000,000,000

8. France $2,154,000,000,000

9. Italy $1,780,000,000,000

10. Canada $1,089,000,000,000

11. Spain $1,081,000,000,000

12. India $796,100,000,000

13. Korea, South $768,500,000,000

14. Mexico $741,500,000,000

15. Russia $733,000,000,000

16. Australia $645,300,000,000

17. Brazil $620,700,000,000

18. Netherlands $612,700,000,000

19. Switzerland $386,800,000,000

20. Sweden $371,500,000,000

http://www.theodora.com/wfbcurrent/world/world_economy.html

http://www.theodora.com/wfbcurrent/european_union/european_union_economy.html

http://www.theodora.com/wfbcurrent/united_states/united_states_economy.html

http://www.theodora.com/wfbcurrent/japan/japan_economy.html

http://www.theodora.com/wfbcurrent/germany/germany_economy.html

http://www.theodora.com/wfbcurrent/china/china_economy.html

http://www.theodora.com/wfbcurrent/united_kingdom/united_kingdom_economy.html

Gross STATE Product• California, it is often said, would be the world’s sixth- or seventh-largest economy if it was a

separate country. Actually, that would be the eighth, according to this map, as France (with a GDP of $2,15 trillion) is #8 on the aforementioned list.

• Texas’ economy is significantly smaller, exactly half of California’s, as its GDP compares to that of Canada (#10, $1,08 trillion).

• Florida also does well, with its GDP comparable to Asian tiger South Korea’s (#13 at $786 billion).

• Illinois – Mexico (GDP #14 at $741 billion) • New Jersey – Russia (GDP #15 at $733 billion) • Ohio – Australia (GDP #16 at $645 billion) • New York – Brazil (GDP #17 at $621 billion) • Pennsylvania – Netherlands (GDP #18 at $613 billion) • Georgia – Switzerland (GDP #19 at $387 billion) • North Carolina – Sweden (GDP #20 at $371 billion) • Massachusetts – Belgium (GDP #21 at $368 billion) • Washington – Turkey (GDP #22 at $358 billion) • Virginia – Austria (GDP #24 at $309 billion) • Tennessee – Saudi Arabia (GDP #25 at $286 billion) • Missouri – Poland (GDP #26 at $265 billion) • Louisiana – Indonesia (GDP #27 at $264 billion) • Minnesota – Norway (GDP #28 at $262 billion) • Indiana – Denmark (GDP #29 at $256 billion) • Connecticut – Greece (GDP #30 at $222 billion) • Michigan – Argentina (GDP #31 at $210 billion)


LOCATION IS IMPORTANT!!

• GDP DOES INCLUDE the market value of goods and services produced by American owned businesses located in the U.S. or by foreigners who own a business located in the U.S.

– Honda Motors is a Japanese company but the Accords it produces in the U.S. are included in the U.S. GDP.

GDP - LocationGDP - LocationAll goods/services produced All goods/services produced legally for pay legally for pay inin a country’s borders.a country’s borders.[[GeographyGeography matters, matters, not citizenshipnot citizenship]]

GNP – OwnershipGNP – OwnershipAll goods/services produced All goods/services produced legally for paylegally for pay byby citizens of a country.citizens of a country.[[CitizenshipCitizenship mattered, mattered, not geographynot geography]]

The difference between GDP & GNP is about The difference between GDP & GNP is about 2/102/10 of 1%. of 1%.

Nike inNike inIndonesiaIndonesiaTexasTexas

ChinaChina EuropeEurope

BMWBMW in Waco in Waco

Provo,UTProvo,UT

Honda in OhioHonda in Ohio

in Chicagoin Chicago


LOCATION IS IMPORTANT!!

• GDP DOES NOT INCLUDE the market value of Goods and Services produced by Americans who locate their businesses in foreign countries

– General Motors is an American owned company, but the cars it produces in Mexico do not count in the U.S. GDP


• Now the we know where GDP is produced we can

define exactly what is included and excluded in

counting GDP.


• What is INCLUDED when we count GDP?1. Personal Consumption Expenditures (C)

Spending by Households on Goods and Services

Goods: Tangible Items – things you can see and touch

Durable Goods – Goods that last 3 years or more

Non-Durable Goods – Goods that last less than 3 years Services: Intangible Items – things you can’t really see or touch.

Intangible items – labor for haircuts, medical care, teaching, legal services, fees to stockbrokers, labor for T.V., car, or home repairs.

CONSUMPTION ACCOUNTS FOR APPROX 65% OF GDP!!

Personal Consumption Expenditure ( Personal Consumption Expenditure ( CC ) )Personal Consumption Expenditure ( Personal Consumption Expenditure ( CC ) )

EXPENDITURES APPROACHEXPENDITURES APPROACHGDP = C(66%) + Ig(18%) + G(17%) + XnGDP = C(66%) + Ig(18%) + G(17%) + Xn

•DDurable urable CConsumeronsumer GGoods[12%]oods[12%]

•NNondurableondurables[29s[29%][soup & soap]%][soup & soap]

•Consumer ExpendituresConsumer Expenditures for Services[59%] for Services[59%]

Ferrari Ferrari producedproduced here hereMaytag Maytag producedproduced here here


• What is INCLUDED when we count GDP?

• Investment (I) - Can also be called Capital or Savings

The purchase of goods that will be used in the present and future to produce more goods and service.

Capital Goods – Physical Capital Tools, factories, computers, airplanes and structures such as from new construction – new houses, office buildings, etc.

INVESTMENT ACCOUNTS FOR 15% OF GDP

Personal Consumption Expenditure ( C )Personal Consumption Expenditure ( C )

3 S3 Subcategoriesubcategories [*spending on output not consumed]

A. Business fixed investment-tools, machinery, & plants B. Residential fixed investment – construction of new houses [can rent for financial return] & apartments. C. Inventory investment – change in inventories [A net increase in inventoriesnet increase in inventories is investmentinvestment; a net decrease in inventoriesdecrease in inventories is negative investmentnegative investment or disinvestmentdisinvestment (disinvestmentdisinvestment represents

sale of output output produced in a previous yearproduced in a previous year)

Let’s say this Porsche isLet’s say this Porsche is produced by a foreign co. produced by a foreign co. in Plano, Texas.in Plano, Texas.

BusinessesBusinessesBusinesses

Gross Private Domestic Investment Gross Private Domestic Investment (I(IGG))Gross Private Domestic Investment Gross Private Domestic Investment (I(IGG))

GGovernmentovernment P Purchasesurchases (G) (G) [state, local & federal][state, local & federal]GGovernmentovernment P Purchasesurchases (G) (G) [state, local & federal][state, local & federal]

Personal Consumption Expenditure ( C )Personal Consumption Expenditure ( C )Personal Consumption Expenditure ( C )Personal Consumption Expenditure ( C )

Gross Private Gross Private DomesticDomestic Investment ( I Investment ( Igg ) )Gross Private Gross Private DomesticDomestic Investment ( I Investment ( Igg ) )

EXPENDITURES APPROACHEXPENDITURES APPROACH

[“G” purchases of goods/svcs produced (not transfer payments)

3 Subcategories of Government A. Federal government [40%] B. 50 State governments C. 84,000 local governments [60% for state and local]



Government (G)

Government purchases of Goods and Services

Examples : everything from paper clips to tanks and bombs.

GOVERNMENT ACCOUNTS FOR 20% OF GDP



Net Exports (Nx)

Exports minus Imports = Net Exports

What are Exports?Goods and Services made in the U.S.

and shipped to other countriesWhat are Imports?

Goods and Services made in foreign countries and shipped to the U.S.

NET EXPORTS ACCOUNTS 0% OF THE GDP!!!


What is the bottom line on GDP???

GDP is calculated using the sum totals of all of the above – Personal Consumption (C), Investment (I), Government (G), and Net Exports (Nx)

or

Price X Quantity = Nominal GDP(for each good and/service in the economy)

GDP = C + I + G + Nx“Expenditures Model”

ConsumptionConsumption

$8,534$8,534

InvestmentInvestment

$2,085$2,085

GGovernmentovernment

purchasespurchases

$2,260$2,260 Export Export SpendingSpending

$1,210$1,210ImportImport

SpendingSpending

$1,938$1,938


Go to

http://www.bea.gov/newsreleases/national/gdp/2007/pdf/gdp107p.pdf


• What is EXCLUDED when we count GDP?


Intermediate Goods

Goods that are purchased for resale or for further use in manufacturing process

INTERMEDIATE GOODS ARE NOT COUNTED IN THE GDP they are INPUTS!!

Example: Steel used to make cars. When a huge roll of steel is purchased by the auto maker, the value of the steel is not counted in the GDP at that

point. It is counted when the steel is cut up, put into a car, and then sold to you at the purchase price of the car.

If you were to include the price of the steel paid by the auto maker AND the final price paid for the car, you would be MULTIPLE COUNTING the value of the steel.

What Eight Things Do Not Count In GDP?What Eight Things Do Not Count In GDP?

1.1. Intermediate GoodsIntermediate Goods – components of the final good – components of the final good.. A. A. Ford buys batteries or tires for its cars.Ford buys batteries or tires for its cars.

B.B. KFC buys KFC buys chickenschickens to eventually sell to customers to eventually sell to customers..

..

Value AddedValue Added

$2.02$2.02


• What is EXCLUDED when we count GDP?– 1. Transfer Payments

• Recipients contribute nothing to current production in return for payments.

– Two Types of Transfer Payments:

a. Public Transfer Payments – Social Security, welfare (food stamps, Section 8 housing), veterans retirement, etc.

b. Private Transfer Payments – Transfer of funds from one person to another – Cash as a gift; the purchase of a business or a corporation by another person or corporation

1. Stock Market Transactions - The buying and selling of stocks and bonds (government securties)

3. Purely Financial TransactionsPurely Financial Transactions – stocks, bonds, CDs. There is no current productionno current production. Ex: If 100 shares of Dell stock100 shares of Dell stock is bought

GDPGDP – – what is not counted [#3]what is not counted [#3]

I’m not buying a Dell computerI’m not buying a Dell computerbut part ownership of Dell.but part ownership of Dell.

Exchanging one financial asset for anotherExchanging one financial asset for another

Buying stock is not buying a product butBuying stock is not buying a product but buying buying ownership of the firmownership of the firm. .

GDPGDP – what is not counted .– what is not counted .4.4. Transfer PaymentTransfer Paymentss –welfare, unemployment, social security –welfare, unemployment, social security. [There is nono contribution to final productioncontribution to final production]

“Now that I’ve gotten my welfare check, I can get an iPod nano and listen to 1,000 songs”



– Secondhand Sales (Used Goods)

The sale of used cars, houses, computers, clothes, jewlery, etc.

Not counted because the goods would have been counted in the year they were made and credited to the GDP of that year. Counting them again would be Double (Multiple) Counting.

[It has not been produced again so would not count.][It has not been produced again so would not count.]

ChevyChevy

GDP GDP - - what is not counted [#2]what is not counted [#2]2. Second Hand Sales – no current production. 2. Second Hand Sales – no current production. A. If a 1957 Chevy is bought in 2005A. If a 1957 Chevy is bought in 2005

The salesman is doing productive work. His commission would count.The salesman is doing productive work. His commission would count.

B.B. Boots producedBoots produced in in 1980 are bought 1980 are bought in ain a Thrift Store in 05. Thrift Store in 05.

They also have not been produced again.They also have not been produced again.Salesman’s commission would count.Salesman’s commission would count.You are buying his services.You are buying his services.

Car salesmanCar salesman

Shoe salesmanShoe salesman

5757



• Things that you do for yourself, or household, are not counted in the GDP.

» The value of the labor households use to clean house, mow the grass, change the oil in your car.

» Household Production is more important when you consider the economies of Traditional Societies – which tend to grow their own food, make their own clothes, eat their livestock.

» Example: Americans buy food and meat at the store» Counts in GDP» Most Sudanese grow their own food and livestock » Does not count in GDP

Not including Household Production of Goods and Services tends to underestimate the value of GDP.

7.7. Non-market Transactions Non-market Transactions Are Not Are Not CountedCountedWork in your own householdown household or volunteer work volunteer work in

the community does not count because there was no payment.

You need to do some ofYou need to do some ofthis housework.this housework.

7.7. Non-market Transactions Non-market Transactions Are Not Are Not CountedCountedWork in your own householdown household or volunteer workvolunteer work

in the community does not count because there wasno payment.

So, don’t marry your maid, gardener, or don’t marry your maid, gardener, or fitness instructorfitness instructor, or you will hurt GDP.

Is GDP a perfect measure of Social Welfare? No!


• Black Market Items– bootleg videos and music

• Drugs • Other illegal activities• Household production not counted• Other illegal activities• Leisure time

GDP –Included or Excluded –Why?








Documents

Measuring Broad Economic Goals GDP, Inflation, Unemployment Unit 2