A Letter from the Edge

Thinking like a Macroeconomist? If the US could maintain a high economic growth rate, we would eventually be able to satisfy everyone’s wants for goods and services. Unit 7 If all the nations of world disarmed, the international economy would collapse into a long depression and unemployment would increase. Unit 8 Money is an important economic resource. Unit 5 The higher the GDP, the better off all the people of the country are. Unit 2 Full employment means zero unemployment. Unit 2 The United States has had and inflation rate of at least 3 percent for each of the last 30 years. Unit 2 Inflation hurts everyone. Unit 2 Money consists mainly of currency and coins and is created by government printing presses and mints. Unit 5 The value of the dollar is determined by the fact that it is back by gold. Unit 5 Most economists believe the only purpose of taxes is to provide money for government. Unit 4 The chief task of the Federal Reserve is to insure deposits of bank customers. Unit 6 Tariffs are needed to protect our standard of living from competition from cheap foreign labor. Unit 8

Unit 2: Measuring Macro Outcomes Chapter 5 Overview National Income Accounting

Gross Domestic Product (GDP) Gross domestic product (GDP) is the total dollar value of final output produced within a nation’s borders in a given time period. LO1

GDP versus GNP GNP measures “total income” – includes payments that Americans receive from outside the U.S. GDP cannot measure “total income” because goods produced by Americans abroad are not included.

Imagine you  Economics SO MUCH that you become an ‘Economist’ Would you prefer GDP over GNP as a measure of our economic health? Explain.

GDP per Capita GDP per capita is total GDP divided by total population–average GDP. GDP per capita is commonly used as a measure of a country’s standard of living.

GDP per Capita Measures of per capita GDP tell us nothing about the way GDP is actually distributed or used – they are only a statistical average.

Measurement Problems The methods of calculating GDP create a few problems.

Unreported Income The GDP statistics fail to capture market activities that are not reported to tax or census authorities. The underground economy is motivated by tax avoidance or to conceal illegal activities. LO1

Non-Market Activities GDP measures exclude most goods and services produced that are not sold in the market. Exclusion of non-market activities causes problems when comparing living standards over time or between countries. LO1

What’s NOT Included?

TRIVIA: What’s included in GDP? Δ Read each statement. Decide if it is true (included) or false (not included). Δ Write a “T” for true and “F” for false All of the following are included in GDP… 1) Milk Susan buys at WAWA. 2) Milk WAWA buys to be resold to customers. 3) The sale of Mia’s flute from 4 th grade. 4) Tips Chelsea earns from waiting tables. 5) Cash Anthony made from shoveling snow for his neighbors. 6) Computers produced by an American owned company in India, and then sold in the United States.

Value Added The production of most goods and services involves a series of stages. To accurately measure GDP we must distinguish intermediate goods from final goods. LO1

Value Added Intermediate goods are goods or services purchased for use as input in the production of final goods or services. Value added is the increase in the market value of a product that takes place at each stage of the production process. LO1

Value Added in Various Stages of Production LO1

Economics U$A Viewing guide Discussion

SPENDING SECTORS & NATIONAL INCOME ACCOUNTING Unit 2, Day 2

Agenda Film Review GDP & National Income Accounting GDP and Pizza

Film Review Review your notes Identify one NEW thing you learned AND Identify one thing you already KNEW Share with a neighbor

Real Versus Nominal GDP Distinguishing increases in quantity from increases in prices is done by distinguishing between real GDP and nominal GDP.

Real Versus Nominal GDP Nominal GDP is the value of final output produced in a given period, measured in the prices of that period (current prices). Real GDP is the value of final output produced in a given period, adjusted for changing prices.

Real Versus Nominal GDP The distinction between nominal and real GDP is important whenever the price level changes.

Broudatopia Year 1 ItemQtyPrice (ea.)Total Price Year 2 Quantity Price (ea.) Total Price ItemQtyPrice (ea.)Total Price

Computing Real GDP The base period is the time period used for comparative analysis. It is the basis for the indexing of price changes.

Computing Real GDP The general formula for computing real GDP is: (2005 prices)

Computing Real GDP

Inflation tends to obscure actual declines in real output. Inflation is the increase in the average level of prices of goods and services.

Changes in GDP: Nominal Versus Real

Net Domestic Product We won’t be able to produce as much output next year unless we replace factors of production we use this year. Depreciation is the consumption of capital in the production process — the wearing out of plant and equipment. LO3

Net Domestic Product Net domestic product is the amount of output we could consume without reducing our stock of capital. NDP = GDP – depreciation LO3

Net Domestic Product Investment is spending on (production of) new plant, equipment, and structures (capital) in a given time period, plus changes in business inventories. LO3

Net Domestic Product The distinction between GDP and NDP is mirrored in the difference between gross investment and net investment. Gross investment is total investment expenditure in a given time period. Net investment is gross investment less depreciation. LO3

Net Domestic Product The stock of capital — the total collection of plant and equipment — will not grow unless gross investment exceeds depreciation. LO3

Spending Sectors– Value of Output “The circular flow of economic activity” The economy is made up of several different components called “spending sectors” GDP = Total Spending = C + I + G + (X-M) GDP = Total Spending = C + I + G + (X-M)

Consumption Goods and services used by households are called consumption goods. Consumer spending claims over two-thirds of our annual output.

Investment Investment goods are the plant, machinery, and equipment that we produce. Also includes net inventory changes and new residential construction. Investment spending claims about one-sixth of our annual output.

Government Spending Resources purchased by the government sector are unavailable for consumption or investment purposes. Government spending on goods and services (excludes income transfers) claims about one- fifth of our annual output.

Net Exports Net exports are the value of exports minus the value of imports. Exports are goods and services sold to foreign buyers. Imports are goods and services purchased from foreign sources.

Review of GDP Final Goods and Services Manicures Bread Cruise missile New factory Dresses Increase in automobile inventory Intermediate Goods Window glass in new automobiles Lumber in a new house Screws used in a cruise missile Flour for making bread Cloth for making dresses What spending sector? C, I, G? What final product?

GDP and Pizza! Identify the component of GDP (C, I or G) on your card Work with your group to calculate GDP by spending sector and overall (Red=Pepperonia, Green=Anchovia) Create a pie chart showing your country’s total GDP and output mix – Include amounts in parms & percentage of total Blue for Consumption Red for Investment Green for Government

GDP and Pizza (again) PepperoniaAnchovia

Measures of Income GDP accounts have two sides. – One side focuses on expenditure – the demand side. – The other side focuses on income – the supply side. LO2

OUTPUT INCOME EQUIVALENCY Unit 2, Day 3

Agenda GDP Check In Output Income Equivalency GDP WebQuest

GDP Check In 1.Define GDP 2.What are the 4 spending sectors in GDP? – Provide an example of each 3.Name two activities that are NOT included in GDP 4.Identify an intermediate good in a final product—why is the intermediate good not included in GDP?

Measures of Income The total value of market incomes must equal the total value of final output, or GDP. LO2

Output = Income VALUE OF INCOMEVALUE OF OUTPUT Net exports Consumer spending Investment spending Wages Profits Interest Rent Government spending Sales taxes Depreciation Factor market Product market LO2

The Equivalence of Expenditure and Income (2006 data in billions of dollars) LO2

National Income By charting the flow of income through the economy, we see FOR WHOM the output is produced. LO2

Depreciation Depreciation charges reduce GDP to the level of NDP (Net Domestic Product) before any income is available to current factors of production. NDP = GDP – depreciation LO3

Net Foreign Factor Income Wages, interest, and profits paid to foreigners are not part of U.S. income. – They need to be subtracted from the income flow. – Incomes earned by U.S. citizens in other nations represents an inflow of income to U.S. households and are added. LO3

National Income National income (NI) is total income earned by current factors of production. NI = NDP + net foreign factor income LO3

Personal Income Personal income (PI) is the income received by households before payment of personal taxes. Personal income = National income – (corporate taxes + retained earnings + Social Security taxes) + (transfer payments + net interest) LO3

Disposable Income Disposable income (DI) is the after-tax income of households. It is personal income less personal taxes. Disposable income = personal income – personal taxes LO3

Disposable Income Saving is that part of disposable income not spent on current consumption –disposable income less consumption. Disposable income = Consumption + Saving All disposable income is either consumed or saved. LO3

The Flow of Income The dollar value of output will always equal the dollar value of income. LO2

Income and Expenditure The flow of income that starts with GDP ultimately returns to the market in the form of new consumption (C), investment (I), and government purchases (G). LO2

Circular Flow of Spending and Income LO2

GDP WebQuest Form a group of 3 or 4 people – This group will constitute your work group for the 1 st marking period podcast project Complete the GDP webquest – Use laptops and respond to questions together – All students should complete their own copy PLEASE ENSURE ALL LAPTOPS ARE PROPERLY RETURNED AND PLUGGED IN!!