Finance 30220: Macroeconomics Introduction to The US Economy

How do we measure a country’s size? Total production would be a good start, but the global economy complicates things…. BMW X5 IPhone

Canada China Egypt India Mexico Japan South Africa USA Germany Where do BMWs come from? Spartanburg, South Carolina 8,000 Employees Produces 300,000 vehicles annually Produces ALL X3, X4, X5, and X6 models (even for export to Europe)

Where does your IPhone come from? Imports of the iPhone in 2009 contributed $1.9 billion to the U.S. trade deficit with China.

Two measures of a country’s production Gross Domestic Product represents the total current market value of all goods and services produced within a country over the course of some time period Gross National Product represents the total current market value of all goods and services produced by a country’s citizens over the course of some time period By the Standard of GDP, a BMW X5 is an American car, but the IPhone is an Chinese phone (actually, a global phone) By the Standard of GDP, a BMW X5 is an German car, (The IPhone is still a global phone)

Gross Domestic Product: $1.3B Gross National Product: $7.54B (+580%) Why East Timor’s GNP is almost six times as high as its GDP

Gross Domestic Product: $210.3B Gross National Product: $164.2B (-25%) Why is Ireland’s GNP so much lower than its GDP? (Do a google search on this)

The Bureau of Economic Analysis (BEA) reports Gross Domestic Product (GDP) for the United States on a quarterly basis: For the first quarter of 2015, GDP in the United States was (on an annualized basis) was... $17,665,000,000, * Source: Gross National product $17,827,100,000,000.00

Let’s stick with GDP for now. How does the US Economy compare in size to other countries around the world? (World Economy = $108T ; the countries listed below are 75% of the total) Japan $4.807T United States $17.46T European Union $17.61T Australia $1.1T Brazil $3.07T PPP Method 2014 est. * Source: CIA Factbook China $17.63T India $7.277T Russia $2.5T California $2.0T Mexico $2.14T England $2.4T

The average price of a Big Mac in the United States is* $4.62 The average price of a Big Mac in China is* Yuan Problem: How do we compare economies with different currencies? The Market Exchange rate method involves converting foreign prices to US dollars using the current market exchange rate. Y16.60 x.16 = $2.65 The Purchasing Power Parity method uses prevailing US prices $ Chinese Yuan =.16 U.S. dollars Which if these is more accurate?

In this case, you could make money by buying Big Macs in China and then resell them in The US. There is a unique exchange rate that eliminates this profit opportunity x exchange rate = 4.62 exchange rate = =.28 ($ per Yuan) (3.57 Yuan per $) (This is known as the PPP exchange rate) The average price of a Big Mac in the United States is* $4.62 The average price of a Big Mac in China is* Yuan = $ Chinese Yuan =.16 U.S. dollars In principle, it shouldn’t matter…arbitrage would eliminate any price differentials

Do markets really eliminate profit opportunities? % Yuan Per US Dollar PPP Based off of Big Macs, the Yuan is “undervalued” by 55%

Valuing currencies using the Big Mac Standard “Overvalued” “Undervalued” China

The method by which countries are evaluated sometimes greatly change the results! PPP ApproachMarket Exchange Rate CountryGDPRankGDPRank China$17.63T#1$10.36T#3 European Union$17.61T#2$18.14T #1 USA$17.46T#3$17.46T#2 India$7.277T#4$2.048T#7 Japan$4.807#5$4.77T#4 Germany$3.621#6$3.82T#5 Russia$3.568#7$2.06T#6 *2014 Estimate ** Source: CIA Factbook

Nominal GDP around the world (PPP Method) *Source: CIA Factbook Note how concentrated GDP is among a few countries….

* Source: Lets use the PPP method as a reasonable method for comparing countries. Per Capita GDP is calculated by dividing total GDP by the current population. This gives a better sense of average well being. Per Capita GDP = $17T 320M = $53,125

* Source: CIA Factbook Note: 2014 GDP estimates measured on a Purchasing Power Parity Basis In Per Capita Terms, the United States ranks #18 while China sits at #113 ($12,900)!! The European Union comes in at #42 ($38,300)

*Source: CIA World Factbook GDP Per Capita around the World Again, per capita GDP is highly concentrated is a few countries

* Source: Census Bureau Median Household Income by County (2012) Recall, GDP per capita is around $53,000 Even within the US, income is heavily concentrated!

* Source: World Bank Did you know that if you earn $20,000 or more per year, you are in the top 4% of the global income distribution $20,000 is in the bottom 20% of the US income distribution

Side note: Calculating rates of growth t = 0t = 1t = 2t = 3t = Suppose that we have the following data. How would you calculate the rate of growth between time 0 and time 4.

Side note: Calculating rates of growth t = 0t = 1t = 2t = 3t = (Of 100) Calculating a percentage change like this assumes that the growth takes place all at once

Side note: Calculating rates of growth t = 0t = 1t = 2t = 3t = % Using natural logs allows the growth process to be a smooth, continual process

Side note: Calculating rates of growth t = 0t = 1t = 2t = 3t = % Again, this assumes a discrete process (happening at regular intervals)

Side note: Calculating average annual rates of growth t = 0t = 1t = 2t = 3t = % Using natural logs allows the growth process to be a smooth, continual process

PeriodGDP (Billions) 2014Q117, Q217, Q317, Q417, Q117,655 Another measure of economic performance would be the rate of growth in output rather than the level of output Year on Year growth (2015Q1-2014Q1) Year on Year Growth Annualized Growth Annualized Growth (2015Q1)

PeriodGDP (Billions)Price Level 2014Q117, Q217, Q317, Q417, Q117, We can approximate real growth by subtracting the inflation rate * Source: Year on Year Inflation (2013Q Q3) Year on Year growth (2013Q3-2014Q3 ) Real Growth = 2.63% Annualized Growth (2014Q3) Annualized Inflation (2014Q3) Real Growth = -.97% - -

* Source: CIA Factbook Note: 2014 GDP estimates measured on a Purchasing Power Parity Basis In terms of real GDP Growth the US drops to #131

Real GDP Growth by State: 2013 *Source: Bureau of Economic Analysis Economic growth in the US is also pretty concentrated

Growth Rates of Real GDP around the world *Source: IMF's October 2012 World Economic Outlook Note that this picture of economic growth is almost a mirror image of the picture for GDP per capita (the fastest growing regions are the lower income regions…we will come back to this)

YearGDPPrice 1947Q1$237B Q1 17, Let’s look at longer term averages for the US… Total Growth Price Growth (Inflation) Real Growth = 6.4% - 3.2% = 3.1%

Average Real Growth = 3.2% Note that the US seems to be slowing…this began in the 1970s ???

Something definitely happened in the 1970s and 1980s…

Index: 1947 = 100 Since the late 1970’s we have seen the emergence of a “wage gap”. That is, we see a difference between productivity and wages

Percent 65% Historically, labor’s share of income has been constant at around 65%, but has decreased since the 1980s. So, where is the extra income going? This “wage gap” translates into a lower labor share of income

*Source: Thomas Piketty and Emmanuel Saez As labor’s share of total income declines, a larger share of income is going to capital owners (i.e. to rich people)

Real GDP Per Capita (1993 = 100) Real Median Household Income (1993 = 100) Note the divergence of median with mean in the late 1990’s

* Source: US Census Bureau US Income Distribution in 2012 (Real Mean Household income = $60,000) # of Households = 121M

Source: US Census Bureau ( $105,910+ $65,501 - $105,910 $40,187 - $65,501 $20,900 - $40,187 $0 - $20,900 Average Income by Quintiles (2013)

The Lorenz curve plots the cumulative distribution of US income The Lorenz Curve

The Gini Coefficient 0 = Perfect Equality 1 = Perfect inequality The US currently has a Gini coefficient of.45

Gini Coefficient in the US by County * Source: Census Bureau

* Source: CIA Fact book Gini Coefficients around the world

Note that income inequality in the US was worse back in the 1920’s, but has grown dramatically since the 1970s Income inequality really accelerated in the 1990’s!

The Good Old Days: Economic Growth from

The Times, They are a Changin’: Economic growth from

Here we can see both the declining growth as well as the rising inequality.