Copyright © 2004 South-Western Mods 2, 10-11, Intro to Macro, Measuring a Nation’s Income

Copyright © 2004 South-Western Econo Game Results Analysis Circular Flow

The Circular-Flow Diagram Spending Goods and services bought Revenue Goods and services sold Labor, land, and capital Income = Flow of inputs and outputs = Flow of dollars Factors of production Wages, rent, and profit FIRMS Produce and sell goods and services Hire and use factors of production Buy and consume goods and services Own and sell factors of production HOUSEHOLDS Households sell Firms buy MARKETS FOR FACTORS OF PRODUCTION Firms sell Households buy MARKETS FOR GOODS AND SERVICES Copyright © 2004 South-Western

The Expanded Circular-Flow Diagram

Copyright © 2004 South-Western Circular Flow Worksheet Flows 1. Households spend $ on goods and services. 2. Businesses produce goods and services for households to buy. 3. Businesses pay wages/rents/income $ to households for resources. 4. Households provide resources for businesses to use in production. 5. Government spends $ to buy resources. 6. Government receives resources from Resource Market. 7. Government spends $ to buy Goods & Services. 8. Government receives Goods & Services from Product Market. 9. Government provides Goods & Services to Households. 10.Households pay tax $ to Government. 11.Government provides Goods & Services to Businesses. 12.Businesses pay Tax $ to Government.

Copyright © 2004 South-Western Circular Flow Worksheet Answers ______1. David pays $9.99 for a CD at the local store. ______2. The Massachusetts Dept of Education pays Ms Holm to grade MCAS essays. ______3. Maria pays her federal income tax. ______4. Jorge receives $15,000 in income from his half-ownership of a coffee shop. ______5. The City of Boston pays for an order of three new cars for restaurant inspectors to use. ______6. Mammoth Toys Inc. hires 100 new employees. ______7. The National Park Service opens two new campgrounds in Yellowstone National Park. ______8. As a small business owner, Keisha makes decorative pillows that she sells for $30.00 ______9. Jordan’s Furniture submits its quarterly sales tax receipts to the state of Massachusetts. _____10. Emily earns $6.50 per hour entering data at the music conservatory.

Copyright © 2004 South-Western Circular Flow MC Problems Answers: 26.A 27.D 28.D 29.A

Copyright © 2004 South-Western Test of Macroeconomic Thinking Take T/F Quiz Answers? All False!!

Copyright © 2004 South-Western Intro to Macroeconomics Macroeconomics Macroeconomics is the study of the economy as a whole. Its goal is to explain the economic changes that affect many households, firms, and markets at once. It utilizes aggregate data on various measures.

Copyright © 2004 South-Western Macro Issues Macroeconomics answers questions like the following: Why is average income high in some countries and low in others?—Macro measure is GDP Why do production and employment expand in some years and contract in others?—Macro measure is unemployment rate Why do prices rise rapidly in some time periods while they are more stable in others?—Macro measure is inflation rate

Copyright © 2004 South-Western The Business Cycle— a Macro Model of the Economy

Real GDP in the United States Billions of 1996 Dollars $10,000 9,000 8,000 7,000 6,000 5,000 4,000 3, Copyright © 2004 South-Western

Evidence for a Recession?

Copyright © 2004 South-Western The First Macro Measure— National Accounts—GDP When judging whether the macro economy is doing well or poorly, we need some measure of its overall productivity

Copyright © 2004 South-Western National Accounts—THE ECONOMY’S INCOME AND EXPENDITURES For an economy as a whole, income must equal expenditure because: Every transaction has a buyer and a seller. Every dollar of spending by some buyer is a dollar of income for some seller. Remember Circular Flow!!

Copyright © 2004 South-Western GROSS DOMESTIC PRODUCT Gross domestic product (GDP) is a measure of the income and expenditures of an economy. It can be measured in 3 ways: 1.Measure the value of final products 2.Measure the spending on these products and services 3.Measure the income of factor markets in the economy

Copyright © 2004 South-Western THE MEASUREMENT OF GROSS DOMESTIC PRODUCT 1.Measuring the value of final products—this is the Output approach GDP= the market value of all final goods and services produced within a country in a given period of time.

Copyright © 2004 South-Western THE MEASUREMENT OF GROSS DOMESTIC PRODUCT 2.Measuring the spending on all final products—this is the Expenditure approach GDP (Y) is the sum of the following: Consumption (C) Investment (I) Government Purchases (G) Net Exports (NX) Y = C + I + G + NX

Copyright © 2004 South-Western THE MEASUREMENT OF GROSS DOMESTIC PRODUCT 3.Measuring the income of factor markets— this is the Income approach NI (National Income) = W+R+I+P Wages Rents Interest Profits

Copyright © 2004 South-Western Comparing the Three Approaches INCOME Approach EXPENDITURE Approach OUPUT Approach

Copyright © 2004 South-Western THE MEASUREMENT OF GROSS DOMESTIC PRODUCT All three approaches = each other!! Remember Circular Flow!!

Copyright © 2004 South-Western THE EXPENDITURE APPROACH TO GDP GDP (Y) is the sum of the following: Consumption (C) Investment (I) Government Purchases (G) Net Exports (NX) Y = C + I + G + NX

Copyright © 2004 South-Western THE COMPONENTS OF GDP Consumption (C): The spending by households on goods and services, with the exception of purchases of new housing. Investment (I): The spending on capital equipment, inventories, and structures, including new housing. Government Purchases (G): The spending on goods and services by local, state, and federal governments. Does not include transfer payments because they are not made in exchange for currently produced goods or services. Net Exports (NX): Exports minus imports.

Copyright © 2004 South-Western GDP and Its Components (2010) Consumption 71% Government Purchases 19% Net Exports -3 % Investment 13%

Copyright © 2004 South-Western THE MEASUREMENT OF GROSS DOMESTIC PRODUCT Remember: GDP= the market value of all final goods and services produced within a country in a given period of time. YOU ARE MEASURING PRODUCTION!!!

Copyright © 2004 South-Western The Finer points of the Components of GDP GDP includes all items produced in the economy and sold legally in markets. What Is Not Counted in GDP? GDP excludes most items that are produced and consumed at home and that never enter the marketplace. It excludes items produced and sold illicitly, such as illegal drugs. It excludes used items

Copyright © 2004 South-Western Resources for GDP figures

Copyright © 2004 South-Western GDP Counting Game Find a partner Get envelope and wkshts Get busy!! Check with me when done—Get Key!! Then do Second GDP worksheet

Copyright © 2004 South-Western REAL VERSUS NOMINAL GDP Learn these two words—we will be using them often, about a number of concepts: NOMINAL—literally means “in name only”—in Economics, it refers to the idea that you are looking at some measure or value at “face value” or in “current terms”—meaning it has not been adjusted for any outside effects REAL—in Economics, using the “real” value means you have adjusted the concept for the effects of outside influences

Copyright © 2004 South-Western REAL VERSUS NOMINAL GDP Nominal GDP values the production of goods and services at current prices—at the “face value” of current prices. Real GDP values the production of goods and services at constant prices. In other words, you have adjusted the value to get rid of an outside influence. In this case, you will refigure GDP in dollars that get rid of the influence of rising prices, by choosing a base year in dollars to compare prices against.

Copyright © 2004 South-Western REAL VERSUS NOMINAL GDP An accurate view of the true growth rate of production in an economy requires adjusting nominal to real GDP

Copyright © 2004 South-Western Real and Nominal GDP Copyright©2004 South-Western

GDP and Economic Well-Being We use per capita GDP as the best single measure of the economic well-being of a society. GDP per capita tells us the income and expenditure of the average person in the economy AND it takes out the effect of changes in population Per capita GDP = Real GDP ÷ population

Copyright © 2004 South-Western 2013 World “Top Ten” Per Capita GDP (IMF stats) Luxembourg1$112,473 Norway2$100,579 Qatar3$98,986 Switzerland4$81,276 Australia5$64, 578 Denmark6$59,129 Sweden7$58,014 Singapore8$55,182 USA9$53,001 Canada10$52,037

Copyright © 2004 South-Western Alternate Statistics by_GDP_(nominal)_per_capitahttp://en.wikipedia.org/wiki/List_of_countries_ by_GDP_(nominal)_per_capita

Copyright © 2004 South-Western GDP per capita for U.S.

Copyright © 2004 South-Western US States and Country Total GDP: An interesting comparison

Copyright © 2004 South-Western GDP and Economic Well-being Higher per capita GDP indicates a higher standard of living HOWEVER… GDP is not a perfect measure of happiness or the quality of life Robert F. Kennedy said: “Measures of income tell us everything, in short, except that which makes life worthwhile.”

Copyright © 2004 South-Western GDP AND WELL-BEING Some things that contribute to well-being are not included in GDP. The value of leisure. The value of a clean environment. The value of almost all activity that takes place outside of markets, such as the value of the time parents spend with their children and the value of volunteer work. So…here are some other measures of well- being and quality of life

Copyright © 2004 South-Western Happy Planet Index Uses 3 measures: Experienced well-being The Cantril Self-Anchoring Scale, developed by pioneering social researcher Dr. Hadley Cantril, consists of the following: Please imagine a ladder with steps numbered from zero at the bottom to 10 at the top. The top of the ladder represents the best possible life for you and the bottom of the ladder represents the worst possible life for you. On which step of the ladder would you say you personally feel you stand at this time? (ladder- present) On which step do you think you will stand about five years from now? (ladder-future) Life expectancy Ecological footprint

Copyright © 2004 South-Western Happy Planet Index

Copyright © 2004 South-Western Economist Mag’s Quality of Life Index: where-be-born-2013-lottery-life Uses 9-11 measures GDP Life expectancy Political stability and security Family life (Divorce rate) Community life (church attendance, etc) Climate/geography Job security Political freedom Gender Equality

Copyright © 2004 South-Western Economist Mag’s Quality of Life Index

Copyright © 2004 South-Western Distorted Maps

Copyright © 2004 South-Western World Alcohol Consumption

Copyright © 2004 South-Western HIV Prevalence

Copyright © 2004 South-Western House Prices

Copyright © 2004 South-Western Military Spending

Copyright © 2004 South-Western War and Death

Copyright © 2004 South-Western Toy Exports

Copyright © 2004 South-Western Toy Imports

Copyright © 2004 South-Western Clothing Exports

Copyright © 2004 South-Western Clothing Imports

Copyright © 2004 South-Western The Wealth of Nations—Year 1500

Copyright © 2004 South-Western The Wealth of Nations—Year 2002

Copyright © 2004 South-Western The Wealth of Nations—Year 2015