GNP – Ownership All goods/services produced legally for pay by citizens of a country. [ Citizenship mattered, not geography] Nike in Indonesia Plano, TX ChinaEurope BMW in Waco Provo,UT Honda in Ohio Honda in Ohio in Chicago GDP - Location All goods/services produced legally for pay in a country’s borders. [ Geography matters, not citizenship] The difference between GDP & GNP is about 2/10 of 1%.

0 Real GDP AD 1 AD 2 AS 1 AS 2 PL 2 PL 3 Y* 1 Y2Y2 Y3Y3Y3Y3 Can sustain a much greater increase in AD if the AS curve is also shifting to the right, due to increasing productivity also shifting to the right, due to increasing productivity. Economy’s Speed Limit at F ull E mployment is 4 %, instead of 2.5 %. In the early 90’s, at FE, 2.5% was the speed limit. AS shifted slowly due to low productivity. So, at FE, the “goldilocks economy” has expanded. PL 1 4% Real GDP under 4% 17 increases “Goldilocks Economy” [not too fast or slow] Increasing productivity of the late 90’s allowed more growth at FE GDP.

*Represents “GDP Speed Limit” at full employment

Billions of 1996 Dollars $10,000 9,000 8,000 7,000 6,000 5,000 4,000 3, Copyright © 2004 South-Western

Personal Consumption Expenditure ( C ) GDP = C(66%) + Ig(18%) + G(17%) + Xn D urable C onsumer G oods[12%]D urable C onsumer G oods[12%] N ondurable s[29 %][soup & soap]N ondurable s[29 %][soup & soap] Consumer Expenditures for Services[59%]Consumer Expenditures for Services[59%] Ferrari produced here Maytag produced here Spending by HH on all g/s except for new housing.

COMPOSITION OF CONSUMER Spending, 2005 Services $5,155 billion (59%) Nondurable Goods $2,564 billion (29%) Durable Goods $1,027 billion (12%) Total of $8,746 billion

Personal Consumption Expenditure ( C ) 3 S ubcategories 3 S ubcategories [*spending on output not consumed ] A. Business fixed investment -purchase of tools, machinery, & plants B. Residential fixed investment–construction of new houses [can rent for financial return] & apartments. C. Inventory investment – change in inventories net increase in inventoriesinvestmentnet [A net increase in inventories is investment; a net decrease in inventories negative investment decrease in inventories is negative investment or disinvestmentdisinvestment disinvestment (disinvestment represents output produced in a previous year sale of output produced in a previous year) Let’s say this Porsche is produced by a foreign co. in Plano, Texas. Gross Private Domestic Investment (I G ) U.S. capital stock is over $30 trillion.

G overnment P urchases (G) [state, local & federal] Personal Consumption Expenditure ( C ) Gross Private Domestic Investment ( I g ) [“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 Purchases ( G ) Net Exports( X n ) Personal Consumption Expenditure (C) Gross Private Domestic Investment (I g ) Net E xports (X n )= Exports (X)–Imports (M) [M represents production outside a country]

Consumption 69% Government Purchases 18% Net Exports -3 % Investment 16%

Consumption9,429,300[70%] Investment$2,186[16%] G overnment purchases$2,570[19%] ExportSpending$1.210 ImportSpending$ %

To2007 The key is to keep the economy growing. At 2.5% growth, the U.S. The key is to keep the economy growing. At 2.5% growth, the U.S. economy will expand to $23 trillion in 25 years. But – at 3%, it would reach $26 trillion, which is like another Germany, with Saudi Arabia thrown in. 0 1% 2% 3% 4% 5% 1929To To To To To To To % 4.5% 3.3% 3.8% 2.8% 2.7% 2.6% LongTermGrowth 3.2% 1990To2000

U.S. Japan Germany China U.K. France Italy Canada Spain Brazil S. Korea India Mexico Russia Australia Comparative GDPs in Trillions,

U.S. Japan Germany China U.K. France Italy Canada Spain Brazil S. Korea India Mexico Russia Australia Comparative GDPs in Trillions, If California and Texas were countries, where would they rank? Calif. 1.7 TX 1.1 TX 1.1

We have 20% of the world’s GDP, 25% of global trade, 40 % of world stock market capitalization, and nearly 50% of the world’s largest companies. Texas, at $1.1 trillion would be the 8th largest country. Texas produces 20% more than India. California, with a $ 1.7 trillion GDP would be number 7. We make up 4.7 % of the world’s population, but produce 20 % of GDP [output]. but produce 20 % of GDP [output]. Gross World Product is $66 trillion /6.6 bil.= $ So, World Per Capita is about $10,200. China, India, Indonesia, & Bangladesh have over 40% of the world’s population, but produce only 7% of the world’s GDP.

[Selected Countries] CountryPer C apita L uxembourg 55,600 Switzerland 48,230 U.S. $45,600 Japan37,180 Norway30,800 France30,090 Denmark29,800 Canada29,700 Austria27,000 Germany27,000 Belgium26,100 China and India are still poorer than he U.S. was in % of Africans live on less than $1 a day & it is getting worse. CountryPer C apit United Kingdom $24,700 Sweden24,700 Italy24,300 Australia24,000 New Zealand19,500 Greece17,900 Hungary12,000 Mexico 6,770 China 2,000 Pakistan 600 Rwanda 220 Liberia 110

12 tril. 10 tril. 9 tril. 8 tril. 7 tril. 6 tril. 5 tril. 4 tril. 3 tril. 2 tril. 1 tril ,204 1,665 2,416 3,187 4, tril. PerCapita $ 45,600 [If GDP increases, p er c apita income increases] 13 tril.

GDP Per Capita [in 1992 dollars] T he Poorest Nation s Nation Per Capita 1. Afghanistan $ Sierra Leone$ Ethiopia$ Somalia$ Congo$ Eritrea$ Tanzania$ Burundi$ Rwanda$ Malawi$ Mozambique $1,000 Djibouti $1,300 Djibouti $1,300 5 b illion are in the Third There are 6.6 billion people on our planet; 5 b illion are in the Third World2.5 billionless than $2 a daydirest poverty World. 2.5 billion live on less than $2 a day. The direst poverty Africaworld’s 10poorest countries½ is in Africa, home of the world’s 10 poorest countries. Over ½ the people of Sub-Sahara Africaless than $2 a day the people of Sub-Sahara Africa live on less than $2 a day. 8 million people die each year because they are too poor to stay alive. $6, $15, $25, $45, ½ of the world’s population have yet to make their first phone call.

GDP – measures legal production in U.S. in one year. GDP – measures legal production in U.S. in one year. GDP measures all final goods/services GDP measures all final goods/services produced by workers and capital located produced by workers and capital located in the U.S., regardless of ownership. in the U.S., regardless of ownership. [Domestically located resources] [Domestically located resources]

1. Intermediate Goods – components of the final good. A. Ford buys batteries or tires for its cars. A. Ford buys batteries or tires for its cars. B. KFC buys chickens to eventually sell to customers. B. KFC buys chickens to eventually sell to customers.

Value Added Value Added – increase in the market value at each stage $1 $4 $7 $8 $1 $1$1 $4 $4 $7 Value of Output($) $20 $12 $5 $1 Final Good Retail Shirt W holesale Shirt Cloth Cotton Value Added ($) Intermediate Good S um = $ 38 CottonFarmerTextileMill ShirtManufacturer 0 RetailStore $20 = sum So, to avoid “multiple counting”, we count the $20 final price, not $38. $20 “ Wife-beater ” Shirt from Kohls Only Final Sales($20) Count [to prevent “multiple counting”($38) ]

. Value Added $2.02

[It has not been produced again in 1963 & would not count.] 2. 2 nd Hand Sales – no current production. – no current production. A Chevy bought in 2007 A Chevy bought in 2007 The salesman is doing productive work. His commission would count. B. Boots produced in 1980 are bought in a Thrift Store in 07. They also have not been produced again. Salesman’s commission would count. You are buying his services. Salesman Shoe salesman 57 Chevy

The salesman’s commission does count So again, second hand sales, let’s say from Salvation Army, do not count.So again, second hand sales, let’s say from Salvation Army, do not count.

Purely Financial Transactions 3. Purely Financial Transactions – stocks, bonds, CDs. no current production There is no current production. 100 shares of Dell stock Ex: If 100 shares of Dell stock is bought I’m not buying a Dell computer but part ownership of Dell. Exchanging one financial asset for another Buying stock is not buying a product but buying ownership of the firm.

GDP – what is not counted [#4]. GDP – what is not counted [#4]. 4. Transfer Payment s –welfare, unemployment, social security 4. Transfer Payment s –welfare, unemployment, social security. nocontribution to final production [There is no contribution to final production] “Now that I’ve gotten my welfare check, I can get an iPhone”

5. Unreported “Legal” Business Activity “legal” Unreported “legal” business activity does not count. two-thirds“underground economy.” This is two-thirds of the “underground economy.” Then he has LASIK but the doesn’t report surgeon doesn’t report $500 $500 of his $3,400 bill? And what if this doesn’t waitress doesn’t report all tips report all tips? And what if the doesn’t dentist doesn’t report $400 for teeth whitening teeth whitening? Before LASIK Surgery

6. Illegal business activity is also not counted. Illegal business activity, because it goes unreported, also does not count. Making up 1/3 of the “underground economy,” it not count. Making up 1/3 of the “underground economy,” it includes murder for hire, gambling, drugs, and prostitution. includes murder for hire, gambling, drugs, and prostitution. And, what about “Jane Ho”? “I’m getting $1,000 to kill you, Ziggy, but at least it will not count in GDP.”

S elf E mployed $255 O ther Legal $25 R ents & Royalties $ 30 C orporate Profits $50 Interest $55 Wages and Salaries $185 Drugs $120 Bribery $35 Gambling and Loan Sharking $10 Pornography $20 Fraud $30 Other Illegal $20 Prostitution $30 Stolen Goods $35 I llegal $300 B L egal $600 B What gets reported is the “Above Ground” W hat doesn’t get reported is the “Underground”

7. Non-market Transactions Are Not Counted own householdvolunteer work Work in your own household or volunteer work in the community does not count because there was no payment. You need to do some of this housework.

7. Non-market Transactions Are Not Counted own householdvolunteer work Work in your own household or volunteer work in the community does not count because there was no payment. don’t marry your maid, gardener, or So, don’t marry your maid, gardener, or fitness instructor fitness instructor, or you will hurt GDP.

IfU. S. corporationsproduce goods overseas If U. S. corporations produce goods overseas, it does not count in GDP, but would count in GNP. Remember, we are measuring production inside the U.S. Imports represent production outside of the U.S. GM in France Nike in Indonesia

1. 1.Second Hand Sales[no production] 2. 2.Public/Private Transfer Payments 3. 3.Purely Financial Transactions 4. 4.Intermediate Goods 5. U.S. Corporations producing overseas 6. Non-market transactions [household or volunteer work] Underground Economy 7. Illegal business activity 8. Unreported legal business activity

W hen Outback buys potatoes for baked potatoes - W hen Outback buys potatoes for baked potatoes -When a tattoo business buys ink for tattoos ink for tattoos -When Tom Thumb buys spam to sell it to you spam to sell it to you -When the popsicle maker buys the sticks -Dell buys a computer monitor frame -Ice cream that Braums buys for sundaes -A bakery buys an apple to put in its pies -W hen F ord buys a windshield wiper for a car -When hooker, J-Lo Ho, is paid $200.00

Nominal [money] GDP v. Real GDP increase in pricesoutput An increase in prices and/or output will increase nominal GDP. increase in output will increase real GDP Only an increase in output will increase real GDP. Nominal GDP could increase even if output falls. Real GDP = Nominal Y/GDP deflator x 100 nominal GDP measures output & prices So, nominal GDP measures output & prices. Real measures only output [actual production] Constant (real) GDP current (money) GDP Constant (real) GDP v. current (money) GDP

Nominal [ ] GDP v. Real GDP Nominal [Current) GDP v. Real (constant) GDP Price of Market Basket(2001 [nominal GDP] $64 Price of Market Basket(2001) [nominal GDP] $64 GDP Price Index = Price of same Market Basket(1998)x100;[Real GDP] $50x100=128 GDP Price Index = Price of same Market Basket(1998)x100; [Real GDP] $50x100=128 [GDP Deflator] in the base year (1998)[$64/128 x 100 = $50] [GDP Deflator] in the base year (1998) [$64/128 x 100 = $50] B ase year [$50/$50=1x100=100] $46/$50x100=92 [deflation of 8%]

The “GDP” Balloon takes Nominal – measured in terms of money. Real–measured in terms of goods/services. $6,736.9/126.1 x 100 = $5,342.5

[Real GDP must decline for 6 months] [Real GDP must decline for 6 months]

Recession [Real, not nominal GDP has declined] Recession [Real, not nominal GDP has declined] Real GDP Inflationcomponent

Annual growth GROWTH RATE (percent per year) Long-term average growth (3%) Recessions Zero growth The Business Cycle in U.S. History [11 Recessions since WWII, from 6 months to 16 months] The Business Cycle in U.S. History [11 Recessions since WWII, from 6 months to 16 months] 2005