MACROECONOMICS How do we know which countries are economically successful?

Copyright©2004 South-Western What would we use to measure which people are most economically successful? We would look at their INCOME We can do the same with an entire country!! We can look at all the income earned in one country in a year or We can look at the total value of everything that is produced in a country in one year Total INCOME = Total PRODUCTION How? It’s similar to people !

Copyright©2004 South-Western What if there were only two people in a country (economy)? $500 = Income Goods and Services = $500 The value of all goods and services produced in this “economy” = $500 We only look at one side to evaluate the size of this economy.

Copyright©2004 South-Western Total Product = Gross Domestic Product ●In order to measure the entire economy, we must look at MACROECONOMIC Indicators! Gross Domestic Product (GDP) = The total value of everything produced in an economy in a given time period. ●In order to measure the entire economy, we must look at MACROECONOMIC Indicators! Gross Domestic Product (GDP) = The total value of everything produced in an economy in a given time period.

Copyright©2004 South-Western Figure 1 The Circular-Flow Diagram GOV. GDP = C+I+G+X I C G

Copyright©2004 South-Western Circular Flow Diagram including Exports/Imports Question: Suppose next year’s imports are much greater than exports. What will be the affect on next year’s GDP? Overall Decrease

Copyright©2004 South-Western Gross Domestic Product measures production ●Recent GDP figures (in millions) ● ,469 ● ,971 ● ,734 ● ,479 ● ,194 ● ,737 ● ,294 ● ,219? ●GDP= C+I+G+X ●C-Consumption- measures how much in consumption was produced ●I-Investments- Measures how much businesses spend on their businesses ●G-Government Spending- measures how much the government bought ●X-Net exports- measures how much we sold and bought from abroad ●GDP= C+I+G+X ●C-Consumption- measures how much in consumption was produced ●I-Investments- Measures how much businesses spend on their businesses ●G-Government Spending- measures how much the government bought ●X-Net exports- measures how much we sold and bought from abroad

Copyright©2004 South-Western U.S. GDP By Sector

Table 1 GDP and Its Components Copyright©2004 South-Western

What are the rankings? ●World GDP Per Capita rankingsWorld GDP Per Capita rankings ●World GDP RankingsWorld GDP Rankings ●World GDP Per Capita rankingsWorld GDP Per Capita rankings ●World GDP RankingsWorld GDP Rankings

Copyright©2004 South-Western Calculating Gross Domestic Product ●Y (GDP) = C+I+G+X ■C= Consumption (Think consumers buying stuff) ■I = Investment (Think businesses investing in their companies, like buildings, raw materials, land purchases etc.) ■G= Government (All purchases) ■X= NET Exports= Exports - Imports (This number is negative if we import more than we export) ●Y (GDP) = C+I+G+X ■C= Consumption (Think consumers buying stuff) ■I = Investment (Think businesses investing in their companies, like buildings, raw materials, land purchases etc.) ■G= Government (All purchases) ■X= NET Exports= Exports - Imports (This number is negative if we import more than we export)

Copyright©2004 South-Western Figure out the C, I, G, X, and the total GDP 1.You loan your best friend $20 2.Busy moms buy $16,000 worth of the new book “Feeding Teenagers” 3.You buy a “hot” stereo for $200 4.You pay $60 for a subscription to Teen Bop 5.Your Dad’s shop sells $5000 worth of plate glass for housing construction 6.The football team buys $1000 of chiropractic services. 7.A Japanese firm buys 30 IBM computers for $15k 8.You get your haircut for $15 1.You loan your best friend $20 2.Busy moms buy $16,000 worth of the new book “Feeding Teenagers” 3.You buy a “hot” stereo for $200 4.You pay $60 for a subscription to Teen Bop 5.Your Dad’s shop sells $5000 worth of plate glass for housing construction 6.The football team buys $1000 of chiropractic services. 7.A Japanese firm buys 30 IBM computers for $15k 8.You get your haircut for $15 9.Cover-up cosmetics has an unsold inventory of $30k 10.You buy a rusty thunderbird for $ Your Grandpa buys 3 shares of IBM for $ You spend seven hours cleaning your room 13.McDonalds buys a new fry cooker for $ You buy a walkman made by Sony in Japan for $ You pay $150 in income tax 9.Cover-up cosmetics has an unsold inventory of $30k 10.You buy a rusty thunderbird for $ Your Grandpa buys 3 shares of IBM for $ You spend seven hours cleaning your room 13.McDonalds buys a new fry cooker for $ You buy a walkman made by Sony in Japan for $ You pay $150 in income tax

Copyright©2004 South-Western How might GDP mislead? ●GDP = the total value (in $) of all products created in a country in a year. ● Is it possible that GDP could increase even IF there was NO increase in the number of goods and services produced in a country in a given year? ●THAT CAN HAPPEN…HOW? INFLATION! ●GDP = the total value (in $) of all products created in a country in a year. ● Is it possible that GDP could increase even IF there was NO increase in the number of goods and services produced in a country in a given year? ●THAT CAN HAPPEN…HOW? INFLATION!

Copyright©2004 South-Western Calculating REAL GDP vs. NOMINAL GDP ●In order to get a “real” idea of GDP we need to take out the effects of inflation on prices. ●We “deflate” nominal GDP to get REAL GDP. ●GDP deflator = (Nominal GDP/Base Year GDP) X 100 ●In order to get a “real” idea of GDP we need to take out the effects of inflation on prices. ●We “deflate” nominal GDP to get REAL GDP. ●GDP deflator = (Nominal GDP/Base Year GDP) X 100

Copyright©2004 South-Western Calculating Nominal GDP ●Nominal GDP = Quantity * Price (Both Q and P are for the same year)

Table 2 Real and Nominal GDP Copyright©2004 South-Western

Calculating REAL GDP ●Choose a BASE Year ■You will use BASE YEAR Prices to calculate GDP for ANY Year, thus eliminating the affect of price changes! ■Real GDP = Quantity * Base Year Price ●Choose a BASE Year ■You will use BASE YEAR Prices to calculate GDP for ANY Year, thus eliminating the affect of price changes! ■Real GDP = Quantity * Base Year Price

Copyright©2004 South-Western Table 2 Real and Nominal GDP Copyright©2004 South-Western

Calculating GDP Deflator ●GDP Deflator = Nominal

Copyright©2004 South-Western Is this a good indicator? ●What about measuring an economy over time? What Problems will result with this format? ●Real vs. Nominal GDP NominalReal ●What about measuring an economy over time? What Problems will result with this format? ●Real vs. Nominal GDP NominalReal

Copyright©2004 South-Western GDP Deflator ●Take Nominal GDP and Divide it by Real and multiply by 100. ●That gives us a number that can be used for comparison purposes. Do Problems and Applications #5, 6 and 7 from page 517 for tomorrow. ●Take Nominal GDP and Divide it by Real and multiply by 100. ●That gives us a number that can be used for comparison purposes. Do Problems and Applications #5, 6 and 7 from page 517 for tomorrow.

Copyright©2004 South-Western GDP vs GNP ●Gross Domestic Product-produced in a country ■Y= C+I+G+ (E-M) ●Gross National Product-produced by a country ■GNP= GDP + (Net investment income) ■Ie. If America pays more $ in interest to foreign countries than it receives from U.S. Assets held abroad, then its GNP will be lower than its GDP. ●Gross Domestic Product-produced in a country ■Y= C+I+G+ (E-M) ●Gross National Product-produced by a country ■GNP= GDP + (Net investment income) ■Ie. If America pays more $ in interest to foreign countries than it receives from U.S. Assets held abroad, then its GNP will be lower than its GDP.