1. Intro to Macroeconomics: Measuring Domestic Output and National Income Mr. Griffin MHS AP Macroeconomics: Units I, II, & VI

2. Intro to Macroeconomics Part I – Units I & II

3. The Hackneyed Analogy Micro: “study of the slice” Macro: “study of the whole pie”

4. Drawing a Line Between Macro and Microeconomics Aggregation and Macroeconomics  An economic aggregate: an abstraction that people use to describe some important feature of economic life, such as total domestic product.

5. Drawing a Line Between Macro and Microeconomics The Foundations of Aggregation  The composition of demand and supply in various markets is of little consequence for the economy-wide issues of growth, inflation, and unemployment.  During economic fluctuations, markets tend to move up or down together.

6. Supply and Demand in Macroeconomics Moving to Macroeconomic Aggregates  Aggregate supply and aggregate demand relate domestic product (on the horizontal axis) to the price level (on the vertical axis).

7. Supply and Demand in Macroeconomics Moving to Macroeconomic Aggregates  Aggregate demand (AD) = quantity of domestic product that is demanded at each possible price level  Aggregate supply (AS) = quantity of domestic product that is supplied at each possible price level

8. An Economy Slipping into a Recession D 2 B Price Level S D0D0 D0D0 S E Domestic Product D2D2

9. Economic Growth D 1 C Price Level S0S0 D0D0 D0D0 S0S0 E Domestic Product D 1 S 1 S 1 Q 0 Q 1

10. Inflation  Major concerns of macroeconomics Inflation Unemployment Growth   AD   price level Supply and Demand in Macroeconomics

11. Recession and Unemployment   AD  unemployment  Recession = a period of time during which production falls and people lose jobs Supply and Demand in Macroeconomics

12. Economic Growth  Economic growth =  GDP   AD and/or  AS  growth Supply and Demand in Macroeconomics

13. The Business Cycle

14. The Complete Macro Circular Flow Diagram

15. GDP: Measurement of Income and Economics Performance Part II – Unit II

16. Assessing the Economy’s Performance National Income Accounting: Health of the Economy Comparisons Over Time Formulation of Public Policy What Are These Accounting Measures?

17. Answer: GDP = C + Ig + G + Xn This is THE GDP Equation for the AP Exam and for college

18. Money as the Measuring Rod: Real Versus Nominal GDP  GDP = sum of the money values of all final goods and services produced in the domestic economy within the year  Nominal GDP (GDP in current dollars) values each good and service at the price at which it was actually sold during the year. Gross Domestic Product

19.  Drawback of Nominal GDP: it changes when prices change even if there is no change in actual production.  Solution: calculate real GDP or GDP in constant dollars.  Distinction between Nominal and Real GDP  a working definition of a recession as a period in which real GDP declines Gross Domestic Product

20. What Gets Counted in GDP?  Only goods and services produced within the year  Only final goods and services  Only production within the geographic boundaries of the United States

21. Limitations of the GDP: What GDP Is Not  Includes only market activities  Places no value on leisure  Counts “bads” as well as “goods”  Does not deduct ecological costs of economic activity Gross Domestic Product

22. Excludes: Nonproduction Transactions Secondhand Sales Financial Transactions Public Transfer Payments Private Transfer Payments Stock Market Transactions

23. Gross Domestic Product Two Approaches  Expenditures Approach  Income Approach

24. + + + + + + + Consumption by Households Investment by Businesses Government Purchases Expenditures by Foreigners Expenditures ApproachIncome Approach Wages Rents Interest Profits Statistical Adjustments = = GDPGDP

25. Personal Consumption Expenditure ( C ) EXPENDITURES APPROACH Durable Consumer Goods Nondurable Consumer Goods Consumer Expenditures for Services

26. Personal Consumption Expenditure ( C ) Gross Private Domestic Investment ( I g ) EXPENDITURES APPROACH Machinery, Equipment, and Tools All Construction Changes in Inventories Noninvestment Transactions Gross vs. Net Investment Net Private Domestic Investment

27. EXPENDITURES APPROACH Net Investment Gross Investment Depreciation - = Stock of Capital Consumption and Government Spending Stock of Capital Depreciation Net Investment January 1 Year’s GDP December 31 Increased Gross Investment

28. Government Purchases ( G ) Personal Consumption Expenditure ( C ) Gross Private Domestic Investment ( I g ) EXPENDITURES APPROACH Expenditures for Goods & Services Expenditures for Social Capital Does NOT include Government Transfer Payments

29. Government Purchases ( G ) Net Exports ( X n ) Personal Consumption Expenditure ( C ) Gross Private Domestic Investment ( I g ) EXPENDITURES APPROACH Net Exports (X n ) = Exports (X) – Imports (M)

30. Putting it all together: GDP = C + I g + G + X n EXPENDITURES APPROACH

31. Represented Graphically: The Keynes AE Model Aggregate Expenditures (billions of dollars) o 45 o Real domestic product, GDP (billions of dollars) C C + I g + X n C + I g + X n + G

32. 1 Minute Drill Which of the following is included in the calculation of GDP? – Sale of stock in Home Depot – Attorney’s fees – New laptop for a small business – Your grandmother sells her house – An unemployment check – A new police cruiser

33. Compensation of Employees Rents Interest Proprietors’ Incomes Corporate Profits Corporate Income Taxes Dividends Undistributed Corporate Profits THE INCOME APPROACH

34. From National Income to GDP Indirect Business Taxes Consumption of Fixed Capital (Depreciation) Net Foreign Factor Income THE INCOME APPROACH

35. OTHER NATIONAL ACCOUNTS Gross Domestic Product (GDP) $10,446 Consumption of fixed capital-1,393 Net Domestic Product (NDP) $9,053 Net foreign factor income earned in the U.S. - 10 Indirect business taxes -695 National Income (NI) $8,348 Social security contributions -748 Corporate income taxes -213 Undistributed corporate profits -141 Transfer payments +1,683 Personal Income (PI) $8,929 Personal Taxes -1,113 Disposable Income (DI) $7,816 U.S. GDP, NDP, NI, PI, & DI, 2002

36. Nominal Values Deflate GDP when prices rise Inflate GDP when prices fall Nominal GDP Calculating Real GDP NOMINAL GDP vs. REAL GDP 1234512345 5 7 8 10 11 $ 10 20 25 30 28 100 200 250 - $ 50 140 200 - $ 50 70 80 - (2) Price Pizza Per Unit (1) Units of Output Year (3) Price Index Year 1 = 100 (4) Unadjusted, or Nominal, GDP, (1)x(2) (5) Adjusted, Or Real, GDP

37. Adjustment Process GDP Price Index Price Index in a given year = Price of market basket in specific year Price of same market basket in base year x 100 Real GDP = Nominal GDP Price Index (in hundredths) Price Index (in hundredths) = Nominal GDP Real GDP An Alternative Method NOMINAL GDP vs. REAL GDP

38. SAT Score = Verbal + Math + Writing SAT falls short of “who you are” A higher SAT score does not equal or ensure “quality of life” GDP: A Country’s “SAT Score?”

39. WHERE DOES GDP FALL SHORT? Similar to the SAT in that it does not provide analysis of “the whole picture” Is it possible to get “the whole picture?”

40. What is Wrong with GDP?

41. Major Criticisms of GDP Does not measure externalities  Quality of life  Standard of living  Health of individual / population  Environmental impacts  Black market  Purchasing power  Unpaid work

42. IF NOT GDP THEN WHAT SHOULD WE USE?

43. Human Development Index United Nations calculation based on: Income  Gross National Income Knowledge  Expected years of schooling for children  Mean years of schooling for adults Health  Life expectancy at birth

44. Human Development Index

45. HDI Top Countries RankCountry 1 Norway 2 Australia 3 New Zealand 4 United States 5 Ireland 6 Liechtenstein 7 Netherlands 8 Canada 9 Sweden 10 Germany

46. Annual GDP per Capita Annual gross domestic product (GDP) per capita averages over $20,000 in most developed countries but under $5,000 in most less developed countries.

47. The Case For HDI Is better for viewing the “whole picture” Provides data on developing nations Addresses poverty and health issues (where should the resources go?)

48. Should we use GDP or HDI to address these issues? Health of the Economy Formulation of Public Policy Strength of a Nation

49. GDP and a short History of the Modern US Economy Part III – Units II & VI

50. The Economy on a Roller Coaster Growth, but with Fluctuations  The U.S. has seen significant fluctuations in economic growth, unemployment, and inflation.  Before WWII, the business cycle was particularly strong, the worst episode being the Great Depression of the 1930s.

51. Nominal GDP, Real GDP, and Real GDP per Capita 0 10,000 5,000 20,000 30,000 15,000 25,000 35,000 Dollars per Year $40,000 0 2,000 1,000 4,000 6,000 8,000 3,000 5,000 7,000 $9,000 $10,000 Real GDP (right scale) Billions of Dollars per Year $11,000 Year 19952000 2004 19901985198019751970 1965 1960 1955 Nominal GDP (right scale) NOTE: Real GDP figures are in 2000 dollars. Dollars per Year Billions of Dollars per Year Real GDP per capita (left scale)

52. The Growth Rate of U.S. Real GDP, 1870-2004 –20 –15 –10 –5 5 10 15 20 187018801890190019101920193019401950 1960197019801990 2000 2004 Year 0 Percentage Growth Rate of Real GDP Post–1950 Pre–1940 Rapid industrialization Railroad prosperity Depression of 1890s Panic of 1907 Postwar depression Great Depression Postwar recession World War I World War II Korean War Expansion of 1960s 1974–75 Recession 1982–83 Recession Roaring Twenties 1990–91 Recession Expansion of 1980s Boom of 1990s

53. The Economy on a Roller Coaster The Great Depression  A worldwide event  Caused a much-needed revolution in economic thinking  Until the 1930s, the prevailing economic theory held that a capitalist economy could cure recessions or inflations by itself.

54. The Economy on a Roller Coaster The Great Depression  The Great Depression led John Maynard Keynes, one of the world’s most renowned economists, to write The General Theory of Employment, Interest, and Money (1936).

55. The Economy on a Roller Coaster The Great Depression  Keynes believed that: The economy did not naturally gravitate toward smooth growth and high levels of employment A pessimistic outlook could lead business firms and consumers to curtail their spending plans The economy could then be condemned to years of stagnation

56. The Economy on a Roller Coaster The Great Depression  In terms of the AD-AS framework, Keynes suggested that there were times when the AD curve shifted inward by large amounts.  The consequence would be declining output and deflation.

57. The Great Depression  Keynes showed how governments can manage their economies so that recessions will not turn into depressions and depressions will not last as long as the Great Depression. The Economy on a Roller Coaster

58. From World War II to 1973  During this period, the economy experienced some fairly mild business cycles, but grew considerably.  By the end of the period, inflation was rising.

59. The Economy on a Roller Coaster The Great Stagflation, 1973-1980  The international price of oil was raised sharply in 1973 and again in 1979.  For that reason and some others, the period saw the emergence of stagflation, both unemployment and inflation increasing together.

60. The Economy on a Roller Coaster Reaganomics and its Aftermath  When Reagan assumed office in 1981, the economy went into a sharp tailspin, and soon the rate of inflation fell.  This was followed by a period of steady, non- inflationary growth during most of the 1980s. In 1990-91, recession hit.

61. The Economy on a Roller Coaster Clintonomics: Deficit Reduction and “The Best Economy in 30 Years”  Clinton’s initial objectives were spurring growth and increasing public investment.  Soon, however, the overriding goal in Washington became deficit reduction.

62. The Economy on a Roller Coaster Clintonomics: Deficit Reduction and “The Best Economy in 30 Years”  A variety of transitory factors pushed the economy’s AS curve outward at an unusually rapid pace between 1996 and 1999.  Strong economic growth continued through the late 1990s.  Inflation remained low.

63. The Economy on a Roller Coaster The Bush Economy and the 2004 Election  Real GDP grew very slowly then declined slightly in 2nd half of 2001 1st recession in 10 years Recession ended November 2001

64. The Economy on a Roller Coaster The Bush Economy and the 2004 Election  Policies that helped shift AD curve, mitigating recession 2001-2003 tax cuts? war on terrorism, burst of government spending consumers spending remained strong, despite 9/11 low interest rates encouraged spending

65. The Effects of an Adverse Supply Shift S 1 S 1 D D S 0 S 0 Price Level Real GDP A E

66. The Effects of a Favorable Supply Shift Real GDP Price Level D 0 D 0 S 0 S 0 S 1 S 1 D 1 D 1 S 2 S 2 C B E

67. How to Stabilize the Economy Part IV - Units II & VI… and Stay Tuned for Macro Unit V

68. Macroeconomic Tools Fiscal Policy: Executive & Legislative Branches Monetary: Federal Reserve

69. The Business Cycle

70. Combating Unemployment  When recessions are caused by too low aggregate demand, governments can try to stimulate demand. The Problem of Macroeconomic Stabilization

71. Stabilization Policy to Fight Unemployment Increase in output Price Level Real GDP S S D 0 D 0 E D 1 D 1 A

72. Combating Inflation  When inflation is caused by too high aggregate demand, governments can try to restrain aggregate demand. The Problem of Macroeconomic Stabilization

73. Stabilization Policy to Fight Inflation Decrease in prices Price Level Real GDP S S D 0 D 0 E D 2 D 2 B

74. The Problem of Macroeconomic Stabilization Does It Really Work?  Before 1940, the economy endured pronounced business fluctuations and inflation was rare.  Since World War II the business fluctuations have been much less severe, but inflation has been a common occurrence.  How successful government policy can be is a question to be explored throughout the text.