1. Finance 30220: Macroeconomics
Introduction to The US Economy

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

3. 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)
Germany
China
USA
Canada
Egypt
South Africa
India
Munich, Germany
Japan
Mexico

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

5. VS Two measures of a country’s production
Gross Domestic Product represents the total final goods produced within a country
Gross National Product represents the total value of final goods produced by a country’s citizens VS
By the Standard of GDP, a BMW X5 is an American car (The IPhone is a global product with most of the credit going to the US)
By the Standard of GNP, a BMW X5 is (largely) a German car. (The IPhone is a global product with most of the credit going to the US)
The Bureau of Economic Analysis officially made the switch from GNP to GDP as the standard benchmark in 1991

6. The Bureau of Economic Analysis (BEA) reports Gross Domestic Product (GDP) for the United States on a quarterly basis:
For the first quarter of 2017, GDP in the United States was (on an annualized basis) was...
$19,027,000,000,000.00
Gross National product (on an annualized basis was)…
$19,264,000,000, ( +1.25%)
* Source:

7. The World Bank and other Development Agencies now use Gross National Income as the standard. Gross National Income is very similar to GNP.
GNP = GDP + Income Receipts from assets/citizens abroad less income of foreign nationals within the country.
GNI = GDP + Income earned by citizens/assets abroad that is spent in country less income of foreign nationals in country that is spent out of country.
Income Earned by:
GDP
GNP
GNI
Residents in Country
Includes 
Includes
Foreigners in Country
Excludes
Includes If Spent in Country 
Residents Out of Country
Includes If Remitted Back
Foreigners Out of Country

8. For most countries, the differences between GDP and GNP are minor, but there are some extreme outliers!
Number of Countries
Luxembourg
Kiribati
Luxembourg
GDP: $56.8B
GNP: $40.1B
Kiribati
GDP: $160.1M
GNP: $339.32M
% Difference
GDP > GNP
GDP < GNP
Percentage Difference between GDP and GNP (2015)
* Source: World Bank

9. Let’s compare US GDP with some of our peers – different units!
140.7
5.9T
1.7T
* Source: CIA Factbook
*2016 Estimates

10. Using Market Exchange Rates to adjust GDP
1 Dollar equals 6.80 Chinese Yuan
$10.5T
71.5T
Foreign Currency GDP
Dollar GDP
Foreign Currency Per Dollar

11. Using Market Exchange Rates
* Source: CIA Factbook
World = $75.3T
Pictured Above = $61T (81%)
*2016 Estimates

12. Problem Using Market Exchange Rates
1 Dollar equals 2.80 Chinese Yuan
71.5T
1 Dollar equals 6.80 Chinese Yuan
$10.5T
1 Dollar equals Chinese Yuan
$6.6T
Foreign Currency GDP
Exchange rates fluctuate a lot. How do we know when a country’s currency is “fairly” valued?
Dollar GDP
Foreign Currency Per Dollar

13. Example: Brazil Real Depreciates Real Appreciates Billions of Dollars
Reals per Dollar
Real Depreciates
Real Appreciates

14. Purchasing Power Parity Example: Big Macs
$2.44
16.60
$4.62
At the current exchange rate, you could buy Big Macs in China and Sell them in the US for a Profit!
Foreign Currency Price
Dollar Price
Foreign Currency Per Dollar
1 Dollar equals 6.80 Chinese Yuan

15. “Purchasing Power Parity Exchange Rates” Eliminate Arbitrage Opportunities
$4.62
$4.62
16.60
PPP Exchange Rate
Foreign Currency Price
PPP
Exchange Rate (Foreign Currency Per Dollar)
Dollar Price
Yuan per dollar

16. Arbitrage Should Return the Exchange Rate to its PPP Value
$4.62
16.60
Based off the Big Mac, the Yuan is undervalued by around 63%!
Yuan per Dollar
Buy in China, Sell in US
(Yuan should appreciate)
6.80
Buy in US, Sell in China
(Yuan should depreciate)
Time

17. Using Purchasing Power Parity Conversions for GDP (Big Mac)
For the time being, let’s assume that China only sells Big Macs
71.5T
PPP Exchange Rate
$19.9T (PPP)
Market Exchange Rate
An “undervalued” currency will make a country seem smaller than it is.
$10.5T (ME)
Side Note:
Quantity of Big Macs produced in China
By using the PPP exchange rate, you are revaluing Chinese production at prevailing US prices
By the definition of the PPP exchange rate

18. Question? Should we expect goods prices to equalize across countries and does it matter?
16.60
Market Exchange Rate
$4.62
PPP
Market Exchange Rate
Yuan per dollar
PPP Exchange Rate
Yuan per dollar

19. Valuing currencies using the Big Mac Standard
* Source: The Economist

20. Arbitrage With Shipping Costs
$4.62
16.60
Shipping Cost = $1
Sell Big Macs in China
Buy Big Macs in the US
Profit (Per Big Mac)
Profitable if

21. Arbitrage With Shipping Costs
$4.62
16.60
Shipping Cost = $1
Buy Big Macs in China
Sell Big Macs in the US
Profit (Per Big Mac)
Profitable if

22. Arbitrage With Shipping Costs
16.60
$4.62
Shipping Cost = $1
Buy in China, Sell in the US (Yuan will appreciate)
Yuan per Dollar
4.58
No Profitable Arbitrage
3.59
45%
No Profitable Arbitrage
2.95
Buy in US, Sell in China (Yuan will depreciate)
Buy in US, Sell in China (Yuan will depreciate)
Time

23. Adding Non-Traded Goods - Haircuts
$4.62
Haircut 50
Lets Assume the PPP exchange rate of 3.59 Yuan Per Dollar
16.60
$25
Big Macs
Haircuts
Big Mac prices are equalized, but haircut prices are not
Chinese Expenditures
Big Macs: 16,600 (1,000 Big Macs)
Haircuts: 55,000 (1,000 Haircuts)
GDP = 71,600
US Expenditures
Big Macs: $4,620 (1,000 Big Macs)
Haircuts: $25,000 (1,000 Haircuts)
GDP = $29,620

24. $4.62
Haircut
Haircut
$25 50
16.60
We need to construct a price index that incorporates each good and its relative importance – let’s use expenditure shares as weights
US Expenditures
Big Macs: $4,620 (1,000 Big Macs)
Haircuts: $25,000 (1,000 Haircuts)
GDP = $29,620
Chinese Expenditures
Big Macs: 16,600 (1,000 Big Macs)
Haircuts: 55,000 (1,000 Haircuts)
GDP = 71,600

25. $4.62 $25 50 16.60 Haircut Haircut GDP = $29,620 GDP = 71,600
PPP Exchange Rate
$4.62
Haircut
$25 50
Foreign Currency Price Index
16.60
PPP
Exchange Rate (Foreign Currency Per Dollar)
Dollar Price Index
PPP Exchange Rate
GDP = $29,620
GDP = 71,600
Yuan per dollar
Market Exchange Approach
Actual Exchange Rate
PPP Approach
The existence of non-traded goods makes the Yuan appear undervalued! Further, it makes the PPP approach overstate the size of the Chinese economy!

26. Now, suppose that China experiences a growth in haircuts (non-tradeable) and a decline in Big Macs (Tradeable). Did the Chinese economy grow or not?
Haircut 50
16.60
PPP Exchange Rate
Yuan per dollar
Actual Exchange Rate
Chinese Expenditures
Big Macs: 13,280 (800 Big Macs)
Haircuts: 60,000 (1,200 Haircuts)
GDP = 73,280
Market Exchange Approach
2.3% Growth from previous year
PPP Approach
1.7% decline from previous year

27. Example: Brazil Real Depreciates Real Depreciates Billions of Dollars
Reals per Dollar
Real Depreciates
Real Appreciates

28. Nominal GDP around the world (PPP Method)
World = $119.3T
Pictured Above = $86.8T (73%)
*Source: CIA Factbook

29. The method by which countries are evaluated sometimes greatly change the results!
World = $119.3T
World = $75.3T
PPP Approach
Market Exchange Rate
Country
GDP
Rank
China
$21.2T #1
$10.7T #3
European Union
$20.0T #2
$16.5T
United States
$18.6T
India
$8.7T #4
$2.3T #6
Japan
$4.9T #5
$4.7T
Russia
$3.8T
$1.3T #8
Brazil
$3.1T #7
$1.8T
Indonesia
$3.0T
$941B
#13
United Kingdom
$2.8T #9
$2.7T
Mexico
#10
$1.1T
** Source: CIA Factbook
*2016 Estimate

30. Lets use the PPP method as a reasonable method for comparing countries
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.
$19T
Per Capita GDP =
325M
= $58,500
* Source:

31. GDP Per Capita around the World
$39,200
$26,100
$42,500
$57,300
$14,600
$38,900
$18,900
$6,700
$14,800
$48,800
*Source: CIA World Factbook

32. The World Bank classifies countries into four groups based on GNI per capita
Maximum
Minimum
2015
Luxembourg = $99,717
Burundi = $277
Country Type (# of Countries)
(Average) GDP Per Capita (PPP)
Average GNI Per Capita (PPP)
Low Income (30)
$600
$615
Low Middle Income (52)
$2,364
$2,478
Upper Middle Income (56)
$7,198
$7,329
High Income (78)
$33,776
$35,644
Global Average (216)
$13,155
$13,850

33. $20,000 is in the bottom 20% of the US income distribution
Did you know that if you earn $20,000 or more per year, you are in the top 4% of the global income distribution
67% Are below $1,500 per year
$20,000 is in the bottom 20% of the US income distribution
* Source: World Bank

34. Side note: Calculating rates of growth 540
168%
100
t = 0
t = 1
t = 2
t = 3
t = 4
Suppose that we have the following data. How would you calculate the rate of growth between time 0 and time 4.
Calculating a percentage change like this assumes that the growth takes place all at once
Using natural logs allows the growth process to be a smooth, continual process

35. Side note: Calculating average annual rates of growth
42%
52%
42%
42%
52%
42%
52%
100
52%
t = 0
t = 1
t = 2
t = 3
t = 4
Again, this assumes a discrete process (happening at regular intervals)
Using natural logs allows the growth process to be a smooth, continual process

36. Period GDP (Billions) 2016Q1 18281.6 2016Q2 18450.1 2016Q3 18675.3
Another measure of economic performance would be the rate of growth in output rather than the level of output
Period
GDP (Billions)
2016Q1
2016Q2
2016Q3
2016Q4
2017Q1
Year on Year Growth
Annualized Growth
Year on Year growth (2017Q1-2016Q1)
Annualized Growth (2017Q1)

37. Period GDP (Billions) Price Level 2013Q3 18281.6 110.630 2013Q4
We can approximate real growth by subtracting the inflation rate
Period
GDP (Billions)
Price Level
2013Q3
2013Q4
2014Q1
2014Q2
2014Q3
Year on Year growth (2017Q1-2016Q1)
Annualized Inflation (2017Q1)
- Year on Year growth (2017Q1-2016Q1)
- Annualized Inflation (2017Q1)
* Source:

38. Growth Rates of Real GDP around the world (PPP) – 2014
1.6%
0.7%
3.1%
2.4%
7.3%
0.0%
2.2%
7.2%
0.1%
2.7%
*Source: CIA World Factbook

39. The World Bank classifies countries into four groups based on GNI per capita
Maximum
Minimum
2015
Ireland = 26.3%
Yemen = -28.0%
Country Type (# of Countries)
GDP Growth (PPP)
GDP Per Capita Growth (PPP)
Low Income (30)
2.12%
-.54%
Low Middle Income (52)
3.52%
1.95%
Upper Middle Income (56)
2.45%
1.43%
High Income (78)
2.25%
1.35%
Global Average (216)
2.63%
1.26%

40. Let’s look at longer term averages for the US…
Year
GDP
Price
1947Q1
$243B
12.6
2017Q1
$19,027B
112.8
Price Growth (Inflation)
Total Growth
Average Annual Real Growth = 6.2% - 3.1% = 3.1%

41. Note that the US seems to be slowing…something happened in the 1970s
Average (Pre 1970’s) = 4.2%
4.3%
Average (Post 1970’s) = 2.4%
4.0%
3.1%
3.1%
Average Real Growth = 3.1%
2.8%
2.0%
1.8%
Real GDP Growth (%)

42. Technology happened in the 1970s…The Beginnings of what’s been dubbed “The Information Technologies Revolution”
Transistor count = 2,300
capable of executing 92,600 instructions per second
 Transistor count = 2.27B
capable of executing up to 317 Billion instructions per second
Jack Kirby demonstrates the first working integrated circuit at Texas Instruments
Intel Founded by Gordon Moore and Robert Noyce
Intel Releases the 4004 CPU
Intel Releases the 8008 CPU
Core i7-6950X
July
1958
July
1968
April
1971
April
1972
August
2016

43. Core i7-6950X Gordon Moore 1929 - Intel 4004
Moore's law refers to an observation made by Intel co-founder Gordon Moore in He noticed that the number of transistors per square inch on integrated circuits had doubled every year since their invention. Moore's law predicts that this trend will continue into the foreseeable future.
Intel 4004

44. Technology leads to lower equipment costs for business….
Real Growth in Equipment Costs
Pre 1977
Average = 5.6%
Post 1977
Average = 1.7%
1972
1977

45. US Current Account Balance as a percentage of GDP
Cheaper/Better equipment (among other things, leads to globalization)….
Pre-1977
Average = .5%
Post Average = -2.4%
1972
1977
US Current Account Balance as a percentage of GDP

46. Union Membership in the US (% of Non-agricultural Labor Force)
The pressure of global competition hurts labor unions
Union Membership in the US (% of Non-agricultural Labor Force)
1964
29.3%
78% Decline
1972
26.6%
2014
11.1%
*Source: Barry T. Hirsch, David A. Macpherson, and Wayne G. Vroman, “Estimates of Union Density by State,” Monthly Labor Review, Vol. 124, No. 7, July 2001.

47. The end result is the emergence of a “wage gap”
The end result is the emergence of a “wage gap”. That is, we see a difference between productivity and wages
Index: 1947 = 100
1972

48. So, how do families cope with stagnating wages?
Historically, labor’s share of income has been constant at around 65%, but has decreased since the 1980s.
Percent
65%
This “wage gap” translates into a lower labor share of income
58%
So, how do families cope with stagnating wages?

49. Phase #1: Women enter the workforce as a second household income
Phase #2: Households begin borrowing
95%
Labor Force Participation
67%
Household Debt as a Percentage of GDP
45%
60%

50. Meanwhile, on Wall Street….
Dow Jones Industrial Average
1972

51. The top 20% of households collect 50% of all income earned (that’s 24 million households earning $9 Trillion – around $375,000 per household)
Mean Household
Income = $85,000
# of Households = 121M
* Source: US Census Bureau

52. Average Income by Quintiles - 2015 dollars (2015)
$117,002+
$72,001 - $117,002
$43,511 - $72,001
$22,800 - $43,511
$0 - $22,800
Source: US Census Bureau (

53. Saez/Piketty Allow us to look at the top end of the distribution!
Emmanuel Saez
UC Berkeley
Note: There are roughly 125 million households
Thomas Piketty
Paris School of Economics

54. Note the divergence of median income with mean income beginning in the late 1970’s in the United States
202.0
Real GDP Per Capita (1974 = 100)
176.3
Real Median Personal Income (1974 = 100)
130.7
128.0
100

55. Today, The top 10% of households ( 12 million) collect around 45% of all income earned ( $8 trillion) – that’s around $650,000 apiece.
Emmanuel Saez
UC Berkeley
Thomas Piketty
Paris School of Economics
*Source: Thomas Piketty and Emmanuel Saez

56. Cumulative Growth in Average Inflation Adjusted After Tax Income by percentile: 1979 - 2011
* Source: Congressional Budget Office

57. The Lorenz curve plots the cumulative distribution of US income

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

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

60. Gini Coefficients around the world
.310
.420
.324
.450
.465
.379
.482
.352
.597
.303
World = .379
* Source: CIA Fact book

61. 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!

62. The Good Old Days: Economic Growth from 1947-1973

63. The Times, They are a Changin’: Economic growth from 1977-1989

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