1. Principles of Macroeconomics
Welcome to Day 6
Principles of Macroeconomics

2. What we did last class: 1) Supply and demand in the labor and financial markets. 2) The incentive and information problems. 3) The invisible hand

3. Now we are ready to start macroeconomics, the study of why the “entire” economy goes good or bad at the same time.

4. Before we can understand why the economy goes bad, we have to know what going bad is. What do you want out of the American economy?

5. 1) A job. 2) Lots of material things. 3) Stable prices at the stores
1) A job. 2) Lots of material things. 3) Stable prices at the stores. The economy is going good when we get these things, and going bad when we don’t.

6. So to know if the economy is going good or bad, we need someway to measure these things. Welcome to everyone’s favorite topic – Economic Statistics.

7. This chapter is about measuring how much stuff we are making – the most basic macroeconomic measurement.

8. GDP is the market value of all final goods and services made within a country’s borders in a year.

9. GDP can be looked at from two sides: the buyers’ side and the sellers’ side. This is because the dollar value of what we buy is equal to the dollar value of what we sell.

10. How To Find Nominal GDP Apples Oranges. Q. P. Q P. NGDP Y1 7 $1. 5 $4
How To Find Nominal GDP Apples Oranges Q P Q P NGDP Y $ $ ? Y $ $3 ? Multiply the quantity of each thing made by its price and add them together.

11. Apples Oranges. Q. P Q P. NGDP Y1. 7 X $1 +. 5 X $4. $27 Y2. 6 X $2 +
Apples Oranges Q P Q P NGDP Y X $ X $4 $ Y X $ X $3 $36 Multiply the quantity of each thing made by its price and add them together.

12. Looking at it from the demand side, the customers we make our products for are usually divided into four groups: 1) Consumers 2) Business Investment 3) The Government 4) Exports

13. This leads to one of the 2 most famous equations in macroeconomics: GDP = C + I + G + (X-M) X-M = Net Exports

14. Are things that are not counted in GDP
Are things that are not counted in GDP? 1) Intermediate Goods – double counting.
Your parents give
you a $20,000 car
made from $12,000
steel, $4,000 rubber,
and $4,000 glass.
Are you $20,000 richer or $40,000 richer?

15. 2) Used Goods These do not represent new production in this year.

16. 3) Government Transfer Payments: Social Security, Welfare
3) Government Transfer Payments: Social Security, Welfare. 4) Non-Market Activities:

17. 5) Financial Transactions: Stock and Bonds 6) Illegal Goods: You can figure them out for yourself. We don’t leave them out because of ethics, just because the numbers are not reported to the government.

18. Here they are all together: 1) Intermediate Goods 2) Used Goods 3) Government transfer payments 4) Non-market activities 5) Financial transactions 6) Illegal goods

19. Circular Flow Diagram - Arrows represent money flows Can this be a working model?
Households
Households
Businesses
Goods Market

20. Factor Inputs
Households
Households
Businesses
Goods Market

21. Factor Inputs
Households
Households
Businesses
Goods Market

22. Factor Inputs
Government
Households
Households
Businesses
Goods Market

23. GDP = C + I + G + (X-M)

24. Now that we understand GDP, there is a problem with it
Now that we understand GDP, there is a problem with it. At least if we want to use it to measure the quantity of output.

25. Apples Oranges. Q. P. Q P. NGDP Y1 7 $1. 5 $4. $27 Y2 14 $1 10 $4
Apples Oranges Q P Q P NGDP Y $ $4 $ Y $ $4 ? Given that NGDP in year 1 is $27, what does the correct measurement for year 2 have to be?

26. Apples Oranges. Q. P. Q P. NGDP Y1 7 $1. 5 $4. $27 Y2 14 $1 10 $4
Apples Oranges Q P Q P NGDP Y $ $4 $ Y $ $4 $ And what does the correct measurement for year 2* have to be? Y2* $ $ ?

27. Apples. Oranges. Q. P. Q P. NGDP Y1 7 $1. 5 $4. $27 Y2 14 $1. 10 $4
Apples Oranges Q P Q P NGDP Y $ $ $ Y $ $ $ Y2* $ $ $54 The quantity measurement is being thrown off by the price changes.

28. The solution is to not allow the prices to change
The solution is to not allow the prices to change. When we do this, we calculate Real GDP. Real GDP is GDP calculated using base year prices. The real value of any economic variable is the statistic after being adjusted for inflation.

29. Base year is year 1. Apples Oranges. Q. P. Q P. NGDP RGDP Y1
Base year is year Apples Oranges Q P Q P NGDP RGDP Y $ $ $ $ Y $ $ $ $ Which statistic is the better measurement of growth?

30. Now a more complicated problem. What is RGDP in years 1 and 2
Now a more complicated problem. What is RGDP in years 1 and 2? Assume year 1 is the base year Apples Oranges Q P Q P NGDP RGDP Y $ $4 $ ? Y $ $3 $ ?

31. Now a more complicated problem. What is RGDP in years 1 and 2
Now a more complicated problem. What is RGDP in years 1 and 2? Assume year 1 is the base year Apples Oranges Q P Q P NGDP RGDP Y $ $4 $27 $27 Y $ $3 $36 $38

32. Can I be sure here that RGDP is higher in year 2 rather than year 1 because we made more stuff rather than because prices are higher? Apples Oranges Q P Q P NGDP RGDP Y $ $4 $27 $27 Y $ $3 $36 $38

33. There is a measure of inflation called the GDP deflator
There is a measure of inflation called the GDP deflator. We will talk more about inflation later in the class, but for now, the GDP deflator is a price index that measures inflation. You can use it to convert nominal into real values.

34. What cost $48.30 to buy in 1980, cost $110.00 in 2010.
Year
Nominal GDP (billions of dollars)
GDP Deflator (2005 = 100)
1960
543.3
19.0
1965
743.7
20.3
1970
1,075.9
24.8
1975
1,688.9
34.1
1980
2,862.5
48.3
1985
4,346.7
62.3
1990
5,979.6
72.7
1995
7,664.0
81.7
2000
10,289.7
89.0
2005
13,095.4
100.0
2010
14,958.3
110.0
What cost $48.30 to buy in 1980, cost $ in 2010.

35. In 1980, California’s minimum wage $3. 10/hour. In 2010, it was $8
In 1980, California’s minimum wage $3.10/hour. In 2010, it was $8.00 an hour. In real terms, was it higher or lower in 2010 than 1980? 110/48.3 = 2.28 Things in 2010 are 2.28 times more expensive than

36. $3.10/hour x 2.28 = $7.07/hour So yes, the minimum wage worker of 2010 could buy more. How much more? $0.93/$7.07 = 13% increase

37. Do the same thing to convert nominal GDP to real GDP.
Year
Nominal GDP (billions of dollars)
GDP Deflator (2005 = 100)
Calculations
Real GDP (billions of 2005 dollars)
1980
2862.5
48.3
2,862.5 / (48.3/100)
5926.5
1985
4346.7
62.3
4,346.7 / (62.3/100)
6977.0
1990
5979.6
72.7
5,979.6 / (72.7/100)
8225.0
1995
7664.0
82.0
 7,664 / (82.0/100)
9346.3
2000
89.0
10,289.7 / (89.0/100)
2005
100.0
13,095.4 / (100.0/100)
2010
110.0
14,958.3 / (110.0/100)

38. Is the 2016 mountain necessarily bigger?
2016 mountain of goods worth $ trillion.
2015 mountain
Of goods worth
$ trillion.
Is the 2016 mountain necessarily bigger?
What if I tell you that GDP deflator was
in 2015 and in 2016?

39. Two last things to note. 1) The nominal and the real GDP will always be the same in the base year. 2) The real GDP measurement becomes more shaky as more time passes. What was the price of smart phones in 1980?

40. What we did today: 1) Criteria for judging the macroeconomy
What we did today: 1) Criteria for judging the macroeconomy. 2) What nominal GDP is and what is not in it. 3) How to draw a circular flow diagram. 4) What real GDP is. 5) How to use the GDP deflator to convert nominal variables to real ones.

41. Principles of Macroeconomics
Welcome to Day 7
Principles of Macroeconomics

42. What we did last class: 1) Criteria for judging the macroeconomy
What we did last class: 1) Criteria for judging the macroeconomy. 2) What nominal GDP is and what is not in it. 3) How to draw a circular flow diagram. 4) What real GDP is. 5) How to use the GDP deflator to convert nominal variables to real ones. Start of class today: 1) Hand in homework assignment #3. 3) Take quiz #3.

43. At this scale, we can see the largest recessions, especially the Great Depression and the Great Recession, and World War II.

44. The St. Louis Federal Reserve Bank runs a web page with all the macroeconomics statistics you could ever want.

45. Notice the economy can still be bad even
Notice the economy can still be bad even
in a recovery, especially a slow one.

47. GDP per capita = GDP per person =
NGDP/Population

48. Exchange rates for the U.S. dollar

49. Country A Country B Country C Produced Produced Produced $40,000
Country A Country B Country C Produced Produced Produced $40,000 $20, $40, Hours Wrk. Hours Wrk. Hours Wrk

50. U.S. hours worked per year 1,789 France hours worked per week 1,473 Are U.S. workers actually richer?

51. Given the things that are left out (leisure, nonmarket activities, illegal goods), Why are comparisons for the same country across a short number of years more accurate than across countries for the same year?

52. What we did today: 1) The phases of the business cycle 2) GDP comparisons across countries. 3) GDP comparisons over time.

53. Principles of Macroeconomics
Welcome to Day 8
Principles of Macroeconomics

54. What we did before the last class: 1) The phases of the business cycle 2) GDP comparisons across countries. 3) GDP comparisons over time.

55. Test Prep

56. Principles of Macroeconomics
Welcome to Day 9
Principles of Macroeconomics

57. Test Day