1. FIN 30220: Macroeconomic Analysis
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
Choose the “American” Product

3. Where do BMWs come from? Germany China USA Canada Egypt South Africa
India
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 current market value of all goods and services produced within a country over the course of some time period
Gross National Product represents the total current market value of all goods and services produced by a country’s citizens over the course of some time period VS

6. The Bureau of Economic Analysis (BEA) reports Gross Domestic Product (GDP) for the United States on a quarterly basis:
For the third quarter of 2014, GDP in the United States was (on an annualized basis) was...
$17,599,800,000,000.00
Gross National product
$17,829,600,000,000.00
* Source:

7. Why East Timor’s GNP is almost six times as high as its GDP
Gross Domestic Product: $1.3B
Gross National Product: $7.54B (+580%)
Foreign Aid

8. “Double Irish with a Dutch Sandwich”
Why is Ireland’s GNP so much lower than its GDP?
Gross Domestic Product: $210.3B
Gross National Product: $164.2B (-25%)
“Double Irish with a Dutch Sandwich”
(Do a google search on this)

9. How does the US Economy compare in size to other countries around the world? (World Economy = $87T ; the countries listed below are 75% of the total)
European Union
$15.8T
Russia
$2.5T
United States
$16.7T
China
$13.4T
England
$2.4T
Japan
$4.7T
California
$2.0T
India
$4.9T
Mexico
$1.8T
Brazil
$2.4T
Australia
$998B
PPP Method 2013 est.
* Source: CIA Factbook

10. The average price of a Big Mac in China is*
Gross Domestic Product represents the total current market value of all goods and services produced within a country over the course of some time period
The average price of a Big Mac in China is*
The average price of a Big Mac in the United States is* $4.62
16.60 Yuan
Problem: How do we compare economies using different currencies?
The Market Exchange rate method involves converting foreign prices to US dollars using the current market exchange rate.
1 Chinese Yuan = .16 U.S. dollars or
1 US Dollar = 6.24 Chinese Yuan
Y16.60 x .16 = $2.65
*2014 Prices

11. Problem: With the extreme variability in exchange rates, is the market exchange method accurate?
Yuan Per US Dollar

12. The average price of a Big Mac in China is*
The Purchasing Power Parity method values foreign production at prevailing US prices.
The average price of a Big Mac in China is*
The average price of a Big Mac in the United States is* $4.62
1 Chinese Yuan = .16 U.S. dollars
16.60 Yuan
Market Exchange rate method
Purchasing Power Parity Method
VS.
$4.62
16.60 x .16 = $2.65
No Calculation Necessary!

13. The average price of a Big Mac in China is*
The Purchasing Power Parity method assumes that if markets are functioning properly, profitable trading opportunities will eventually be eliminated
The average price of a Big Mac in China is*
The average price of a Big Mac in the United States is* $4.62
1 Chinese Yuan = .16 U.S. dollars
16.60 Yuan
$2.65 by current exchange rate
In this example, you could make money by buying Big Macs in China and then resell them in The US. There is a unique exchange rate that eliminates this profit opportunity.
16.60 x exchange rate = 4.62
4.62
exchange rate =
= .28 ($ per Yuan) (3.57 Yuan per $)
16.60
(This is known as the PPP exchange rate)

14. The PPP exchange rate seems to eliminate the short term variation, but do markets really eliminate profit opportunities?
Dollars Per Yuan
PPP
.28
55%
.16

15. Valuing currencies using the Big Mac Standard
“Overvalued”
Valuing currencies using the Big Mac Standard
“Undervalued”
China

16. PPP Approach Market Exchange Rate Country GDP Rank USA $16.72T #1 #2
Note that the method by which countries are evaluated sometimes greatly change the results!
PPP Approach
Market Exchange Rate
Country
GDP
Rank
USA
$16.72T #1 #2
European Union
$15.84T
$17.03T
China
$13.39T #3
$9.33T
India
$4.96T #4
$1.76T #7
Japan
$4.73T #5
$5.00T
Germany
$3.23T #6
$3.60T
Russia
$2.55T
$2.11T
*2013 Estimate
** CIA Factbook

17. 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.
$17T
Per Capita GDP =
320M
= $53,125
Per capita GDP is a better measure of the well being of an average American.
* Source:

18. In Per Capita Terms, the US drops to #14 while China drops to #121 ($9,800)!! The European Union comes in at #41 ($34,500)
Note: 2013 GDP estimates measured on a Purchasing Power Parity Basis
* Source: CIA Factbook

19. 100 125 140 160 175 Side note: Calculating rates of growth:
How would you calculate this rate of growth?
100 to 125 is a 25% increase…
But, from 125 to 100 is a 20% decrease?
Which is it??

20. Using natural logs is the preferred method because the forward/backward problem is eliminated!
100
125
140
160
175
t = 0
t = 1
t = 2
t = 3
t = 4
100 to 125 is a 22.3% increase…
And, from 125 to 100 is a 22.3% decrease

21. Period GDP (Billions) 2013Q3 16,872 2013Q4 17,078 2014Q1 17,044 2014Q2
A better measure of economic performance would be the rate of growth in output rather than the level of output
Period
GDP (Billions)
2013Q3
16,872
2013Q4
17,078
2014Q1
17,044
2014Q2
17,328
2014Q3
17,599
Year on Year Growth
Annualized Growth
Year on Year growth (2013Q3-2014Q3)
Annualized Growth (2014Q3)
However, be careful here!

22. Year Price Quantity GDP 2010 $1 100 $100 2011 $1.25 $125 Year Price
GDP measures current dollar value of all goods and services produced. When GDP rises, its impossible to distinguish between an increase in production and an increase in prices!!
Economy A: Zero growth, high inflation.
Year
Price
Quantity
GDP
2010 $1
100
$100
2011
$1.25
$125
Both have (approximately) 25% annual growth in GDP!!!
Economy B: Rapid growth, no inflation.
Year
Price
Quantity
GDP
2010 $1
100
$100
2011
125
$125

23. Period GDP (Billions) Price Level 2013Q3 16,872 106.9 2013Q4 17,078
We can approximate real growth by subtracting the inflation rate
Period
GDP (Billions)
Price Level
2013Q3
16,872
106.9
2013Q4
17,078
107.3
2014Q1
17,044
107.6
2014Q2
17,328
108.2
2014Q3
17,599
108.6
Year on Year growth (2013Q3-2014Q3)
Annualized Growth (2014Q3)
Year on Year Inflation (2013Q Q3)
Annualized Inflation (2014Q3)
Real Growth = 2.6%
Real Growth = 4.7%
* Source:

24. In terms of real GDP Growth the US drops to #157
Note: 2013 GDP estimates measured on a Purchasing Power Parity Basis
* Source: CIA Factbook

25. 100 175 How would you calculate the average per period growth? or
We have the same forward/backward problem here
No forward/backward problem here!!

26. Perhaps to get a better sense of the US, we should look at average performance over a long time period.
Year
GDP
Price
1947Q3
$250B
13.3
2014Q3
$17,599B
108.6
Price Growth (Inflation)
Total Growth
Real Growth = 6.3% - 3.2% = 3.1%

27. Note that the US seems to be slowing down…we’ll talk about this later
Average Real Growth = 3.2%
Current Real Growth

28. United States European Union
Let’s compare the US with countries that are in our “peer group” in terms of development:
United States
GDP: $17.0T
GDP Per Capita: $50,000
Real GDP Growth: 2.0%
Inflation Rate: 1.6%
European Union
GDP: $15.8T
GDP Per Capita: $34,500
Real GDP Growth: 1.6%
Inflation Rate: 1.5%
~70% of US
*Source: CIA Factbook (2013 estimates)

29. Let’s look at historical data for the US and Europe
Let’s look at historical data for the US and Europe. Europe fell behind the US in the mid 1800s and has been struggling to catch up ever since!
Real Per Capita GDP, Europe and the United States:

30. To understand this, let’s look at the sources of economic growth…
To understand this, let’s look at the sources of economic growth….where does GDP come from?
“is a function of”
Real GDP
Employment
Productivity
Capital
Therefore, we should be able to break down economic growth into its individual components
Capital Growth
Real GDP Growth
Productivity Growth
Employment Growth

31. So, what jumps out at you? Real GDP Growth = 2.35%

32. It seems that the biggest difference between the US and Europe involves employment and productivity. With that in mind, let’s decompose GDP per capita differently…
GDP per hour (productivity)
Employment (% of Population)
GDP per capita
Hrs. per employee

33. Lets measure output per hour in the US (a reasonable measure of productivity)…
Employed Million
Recall, GDP = $17 Trillion
139 Million X 1,794 (hours/yr.) = 250 Billion hours per year
$17T
= $68 Per hour
250B Hrs.

34. Here’s American productivity relative to European productivity.
Country
Labor Productivity (2004) *
Productivity Growth ( )
Productivity Growth ( )
USA
100
1.7%
2.5%
Germany 92
1.0%
France
107
1.5%
1.3%
Italy
0.0%
England 87
1.8%
2.0%
* USA = 100
** Source: OECD

35. As with GDP per capita, productivity in Europe has lagged behind that of the US until recent years.
Real GDP per Hour, Europe and the United States:

36. Ratio of Europe to the United States: 1820 - 2000
Europe had been falling behind the US in both productivity and output per capita until recent years. However, while productivity has caught up with the US, output per capita still lags.
Ratio of Europe to the United States:

37. Productivity in Europe is comparable to the US, but output per capita is much lower. How can that be?
Equal to the US
Lower in Europe
This must be lower in Europe!

38. Unemployment Rate (Average) Average annual hours
The US has maintained a lower average unemployment rate that Europe as well as a higher employment rate
Country
Unemployment Rate (Average)
Average annual hours
USA
5.0%
1,794 (34.5 hrs per wk)
Germany
10.0%
1,426 (27.4 hrs per wk)
France
9.0%
1,441 (27.7 hrs per wk)
Italy
1,585 (30.4 hrs per wk)
England
5.5%
1,669 (32.0 hrs per wk)
** Source: OECD

39. Lately, we have seen wages diverge from productivity …especially in the US!
Country
Labor Productivity (2004) *
Real Compensation (2004)* - Using Mkt. Exchange Rates
Productivity Growth ( )
Real Compensation Growth ( )
USA
100
2.5%
1.7%
Germany 92
147
1.0%
-0.5%
France
107
103
1.3%
0.9%
Italy 88
0.0%
0.5%
England 87
2.0%
3.4%
* USA = 100
** Source: OECD

40. The “wage gap” is the difference between productivity and wages
Index: 1947 = 100

41. Historically, labor’s share of income has been constant at around 65%, but has decreased since the 1980s.
Percent
65% ?
So, where is the extra income going?

42. Median Household Income = $50,000 Mean Household Income = $68,000
Note that the distribution of household income is skewed to the left. That is, there is a large segment of the population that is below average income
Median Household Income = $50,000
Mean Household Income = $68,000
Total Households = 121M
Source: US Census Bureau (

43. One indicator of growing inequality is a separation of the mean and the median
Source: US Census Bureau (

44. Average Income by Quintiles (2012)
$119,000+
$76,000 - $119,000
$50,000 - $76,000
$27,000 - $50,000
$0 - $27,000
Source: US Census Bureau (

45. The Lorenz Curve
The Lorenz curve plots the cumulative distribution of US income

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

47. The Gini coefficient allows us to “quantify” the differences in income inequality across countries.
Country
Gini (1989)
Gini (2007)
% Change
USA
.338
.450
28%
Germany
.257
.270 5%
France
.287
.306 7%
Italy
.303
.333 9%
England
.336
.323
-4%
*Source: Luxembourg Income Study

48. The fact that income inequality in the US is rising is reflected in a rising Gini coefficient
This suggests that while the US market based economy is a real engine of growth, not everyone benefits equally from our economic success…the poor are getting poorer relative to the wealthy!
Start of the “wage gap”

49. Note that income inequality in the US was worse back in the 1920’s

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

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

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