06 Introduction to Macroeconomics and GDP

pg174-206

Misconception - There is no reliable way to gauge the health of an economy.

How is Macroeconomics is Different from Microeconomics ?

In microeconomics, you study what people buy, what jobs they take, and how they distribute their income between purchases and savings, you also examine the decisions of firms and how they compete with other firms. In macroeconomics, you consider what happens when national output of goods and services rises and falls, when overall national employment levels rise and fall, and when the overall price level goes up and down.

What Does GDP Tell Us about the Economy?

Economist measure the total output of an economy as a gauge of its over all health. An economy that produces a large amount of valuable output is a healthy economy. If output falls for a certain period, there is something wrong in the economy.

Production Equals Income

Gross Domestic Product (GDP) is the market value of all final goods an serviced produced within a nation during a specific period of time -typically, a year. GDP is the primary measure of a nation's output.

Three Uses of GDP Data

  • Measuring Living Standards - Per capita GDP (GDP per persone)
  • Measuring Economic Growth
    1. Inflation is the growth in the overall level of prices in an economy.
    2. Real GDP is GPD adjusted for changes in prices.
    3. Economic Growth is measured as the percentage change in real per captia GDP.
  • Measuring Business Cycle
    1. A recession is a short-term economic downturn.

Figure 6.3 The business cycle
The long-run trend of GDP shows consistent growth. The business cycle reflects the fluctuations that an economy typically exhibits. Economy activity increases during the expansion period of the business cycle,but declines during the contraction phase. In real life, the cycle is not nearly as smooth and easy to spot as pictured here.

How is GDP Computed?

  • Counting Market Values
  • Including Goods and Services
    1. Services are outputs that provided benefits without producing a tangible product.
  • Including Only Final Goods and Services
    1. Intermediate goods are goods that firm repackage or bundle with other goods for sale at a later stage.
    2. Final Goods are goods sold to final users.
  • Within a Country
    1. GNP (Gross national product) is the output produced by workers and resources owned by residents of the nation.
  • Including Only Production form a Particular Period
  • Looking at GDP as Different Types of Expenditures
    1. Consumption
    2. Investment (house is considered as an investment)
    3. Government spending
    4. Net Exports (total exports of final goods and services minus total imports of final goods and services)
    5. Not included in GDP (such as, Do it yourself, Used good, Black market,life expectancy, health coverage, transfer payment-social security/welfare, consumer buying bonds or stock)

Real GDP: Adjusting GDP for Price Changes

  1. Nominal GDP is GDP measured in current prices and not adjusted for inflation.
  2. A price level is an index of the average prices of goods and services throughout the economy.
  3. GDP Deflator is a measure of the price level that is used to calculate real GDP.

Figure 6.7 US Nominal and Real GDP, 2009-2015
Nominal GDP typically rises faster than real GDP because nominal GDP reflects both growth in real production and growth in prices (inflation). From 2009 to 2015, nominal GDP in the United State rose by 24%24\%, but nearly half of that increase was due to inflation. The increase in real GDP during the same period was 13%13\%.

To compute real GDP, we use the current prices of goods and services and then adjust them to prices from an agree-upon common time period, or base period. We do this in two steps:

  1. Divide nominal GDP by the price level.
  2. Multiply the result by the price level (100) from the base period.

realGDPt=nominalGDPtpricelevel×100Equation 6.3real \: GDP_t = \frac{nominal \: GDP_t}{price \: level} \times 100 \qquad\text{Equation 6.3}

Growth Rate

nominalGDPGrowthin2015=GDP2015−GDP2014GDP2014×100growthofnominalGDP≈growthofrealGDP+growthofpricelevel%changeinnominalGDP≈%changeinrealGDP+%changeinpricelevel\begin{aligned} nominal \: GDP \: Growth \: in \: 2015 &= \frac{GDP_{2015}- GDP_{2014}}{GDP_{2014}} \times 100 \\ \\ growth \: of \: nominal \: GDP &\approx growth \: of \: real \: GDP + growth \: of \: price \: level \\ \\ \% change \: in \: nominal \: GDP &\approx \% change \: in \: real \: GDP + \% change \: in \: price \: level \end{aligned}

What are some shortcomings of GDP data?

  • Nonmarket Goods
  • Underground economy
  • Quality of the Environment
  • Leisure Time
  • GDP and Happiness
      1. Wealthier individuals report greater life satisfaction than poorer people in the same country.
      1. Wealthier nations report greater life satisfaction than poorer nations.
  • Why Do Economists Continue to Rely on GDP Data?
    Life expectancy, education levels, access to health care, crime rates, and other are difficult to measure, and the combined statistic that we would generated would be more challenging to understand.

End