The Big Picture of Macroeconomics (Day 1)

THE BIG PICTURE OF MACROECONOMICS

•Can the whole of something be greater than the sum of its parts?

- In macroeconomics, YES

GOVERNMENT INTERVENTION

•Government intervention is necessary-even though it causes inefficiency.

•Price ceilings, price floors, taxation, and tariffs are all necessary for the long term benefit of the economy.]


ECONOMIC AGGREGATES

•Measures that summarize data across different markets for goods, services, workers, and assets.

•Macroeconomics will focus on aggregates because they represent the big picture.


For all countries there are three major economic goals:

1.Promote economic growth

2.Limit unemployment

3.Keep prices stable (Limit inflation)


How do we know how well the economy is doing?

•National income accounting

- Economists collect statistics on production, income, investment and savings.


The most important measure of growth is GDP

•Gross Domestic Product is the dollar value of all final goods and services produced within a country's border in one year.

- Dollar value-GDP is measured in dollars

- Final goods-GDP does not include the value of intermediate goods.

Intermediate goods are goods used in the production of final goods and

services.

- One year-GDP measures annual economic performance.


WHAT DOES GDP TELL US?

•Just like calculating your own income, GDP measures how well the U.S is doing financially.

•HOW DO WE USE GDP?

1. Compare previous years, (Is there growth?)

2. Compare policy changes (did a new policy work?)

3. Compare to other countries (Are we better off?)


HOW CAN YOU MEASURE GROWTH FROM YEAR TO YEAR?

% Change in GDP = ((year 2 - year1)/Year 1) X 100


Mordor's GDP in 2007 was $4,000

Mordor's GDP in 2008 was $5,000

What is the percent change in GDP?


What is NOT included in GDP?

1.Intermediate goods.

• No multiple counting, only FINAL goods.

- EX. Price of finished car, not the radio, tires...

2. Non-production transactions

• Financial transactions

- EX. Stocks bonds, real estate

• Used goods

- EX. Old cars, used clothes

3. Non market (Illegal) activities

- EX. Illegal drugs, unpaid work.


CALCULATING GDP

Two ways of calculating GDP:

1.Expenditures approach-Add up all the spending on final goods and services in that given year.

2.Income approach-Add up all the income that resulted from selling all the final goods and services produced in a given year.

Both ways generate the same amount since every dollar spent is a dollar of income.


EXPENDITURES APPROACH

Four components of GDP:

1.Consumer spending

-EX. $6.01 little Ceasar's Pizza

2. Investment - When business put money back into their own business

- Machinery or tools

3. Governement spending

Ex. Bombs and tanks NOT social security

4. Net exports - Exports (X) – Imports (M)

- EX. Value of 3 Ford Focuses minus to Hondas

GDP = C + I + G + X


NOMINAL GDP - REAL GDP

How can you figure out which is the most popular movie of all time?\


THE PROBLEM WITH GDP

If a country's GDP increased from $4 Billion to $5 billion in one year, is the country experiencing economic growth?

•Did the country produce 25% more products?

•Something about apples and not increasing production so no.


Real GDP vs. Nominal GDP

•Nominal GDP

- GDP measured in current prices. It does not account for inflation year to year.

•Real GDP

- Adjusts for inflation and is a better comparison for economic growth.