1、MacroEconomics Gross Domestic ProductIn this chapter,look for the answers to these questions:nWhat is Gross Domestic Product(GDP)?nHow is GDP related to a nations total income and spending?nWhat are the components of GDP?nHow is GDP corrected for inflation?nDoes GDP measure societys well-being?Micro
2、 vs.MacronMicroeconomics:The study of how individual households and firms make decisions,interact with one another in markets.nMacroeconomics:The study of the economy as a whole.nWe begin our study of macroeconomics with the countrys total income and expenditure.Income and ExpenditurenGross Domestic
3、 Product(GDP)measures total income of everyone in the economy.nGDP also measures total expenditure on the economys output of g&s.For the economy as a whole,because every dollar a buyer spends is a dollar of income for the seller.The Circular-Flow Diagramna simple depiction of the macroeconomynillust
4、rates GDP as spending,revenue,factor payments,and incomenPreliminaries:Factors of production are inputs like labor,land,capital,and natural resources.Factor payments are payments to the factors of production.(e.g.,wages,rent)FIGURE 1:The Circular-Flow DiagramHouseholds:own the factors of production,
5、sell/rent them to firms for income buy and consume g&sHouseholdsFirmsFIGURE 1:The Circular-Flow DiagramHouseholdsFirmsFirms:buy/hire factors of production,use them to produce g&s sell g&sWhat This Diagram OmitsnThe governmentcollects taxespurchases g&snThe financial systemmatches savers supply of fu
6、nds with borrowers demand for loansnThe foreign sectortrades g&s,financial assets,and currencies with the countrys residentsthe market value of all final goods&services produced within a country in a given period of time.Gross Domestic Product(GDP)IsGoods are valued at their market prices,so:all goo
7、ds measured in the same units(e.g.,dollars in the U.S.)Things that dont have a market value are excluded,e.g.,housework you do for yourself.the market value of all final goods&services produced within a country in a given period of time.Gross Domestic Product(GDP)IsFinal goods:intended for the end u
8、ser Intermediate goods:used as components or ingredients in the production of other goods GDP only includes final goods they already embody the value of the intermediate goods used in their production.the market value of all final goods&services produced within a country in a given period of time.Gr
9、oss Domestic Product(GDP)IsGDP includes tangible goods(like DVDs,mountain bikes,beer)and intangible services(dry cleaning,concerts,cell phone service).the market value of all final goods&services produced within a country in a given period of time.Gross Domestic Product(GDP)IsGDP includes currently
10、produced goods,not goods produced in the past.the market value of all final goods&services produced within a country in a given period of time.Gross Domestic Product(GDP)IsGDP measures the value of production that occurs within a countrys borders,whether done by its own citizens or by foreigners loc
11、ated there.the market value of all final goods&services produced within a country in a given period of time.Gross Domestic Product(GDP)Isusually a year or a quarter(3 months)The Components of GDPnRecall:GDP is total spending.nFour components:Consumption(C)Investment(I)Government Purchases(G)Net Expo
12、rts(NX)nThese components add up to GDP(denoted Y):Y =C +I +G +NXConsumption(C)nis total spending by households on g&s.nNote on housing costs:For renters,consumption includes rent payments.For homeowners,consumption includes the imputed rental value of the house,but not the purchase price or mortgage
13、 payments.Investment(I)nis total spending on goods that will be used in the future to produce more goods.nincludes spending oncapital equipment(e.g.,machines,tools)structures(factories,office buildings,houses)inventories(goods produced but not yet sold)Note:does not mean the purchase of financial as
14、sets like stocks and bonds.Government Purchases(G)nis all spending on the g&s purchased by govt at the federal,state,and local levels.nG excludes transfer payments,such as Social Security or unemployment insurance benefits.They are not purchases of g&s.Net Exports(NX)nNX=exports importsnExports repr
15、esent foreign spending on the economys g&s.nImports are the portions of C,I,and G that are spent on g&s produced abroad.nAdding up all the components of GDP gives:Y =C +I +G +NXU.S.GDP and Its Components,20072,3448,9057,03732,228$45,825per capita5.119.415.470.3100.0%of GDP7082,6902,1259,734$13,841bi
16、llionsNXGICYIn each of the following cases,determine how much GDP and each of its components is affected(if at all).A.Debbie spends$200 to buy her husband dinner at the finest restaurant in Boston.B.Sarah spends$1800 on a new laptop to use in her publishing business.The laptop was built in China.C.J
17、ane spends$1200 on a computer to use in her editing business.She got last years model on sale for a great price from a local manufacturer.D.General Motors builds$500 million worth of cars,but consumers only buy$470 million worth of them.A.Debbie spends$200 to buy her husband dinner at the finest res
18、taurant in Boston.Consumption and GDP rise by$200.B.Sarah spends$1800 on a new laptop to use in her publishing business.The laptop was built in China.Investment rises by$1800,net exports fall by$1800,GDP is unchanged.C.Jane spends$1200 on a computer to use in her editing business.She got last years
19、model on sale for a great price from a local manufacturer.Current GDP and investment do not change,because the computer was built last year.D.General Motors builds$500 million worth of cars,but consumers only buy$470 million of them.Consumption rises by$470 million,inventory investment rises by$30 m
20、illion,and GDP rises by$500 million.Real versus Nominal GDPnInflation can distort economic variables like GDP,so we have two versions of GDP:One is corrected for inflation,the other is not.nNominal GDP values output using current prices.It is not corrected for inflation.nReal GDP values output using
21、 the prices of a base year.Real GDP is corrected for inflation.EXAMPLE:Compute nominal GDP in each year:2002:$10 x 400 +$2 x 1000 =$6,0002003:$11 x 500 +$2.50 x 1100=$8,2502004:$12 x 600 +$3 x 1200=$10,800PizzaLatteyearPQPQ2002$10400$2.0010002003$11500$2.5011002004$12600$3.00120037.5%Increase:30.9%E
22、XAMPLE:Compute real GDP in each year,using 2002 as the base year:PizzaLatteyearPQPQ2002$10400$2.0010002003$11500$2.5011002004$12600$3.00120020.0%Increase:16.7%$10$2.002002:$10 x 400 +$2 x 1000 =$6,0002003:$10 x 500 +$2 x 1100=$7,2002004:$10 x 600 +$2 x 1200=$8,400EXAMPLE:In each year,nnominal GDP is
23、 measured using the(then)current prices.nreal GDP is measured using constant prices from the base year(2002 in this example).yearNominal GDPReal GDP2002$6000$60002003$8250$72002004$10,800$8400EXAMPLE:nThe change in nominal GDP reflects both prices and quantities.yearNominal GDPReal GDP2002$6000$6000
24、2003$8250$72002004$10,800$840020.0%16.7%37.5%30.9%The change in real GDP is the amount that GDP would change if prices were constant(i.e.,if zero inflation).Hence,real GDP is corrected for inflation.Real GDP(base year 2000)Nominal GDPThe GDP DeflatornThe GDP deflator is a measure of the overall leve
25、l of prices.nDefinition:One way to measure the economys inflation rate is to compute the percentage increase in the GDP deflator from one year to the next.GDP deflator =100 x nominal GDPreal GDPCHAPTER 23 MEASURING A NATIONS INCOMEEXAMPLE:Compute the GDP deflator in each year:yearNominal GDPReal GDP
26、GDP Deflator2002$6000$60002003$8250$72002004$10,800$84002002:100 x(6000/6000)=100.0100.02003:100 x(8250/7200)=114.6114.62004:100 x(10,800/8400)=128.6128.614.6%12.2%33Use the above data to solve these problems:A.Compute nominal GDP in 2004.B.Compute real GDP in 2005.C.Compute the GDP deflator in 2006
27、.2004(base yr)20052006PQPQPQgood A$30900$31 1,000$361050good B$100192$102200$10020534A.Compute nominal GDP in 2004.$30 x 900 +$100 x 192 =$46,200B.Compute real GDP in 2005.$30 x 1000 +$100 x 200 =$50,0002004(base yr)20052006PQPQPQgood A$30900$31 1,000$361050good B$100192$102200$10020535C.Compute the
28、 GDP deflator in 2006.Nom GDP =$36 x 1050 +$100 x 205 =$58,300 Real GDP =$30 x 1050 +$100 x 205 =$52,000 GDP deflator=100 x(Nom GDP)/(Real GDP)=100 x($58,300)/($52,000)=112.12004(base yr)20052006PQPQPQgood A$30900$31 1,000$361050good B$100192$102200$100205GDP and Economic Well-BeingnReal GDP per cap
29、ita is the main indicator of the average persons standard of living.nBut GDP is not a perfect measure of well-being.nRobert Kennedy issued a very eloquent yet harsh criticism of GDP:Gross Domestic Product“does not allow for the health of our children,the quality of their education,or the joy of thei
30、r play.It does not include the beauty of our poetry or the strength of our marriages,the intelligence of our public debate or the integrity of our public officials.It measures neither our courage,nor our wisdom,nor our devotion to our country.It measures everything,in short,except that which makes l
31、ife worthwhile,and it can tell us everything about America except why we are proud that we are Americans.”-Senator Robert Kennedy,1968GDP Does Not Value:nthe quality of the environmentnleisure timennon-market activity,such as the child care a parent provides his or her child at homenan equitable dis
32、tribution of incomeThen Why Do We Care About GDP?nHaving a large GDP enables a country to afford better schools,a cleaner environment,health care,etc.nMany indicators of the quality of life are positively correlated with GDP.For exampleGDP and Life Expectancy in 12 CountriesLife expectancy(in years)
33、Real GDP per capitaU.S.GermanyJapanNigeriaMexicoRussiaBrazilChinaPakistanBangladeshIndiaIndonesiaGDP and Adult Literacy in 12 CountriesAdult Literacy(%of population)Real GDP per capitaU.S.GermanyJapanRussiaNigeriaMexicoBrazilChinaPakistanBangladeshIndiaIndonesiaGDP and Internet Usage in 12 Countries
34、Internet Usage(%of population)Real GDP per capitaU.S.GermanyJapanMexicoRussiaBrazilChinaConsumer PriceIndex CHAPTER 24 MEASURING THE COST OF LIVINGThe Consumer Price Index(CPI)nMeasures the typical consumers cost of living.nThe basis of cost of living adjustments(COLAs)in many contracts and in Socia
35、l Security.How the CPI Is Calculated1.Fix the“basket.”The Bureau of Labor Statistics(BLS)surveys consumers to determine whats in the typical consumers“shopping basket.”2.Find the prices.The BLS collects data on the prices of all the goods in the basket.3.Compute the baskets cost.Use the prices to co
36、mpute the total cost of the basket.How the CPI Is Calculated4.Choose a base year and compute the index.The CPI in any year equals5.Compute the inflation rate.The percentage change in the CPI from the preceding period.100 xcost of basket in current yearcost of basket in base yearCPI this year CPI las
37、t yearCPI last yearinflationratex 100%=EXAMPLEbasket:4 pizzas,10 lattes$12 x 4 +$3 x 10 =$78$11 x 4 +$2.5 x 10 =$69$10 x 4 +$2 x 10 =$60cost of basket$3.00$2.50$2.00price of latte$122005$112004$102003price of pizzayearCompute CPI in each year2003:100 x($60/$60)=1002004:100 x($69/$60)=1152005:100 x($
38、78/$60)=130Inflation rate:15%115 100100 x 100%=13%130 115115x 100%=using 2003 base year:Whats in the CPIs Basket?Problems With the CPI:Substitution BiasnOver time,some prices rise faster than others.nConsumers substitute toward goods that become relatively cheaper.nThe CPI misses this substitution b
39、ecause it uses a fixed basket of goods.nThus,the CPI overstates increases in the cost of living.Problems With the CPI:Introduction of New GoodsnWhen new goods become available,variety increases,allowing consumers to find products that more closely meet their needs.nThis has the effect of making each
40、 dollar more valuable.nThe CPI misses this effect because it uses a fixed basket of goods.nThus,the CPI overstates increases in the cost of living.Problems With the CPI:Unmeasured Quality ChangenImprovements in the quality of goods in the basket increase the value of each dollar.nThe BLS tries to ac
41、count for quality changes,but probably misses some,as quality is hard to measure.nThus,the CPI overstates increases in the cost of living.Problems With the CPInEach of these problems causes the CPI to overstate cost of living increases.nThe BLS has made technical adjustments,but the CPI probably sti
42、ll overstates inflation by about 0.5 percent per year.nThis is important,because Social Security payments and many contracts have COLAs tied to the CPI.Two Measures of Inflation,1950-2007inflationnInflation is defined as the annual rate of change of the general price level in an economy or sustained
43、 increase in the average price level.The reasons of InflationnThe cost-push inflationIt occurs when the costs of production increase.This could be due to wage or taxation rises or increased material costsnThe demand-pull inflationIt happens when there is an increase in aggregate demand and it is not
44、 possible to increase supply of the goods and services demandednThe mixed type inflationIt is caused by the force of demand side and cost side together.The problems of inflationnIt hits those on fixed incomes very hard because they will be unable to purchase the same quantity of g&s.nIt also hits th
45、ose who have no power of any kind to negotiate on wages.nIt assists the borrower and penalizes the saver.nFirms may initially receive higher prices and become complacent and not strive for efficiency.nConsumers may decide to spend rather than save making the problem worse.nSome firms may not be able
46、 to survive.The solutions to inflationnThe classical solutionsnThe keynesian solutionsnThe monetarist solutionsThe Classical solutions nThe pioneer of the classical school:Adam Smith,a Scot,who is regarded as the father of Economics.nThe view of the classical economists：Adam Smith and the followers
47、believe that the market and the laws of supply and demand should be left alone to regulate an economy.They deem that the inflation can be solved by the force of demand and supply itself.Adam Smith(1723-1790)The Keynesian solutionsnThe father of the Keynesianism:John Maynard KeynesnThe views of the K
48、eynesian school:They argue that the equilibrium of the Macro economy can only be obtained by management of aggregate demand and aggregate supply.They believe that inflation occurs when aggregate demand exceeds aggregate supply.To reduce inflation Keynesians suggests that Govt must act to reduce cons
49、umption expenditure,investment expenditure and government expenditure.John Maynard Keynes (1883-1946)The Monetarist solutionsnThe founder of the monetarist school:Milton Friedman nThe views of monetarist followers:Milton and his associates argue that inflation is a monetary phenomenon.The cause of i
50、nflation is that there is too much money in the economy.They point out that the correct way to get rid of inflation is to reduce the supply of money.To ensure that there is neither inflation nor deflation,monetarist believe it is necessary to ensure that the supply of money matches the growth or red
