Principle of Macroeconomics

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Principle of Macroeconomics

• Dr. Ou Hu Webpage www.as.ysu.edu/ohu
• Office Hours1100-1200, Monday through Friday
  and by appointment

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Principles of Macroeconomics

• Macroeconomics study the behaviors of the
  overall economy
• Macroeconomic Goals
• Sustainable economic growth
• Full employment
• Stable price

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Gross Domestic Product, GDP A Definition

• A nations gross domestic product (GDP)
• Total value of all final goods and services
  produced for the market during a given period
  within the nations borders.

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Gross Domestic Product, GDP A Definition

• of all final
• When measuring production, we only count goods
  and services that are sold to their final users.
• Avoids over-counting intermediate products when
  measuring GDP.
• Value of all intermediate products is
  automatically included in value of final products
  they are used to create.
• Examples tires, glass, flour, etc.

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Gross Domestic Product, GDP A Definition

• goods and services
• Goods cars, furniture, computers, beer, etc.
• Services medical, financial, educational, etc.
• produced
• In order to contribute to GDP, something must be
  produced.
• Q should stocks or bonds be included in the
  calculation
• of GDP?

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Gross Domestic Product, GDP A Definition

• for the market
• GDP does not include all final goods and services
  produced in the economy
• Includes only the ones produced for the
  marketthat is, with the intention of being sold.
• Example Do it yourself activities
• during a given period
• GDP measures production during some specific
  period of time
• Only goods produced during that period are
  counted.
• how about old houses? And how about the
  services provided by the realtors?
• GDP is actually measured for each quarter, and
  reported as an annual rate.

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Gross Domestic Product, GDP A Definition

• within the nations borders
• U.S. GDP measures output produced within U.S.
  borders.
• Regardless of whether it was produced by
  Americans
• Incomes Americans earned abroad are not counted.
• However, foreigners producing goods or services
  within the country are included
• Chinese Acrobats, Toyota, Andrea Bocelli
• GDP vs.GNP
• GNPGDPnet income receipts

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The Expenditure Approach to GDP

• Expenditure approach divides output into four
  categories according to which group in the
  economy purchases it as final users
• Consumption goods and services (C)purchased by
  households
• Private investment goods and services
  (I)purchased by businesses
• Government goods and services (G)purchased by
  government agencies
• Net exports (NX)purchased by foreigners

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The Expenditure Approach to GDP

• When we add up the purchases of all four groups
  we get GDP
• GDP C I G NX

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Consumption Spending

• Consumption is the part of GDP purchased by
  households as final users
• Almost everything households buy during the year
  is included as part of consumption spending when
  we calculate GDP
• One exception is construction of new homes
• Counted as private investment

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Private Investment

• Private investment has three components
• Business Fixed Investment
• Factories, office buildings, machinery, and
  software
• Are regarded as final goods, and firms that buy
  them as final users of those goods
• Residential Investment
• Residential housing is an important part of a
  nations capital stock
• House will continue to provide services into the
  future
• Changes in Business Inventories
• Why do we count the change in firms inventories
  as part of investment in measuring GDP?
• When goods are produced but not sold during the
  year, they end up in a firms inventory stock
• Part of the nations capital stock
• Will provide services in the future, when they
  are finally sold and used

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Government Purchases

• Purchases by state, local, and federal government
  are included.
• Government purchases include
• Goods
• Fighter jets, police cars, school buildings, spy
  satellites, etc.
• Services
• Such as those performed by police, legislators,
  and military personnel
• Government is considered to be a purchaser even
  if it actually produces the goods or services
  itself

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Government Purchases

• Transfer payments represent money redistributed
  from one group of citizens (taxpayers) to another
  (poor, unemployed, elderly).
• While transfers are included in government
  budgets as outlays they are not purchases of
  currently produced goods and services.
• Not result in production of new goods and
  services
• Not included in government purchases or in GDP

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Net Exports

• Not only do we spend on domestic goods and
  services, but we also spend on those from the
  rest of the world. So does the rest of the
  world.
• Add all the U.S. exports (sold to foreigners) in
  the measure of GDP
• Deduct all the U.S. imports (bought from
  foreigners) during the year, leaving us with just
  output produced in United States

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Other Approaches to GDP The Value-Added Approach

• Value added
• Firms contribution to a product or
• Revenue it receives for its output
• Minus cost of all the intermediate goods that it
  buys
• GDP is sum of values added by all firms in
  economy.

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Other Approaches to GDP The Factor Payments
Approach

• In any year, value added by a firm is equal to
  total factor payments made by that firm.
• Thus, GDP total factor payments made by all
  firms in the economy
• factor payments like wages, salaries, rent,
  interest and profit
• GDP is measured by adding up all of the income
• Gives us an important insight into the
  macroeconomy
• Total output of economy (GDP) total income
  earned in the economy

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Measuring GDP A Summary

• Different ways to calculate GDP
• Expenditure Approach
• GDP C I G NX
• Value-Added Approach
• GDP Sum of value added by all firms
• Factor Payments Approach
• GDP Wages and Salaries interest rent
  profit
• Therefore, Total output Total income

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Problems With GDP

• Changes in Quality
• Underground Economy
• Non-market Production
• Not a perfect measure of economic well-being

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Change in Quality

• While BEA includes impact of quality changes for
  many goods and services (such as automobiles and
  computers)
• Does not have the resources to estimate quality
  changes for millions of different goods and
  services
• By ignoring these quality improvements, GDP
  probably understates true growth from year to
  year.

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The Underground Economy

• Some production is hidden from government
  authorities
• Either because it is illegal
• Drugs, prostitution, most gambling
• Or because those engaged in it are avoiding taxes
• Production in these hidden markets cannot be
  measured accurately

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Non-Market Production

• GDP does not include non-market production
• Goods and services that are produced, but not
  sold in the market
• Whenever a non-market transaction becomes a
  market transaction GDP will rise even though
  total production has remained the same
• So, we must we must exercise caution in
  interpreting changes in GDP.

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Not a perfect measure of economic well-being

• No value measured on leisure
• Bad things can raise GDP.
• Disasters, wars, etc.
• Externality ecological cost