GDP

(formulas)

GDP=Consumption+Investments+Gov't Spending

    (Y) =      (C)       +      (I)         +      (GS)

(1) Y - C - I = GS       (2) C = Y - I - GS

(3) I = Y - C - GS       (4) GS = Y - C - I

Private and Public Savings

Private Saving = Y - T - C

Public Savings = T - GS

*If T - GS is less than zero, it is called a budget deficit.

Interesting Earnings

National Savings

NS or S = Y - C - GS = I

National Savings = Investments

GDP Deflator

Nominal GDP x 100

                           Real GDP

Inflation Rate

     New GDP - Old GDP x 100

Old GDP

PPF

-Combinations of output an economy can possibly produce

-Given the available

Factors of production

Production technology

claims that attempt to describe the world as it is.

            -can be evaluated by examining data,

claims that attempt to prescribe how the world should be.

-involve personal viewpoints.

The price that balances quantity supplied and quantity demanded

"Market-Clearing Price"

Surplus

vs

Shortage

Surplus is when there is a price floor which is at the top of the graph

Shortage is when the quantity supplied is less than the quantity demanded

Law of Supply and Demand

GDP in US 2008

14.4 trillion dollars

What is an intermediate good?

A good that is used in the production of another good.

Not counted in GDP because we do not want to measure it twice

1. If a Canadian citizen works temporarily in the United States, is the value of his output is included in GDP for the US?

2. is her/his value of output counted in the GDP for Canada?

1.Yes

2.no

Q: How does GNP differ from GDP?

A:  Total income earned by a nation’s permanent residents

              Difference is that it includes income from Americans who are in other countries

Net National Product (NNP):

A: it excludes indirect business taxes(sales tax)

               Includes business subsidy and statistical discrepencies

        NNP – IBT + BS

Personal income (PI):

PI = NI – Retained earnings (earnings of corportations not paid out to owners) – corporated income tax – contributions for social insurance + interest from holding government debt + income from transfer payments

*Disposable Personal Income:  PI - taxes

Consumption

Spending by households on goods and services with the exception of purchase of new housing (Durables and non durables)

Imports

We import more than we export

Nominal GDP

 the production of goods and services valued at current prices

-Nominal GDP growth does not tell us too much because it takes into account both changes in prices and changes in output so we do not know if one has changed, both has changed, ext

Real GDP

   Q: What does a change in Real GDP reflect?  Why?

The GDP Deflator

Measure of the price level calculated as the ratio of nominal GDP to RGDP x 100

NGDP/RGDP x 100

Q: What is the GDP deflator for any given base year?

Inflation Rate

Recession

Consumer Price Index (CPI):

Measure of the overall cost of goods and services bought by a typical consumer.

It is a gauge of inflation.

Q: What is inflation?

Q: Who (organization) calculates the CPI?

Computing CPI

1. Fix the basket

2. Find the prices

3. Compute the basket’s cost.

  4. Choose a base year and compute the index.

CPI Formula:

Q: What are the three difficulties in measuring the CPI?

1.     Substitution bias- some prices rise more than others therefore consumers may substitute one good for another.

CPI does not allow substitution

Overstates the cost of living

2.     The introduction of new goods- more choices of goods and services makes the dollar worth more and is not calculated into CPI. This lowers the cost of maintaining the same level of economic well being.

3.     Unmeasured quality change – Changes to a good that increase/decrease quality but price is not increased. This is barely calculated into the CPI but is difficult b/c quality is hard to measure.

Q: Why should we care if the CPI is not accurate?

Q: How do the GDP deflator and CPI differ?

1. the GDP deflator looks at all goods and services produced in US while CPI looks at goods bought by typical consumer

2. CPI compares prices of a fixed basket of goods

GDP D automatically changes over time.

Q: How does an increase in the price of a Boeing Airplane affect the GDP deflator and CPI?

Q: How does an increase in the price of Volvos affect the GDP deflator and CPI?

Q: What good is particularly important when considering the difference between CPI and GDP? 

We can use the CPI to compare dollar values from different time periods

Value in year 2 = value in year 1 x CPIy2/CPIy1

Indexation:

Q: Who uses indexation for inflation?

Government transfers

Tax brackets at which tax levels change (partially indexed)

Private sector – labor contracts

nominal interest rate

the interest rate as usually reported w/o a correction for inflation

Definition of real interest rate

Q: Why is the nominal interest rate always greater than the real interest rate?  Must this necessarily be the case?

Countries such as Taiwan, South Korea and Singapore have had economies growing at about 7 percent per year in recent history.

Q: Who was the richest American of all times?

Q: What determines standard of living?

Definition of productivity: 

How Is Productivity Determined

1. Physical Capital per Worker

Definition of physical capital: Stock of equipment and structure that are used to produce goods and services.

Example: Crusoe will catch more fish if he has more fishing poles.

2. Human Capital per Worker

Definition of human capital:  knowledge and skills that workers acquire through education, training and experience.

  Example: Crusoe can catch more fish if he was trained to catch fish

3. Natural Resources per Worker

Definition of natural resources:  inputs to production provided by nature

Example:  trees, oil, water, land, mineral deposits

Q: What are the two broad categories of Nat’l Resources and give examples of each?

A: Renewable: Trees, Fish

  Non-Renewable: oil

technological knowledge

What can governments do to raise productivity and living standards?

diminishing returns

Foreign direct investment

Foreign portfolio investment

Q: In the US, what is the average impact of an additional year of schooling?

Positive externalities

Q: What is the “brain drain” problem faced by many poor countries?

   A: Your most knowledgeable people leave the poor country to get a good job in a good country

Q: What factors determine how much a country will trade?

  A: Location: countries with 80% or more population living on Coast will , on average, have a GDP that is four times higher than other countries.

            Protectionism

            Trade sanctions

Q: How does the U.S. government promotes the creation of new technological information?

A:  Patents – encourage research by granting inventors exclusive rights

            Tax Breaks

            Sponsor research projects like Grants

Q: Who was Thomas Malthus and what was his believe about population growth?

Q: What did he fail to understand?

A: he was looking at population growth and food growth and said we were doomed

A: Technological innovations

Q: How might high population growth effect capital accumulation?

Q: How have some countries attempted to slow population growth?

A:  Direct controls on birth

                                          Increased awareness of birth control methods

                By increasing the opportunity cost of having children. i.e. educate females so they have jobs and keep their legs closed

Q: What are some reasons people might save money?

Q: Why do people borrow money?

financial markets

                 A bond identifies (and is fully described by):

  1.  date of maturity

      2. coupon-interest rate

3. the issuer

                                         TERM

Short term bonds are less risky because the holder is in it for less time.

A long term bond is risky because the holder must own the bond for a longer period of time

    Credit risk

Q: What is it called when a company uses the sale of stock to raise money?

Q: What is it called when a company uses the sale of bonds to raise money?

Q: What determines the prices of stocks?

Q: How can we monitor the overall level of stock prices?

Dow Jones Industrial Average

1. Top 30 US companies          

    2. Oldest  index

Standard & Poor’s 500 Index (S&P500)

            1. largest 500 companies based on the total market value

            2. Broader and more representative

            3. Weighted by market value

A: Stocks get money back after bonds, bonds are not determined by companies success while stocks do.

Take deposits from people who want to save and lend out to people who want to borrow

Q: How do banks cover the cost of providing their service?

mutual fund

Q: What is an “index funds”?

Q: How do index funds tend to perform?

Y-C-G

the total income in economy after paying for consumption and government spending

Q: What has been the debt- GDP ration in recent years?

Q: Throughout history, what has been the primary cause of fluctuations in government debt?

Q: Why did the debt-to-GDP ratio began rising again during the first few years of the George W. Bush presidency?

      1. Tax cuts,

      2. Recession –automatically reduces tax revenue and causes increased spending

      3. Government spending for the “war on terrorism”

Q: What was the Congressional Budget Office’s estimate for the natural rate of unemployment in 2007?

            A: 4.8%

cyclical unemployment:

            Deviation from the natural rate of unemployment