Economics Principles and Applications - YSU

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Transcript Economics Principles and Applications - YSU

ECON 2630
Principles of Macroeconomics
Instructor: Dr. Ou Hu
Principles of Macroeconomics
• Macroeconomics studies the behaviors of
overall economy.
• Goals of Macroeconomics
– Sustainable economic growth
– Full employment
– Stable price
Principles of Macroeconomics
Spending, Income, and GDP
3
Gross Domestic Product, GDP:
A Definition
– A nation’s gross domestic product (GDP)
• Total value of all final goods and services produced
for the marketplace during a given period within the
nation’s borders
4
Gross Domestic Product, GDP:
A Definition
• The total value
– Approach of GDP is to add up dollar value of every good or
service—the number of dollars each product is sold for
– GDP must be adjusted to take away the effects of inflation
– Nominal GDP vs. Real GDP
• …of all final…
– When measuring production, we do not count every good or
service produced in the economy
• Only those 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
5
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?
6
Gross Domestic Product, GDP:
A Definition
• …for the marketplace…
– GDP does not include all final goods and services
produced in the economy
• Includes only the ones produced for the marketplace—that is,
with the intention of being sold
• …during a given period…
– GDP measures production during some specific period
of time
• Only goods produced during that period are counted
how about used goods?
• GDP is actually measured for each quarter, and then reported
as an annual rate for the quarter
• Once fourth quarter figures are in, government also reports
official GDP figure for entire year
7
Gross Domestic Product, GDP:
A Definition
• …within the nation’s borders
– U.S. GDP measures output produced
within U.S. borders
• Regardless of whether it was produced by
Americans
– Americans abroad are not counted
– However, foreigners producing goods or services
within the country are included:
Chinese Acrobat Team, Honda, Rolling Stones
8
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 Purchases of Plant, Equipment, and Software
• A firm’s plant, equipment, and software are intended to last for many years—
only a small part of them is used up to make the current year’s output
• Are regarded as final goods, and firms that buy them as final users of those
goods
– New Home Construction
• Residential housing is an important part of nation’s capital stock
• House will continue to provide services into the future
– Changes in Inventories
• We count the change in firms’ inventories as part of investment in measuring
GDP
• Why?
– When goods are produced but not sold during the year, they end up in some firm’s
inventory stocks
– Part of the nation’s 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 governments 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
• Exclude transfer payments
– 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
• Exclude interest paid on government debt
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Net Exports
• Once we recognize dealings with the rest of
the world, we must correct an inaccuracy in
our measure of GDP
– Deduct all U.S. imports during the year, leaving
us with just output produced in United States
• To properly account for output sold to, and
bought from, foreigners
– We must include net exports—difference
between exports and imports—as part of
expenditure in GDP
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US GDP, 2007 (billions of dollars)
Consumption
Durable Goods
$9,732.0
$1,079.6
Non-durable Goods
2,833.0
Services
5,819.4
Investment
Business Fixed Investment
Residential
Inventory
2,132.3
1,483.2
641.5
7.6
Government Purchases
2,691.4
Net Exports
– 712.7
Exports
1,640.3
Imports
2,353.0
GDP
$13,843.0
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Other Approaches to GDP: The Value-Added
Approach
• Value added
– Firm’s 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
Revenues
Cost of
Purchased Inputs
Value
Added
ABC Grain
$0.50
$0.00
$0.50
General
Flour
$1.20
$0.50
$0.70
Hot'n'Fresh
$2.00
$1.20
$0.80
Company
Total
$2.00
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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 must equal total factor payments made by all firms
in the economy
• All of these factor payments are received by households in the
form of wages and salaries, rent, interest or profit
– GDP is measured by adding up all of the income—wages and
salaries, rent, interest, royalties,and profit—earned by all
households in the economy
• Gives us an important insight into the
macroeconomy
– Total output of economy (GDP) is equal to 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 household income
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GDP Global Perspective
• http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%2
8nominal%29
• http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%2
8nominal%29_per_capita
• http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%2
8PPP%29_per_capita
Problems With GDP
•
•
•
•
Quality Changes
Underground Economy
Non-market Production
Not a perfect measure of economic wellbeing
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Quality Change
– 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.
22
The Underground Economy
• Some production is hidden from
government authorities
– Either because it is illegal or
• Drugs, prostitution, most gambling
– Because those engaged in it are avoiding taxes
• Production in these hidden markets cannot be
measured accurately
23
Non-Market Production
• GDP does not include non-market production
– Goods and services that are produced, but not sold in the
marketplace
• Whenever a non-market transaction becomes a
market transaction GDP will rise
– Even though total production has remained the same
• Can exaggerate the growth in GDP over long periods of time
• What do these problems tell us about value of
GDP?
– For certain purposes—especially interpreting long-run changes in
GDP—we must exercise caution
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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
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The Business Cycle
• Alternating increases and decreases in
•
economic activity over time
Phases of the business cycle
• Peak
• Recession
• Trough
• Expansion
Figure 1: The Business Cycle
Peak
Level of real output
Peak
Peak
Trough
Trough
Time
The Business Cycle
U.S. Recessions since 1950
Period
Duration,
Months
Depth
(Decline in Real
Output)
1953-54
10
-2.6%
1957-58
8
-3.7
1960-61
10
-1.1
1969-70
11
-0.2
1973-75
16
-3.2
1980
6
-2.2
1981-82
16
-2.9
1990-91
8
-1.4
2001
8
-0.4
2007-09
18
-3.7
Source: National Bureau of Economic Research, http://www.nber.org and Minneapolis Federal Reserve
Bank, http://www.minneapolisfed.org/ Output data are in 2000 dollars
Types of Unemployment
• In United States, people are considered
unemployed if they are not working AND actively
seeking a job
– Unemployment can arise for a variety of reasons, each
with its own policy implications
– This is why economists have found it useful to classify
unemployment into four different categories
–
–
–
–
Frictional unemployment
Seasonal unemployment
Structural unemployment
Cyclical unemployment
29
Frictional Unemployment
• Short-term joblessness experienced by people who are
between jobs or who are entering the labor market for first
time or after an absence
• Because frictional unemployment is, by definition, shortterm, it causes little hardship to those affected by it
• By spending time searching rather than jumping at the first
opening that comes their way
– People find jobs for which they are better suited and in
which they will ultimately be more productive
30
Seasonal Unemployment
• Joblessness related to changes in weather, tourist
patterns, or other seasonal factors
• Is rather benign
– Short-term
– predictable
– Workers are often compensated in advance for unemployment
they experience in off-season
• To prevent any misunderstandings, government usually
reports the seasonally-adjusted rate of unemployment
31
Structural Unemployment
• Joblessness arising from mismatches
between workers’ skills and employers’
requirements
– Or between workers’ locations and employers’
locations
• Generally a stubborn, long-term problem
– Often lasting several years or more
32
Cyclical Unemployment
• When the economy goes into a recession
and total output falls, the unemployment
rate rises
• Since it arises from conditions in the overall
economy, cyclical unemployment is a
problem for macroeconomic policy
33
Figure 2: U.S. Unemployment Rate,
1960–2007
34
Figure 3: Unemployment in Western
Europe, 1980 - 2007
35
High Unemployment in Europe
• Unemployment rates have increased since 1980
– 2007 unemployment rates
Country
Italy
France
Germany
UK
US
Unemployment
Rate
6.0%
8.2%
8.0%
5.3%
5.5%
Structural rigidities explain persistently high rates
– Regulated labor markets
– High minimum wages
– Generous unemployment benefits
– Powerful labor unions
36
Definition of Full Employment
• Natural Rate of Unemployment (NRU)
• Full employment level of unemployment
• Can vary over time
• Demographic changes
• Changing job search methods
• Public policy changes
• Actual unemployment can be above or
fall below the NRU
Economic Cost of Unemployment
• GDP Gap
• GDP gap = actual GDP – potential GDP
• Can be negative or positive
• Okun’s Law
• Every 1% of cyclical unemployment
creates a 2% GDP gap
How Unemployment is Measured
• The unemployed are those willing and able to
work, and who are actively searching for jobs
• Others were able to work, but preferred not to
– Including millions of college students, homemakers,
and retired people
• Still others not counted when calculating civilian
employment statistics
In the military, in hospital, and in prison
39
Figure 4: Employment Status of the
U.S. Population – An Illustration
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Figure 5: How BLS Measures
Employment Status
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US Employment Data, Jan 2008
Employed
146.2 million
Unemployed
Labor Force
Not in the Labor Force
Working-Age Population
7.6 million
153.8 million
78.8 million
232.6 million
Unemployment Rate
Participation rate
4.9%
66.1%
42
Problems In Measuring
Unemployment
– Treatment of involuntary part-time workers
• Some economists have suggested that involuntary
part-time workers should be regarded as partially
employed and partially unemployed
– Treatment of discouraged workers
• Individuals who would like to work but, because they
feel little hope of finding a job, have given up
searching
43
Some Data Sources
• Bureau of Economic Analysis
– www.bea.gov
• Federal Reserve Bank of St. Louis
– http://www.stlouisfed.org/