Post on 24-Dec-2015
Copyright © 2004 South-Western
Mods 2, Mods 2, 10-11, 10-11, 37-4037-40Intro to Macro,
Measuring a Nation’s Income
The Circular-Flow Diagram
Spending
Goods andservicesbought
Revenue
Goodsand servicessold
Labor, land,and capital
Income
= Flow of inputs and outputs
= Flow of dollars
Factors ofproduction
Wages, rent,and profit
FIRMS•Produce and sellgoods and services
•Hire and use factorsof production
•Buy and consumegoods and services
•Own and sell factorsof production
HOUSEHOLDS
•Households sell•Firms buy
MARKETSFOR
FACTORS OF PRODUCTION
•Firms sell•Households buy
MARKETSFOR
GOODS AND SERVICES
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Circular Flow Worksheet Flows
1. Households spend $ on goods and services.
2. Businesses produce goods and services for households to buy.
3. Businesses pay wages/rents/income $ to households for resources.
4. Households provide resources for businesses to use in production.
5. Government spends $ to buy resources.
6. Government receives resources from Resource Market.
7. Government spends $ to buy Goods & Services.
8. Government receives Goods & Services from Product Market.
9. Government provides Goods & Services to Households.
10.Households pay tax $ to Government.
11.Government provides Goods & Services to Businesses.
12.Businesses pay Tax $ to Government.
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Circular Flow Worksheet Answers
______1. David pays $9.99 for a CD at the local store.
______2. The Massachusetts Dept of Education pays Ms Holm to grade MCAS essays.
______3. Maria pays her federal income tax.
______4. Jorge receives $15,000 in income from his half-ownership of a coffee shop.
______5. The City of Boston pays for an order of three new cars for restaurant inspectors to use.
______6. Mammoth Toys Inc. hires 100 new employees.
______7. The National Park Service opens two new campgrounds in Yellowstone National Park.
______8. As a small business owner, Keisha makes decorative pillows that she sells for $30.00
______9. Jordan’s Furniture submits its quarterly sales tax receipts to the state of Massachusetts.
_____10. Emily earns $6.50 per hour entering data at the music conservatory.
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Test of Macroeconomic Thinking
• Take T/F Quiz
• Answers?• All False!!
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Intro to Macroeconomics
• Macroeconomics• Macroeconomics is the study of the economy as a
whole.• Its goal is to explain the economic changes that
affect many households, firms, and markets at once.• It utilizes aggregate data on various measures.
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Macro Issues
• Macroeconomics answers questions like the following:• Why is average income high in some countries and
low in others?—Macro measure is GDP • Why do production and employment expand in
some years and contract in others?—Macro measure is unemployment rate
• Why do prices rise rapidly in some time periods while they are more stable in others?—Macro measure is inflation rate
Real GDP in the United States
Billions of1996 Dollars
$10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,0001970 1975 1980 1985 1990 20001995
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The First Macro Measure—National Accounts—GDP
• When judging whether the macro economy is doing well or poorly, we need some measure of its overall productivity
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National Accounts—THE ECONOMY’S INCOME AND EXPENDITURES
• For an economy as a whole, income must equal expenditure because:• Every transaction has a buyer and a seller.• Every dollar of spending by some buyer is a dollar
of income for some seller.
Remember Circular Flow!!
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GROSS DOMESTIC PRODUCT
• Gross domestic product (GDP) is a measure of the income and expenditures of an economy.
• It can be measured in 3 ways:1. Measure the value of final products2. Measure the spending on these products
and services3. Measure the income of factor markets in the
economy
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THE MEASUREMENT OF GROSS DOMESTIC PRODUCT
1.Measuring the value of final products—this is the Output approach
GDP= • the market value of• all final • goods and services • produced • within a country • in a given period of time.
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THE MEASUREMENT OF GROSS DOMESTIC PRODUCT
2.Measuring the spending on all final products—this is the Expenditure approach
GDP (Y) is the sum of the following:• Consumption (C)• Investment (I)• Government Purchases (G)• Net Exports (NX)
Y = C + I + G + NX
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THE MEASUREMENT OF GROSS DOMESTIC PRODUCT
3.Measuring the income of factor markets—this is the Income approach
NI (National Income) = W+R+I+P
• Wages• Rents• Interest• Profits
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Comparing the Three Approaches
INCOME Approach
EXPENDITUREApproach
OUPUT Approach
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THE MEASUREMENT OF GROSS DOMESTIC PRODUCT
• All three approaches = each other!!
Remember Circular Flow!!
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THE EXPENDITURE APPROACH TO GDP
• GDP (Y) is the sum of the following:• Consumption (C)• Investment (I)• Government Purchases (G)• Net Exports (NX)
Y = C + I + G + NX
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THE COMPONENTS OF GDP
• Consumption (C):• The spending by households on goods and services, with the
exception of purchases of new housing.
• Investment (I):• The spending on capital equipment, inventories, and
structures, including new housing.
• Government Purchases (G):• The spending on goods and services by local, state, and
federal governments.• Does not include transfer payments because they are not
made in exchange for currently produced goods or services.
• Net Exports (NX):• Exports minus imports.
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GDP and Its Components (2010)
Consumption 71%
Government Purchases
19% Net Exports -3 %
Investment13%
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THE MEASUREMENT OF GROSS DOMESTIC PRODUCT
Remember:
GDP= • the market value of• all final • goods and services • produced • within a country • in a given period of time.
YOU ARE MEASURING PRODUCTION!!!
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The Finer points of the Components of GDP
• GDP includes all items produced in the economy and sold legally in markets.
• What Is Not Counted in GDP?• GDP excludes most items that are produced and
consumed at home and that never enter the marketplace.
• It excludes items produced and sold illicitly, such as illegal drugs.
• It excludes used items
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GDP Counting Game
• Find a partner
• Get envelope and wkshts
• Get busy!!
• Check with me when done—Get Key!!
• Then do Second GDP worksheet
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REAL VERSUS NOMINAL GDP
Learn these two words—we will be using them often, about a number of concepts:
NOMINAL—literally means “in name only”—in Economics, it refers to the idea that you are looking at some measure or value at “face value” or in “current terms”—meaning it has not been adjusted for any outside effects
REAL—in Economics, using the “real” value means you have adjusted the concept for the effects of outside influences
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REAL VERSUS NOMINAL GDP
• Nominal GDP values the production of goods and services at current prices—at the “face value” of current prices.
• Real GDP values the production of goods and services at constant prices. In other words, you have adjusted the value to get rid of an outside influence. In this case, you will refigure GDP in dollars that get rid of the influence of rising prices, by choosing a base year in dollars to compare prices against.
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REAL VERSUS NOMINAL GDP
• An accurate view of the true growth rate of production in an economy requires adjusting nominal to real GDP
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GDP and Economic Well-Being
• We use per capita GDP as the best single measure of the economic well-being of a society.
• GDP per capita tells us the income and expenditure of the average person in the economy AND it takes out the effect of changes in population
• Per capita GDP = Real GDP ÷ population
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2013 World “Top Ten”Per Capita GDP (IMF stats)
Luxembourg 1 $112,473
Norway 2 $100,579
Qatar 3 $98,986
Switzerland 4 $81,276
Australia 5 $64, 578
Denmark 6 $59,129
Sweden 7 $58,014
Singapore 8 $55,182
USA 9 $53,001
Canada 10 $52,037
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Alternate Statistics
• http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)_per_capita
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GDP and Economic Well-being
• Higher per capita GDP indicates a higher standard of living
HOWEVER…
• GDP is not a perfect measure of happiness or the quality of life
• Robert F. Kennedy said: “Measures of income tell us everything, in short, except that which makes life worthwhile.”
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GDP AND WELL-BEING
• Some things that contribute to well-being are not included in GDP.• The value of leisure.• The value of a clean environment.• The value of almost all activity that takes place
outside of markets, such as the value of the time parents spend with their children and the value of volunteer work.
• So…here are some other measures of well-being and quality of life
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Happy Planet Index
• Uses 3 measures:• Experienced well-being
• The Cantril Self-Anchoring Scale, developed by pioneering social researcher Dr. Hadley Cantril, consists of the following:
• Please imagine a ladder with steps numbered from zero at the bottom to 10 at the top.
• The top of the ladder represents the best possible life for you and the bottom of the ladder represents the worst possible life for you.
• On which step of the ladder would you say you personally feel you stand at this time? (ladder-present)
• On which step do you think you will stand about five years from now? (ladder-future)
• Life expectancy• Ecological footprint
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Economist Mag’s Quality of Life Index:http://www.economist.com/news/21566430-
where-be-born-2013-lottery-life
• Uses 9-11 measures• GDP• Life expectancy• Political stability and security• Family life (Divorce rate)• Community life (church attendance, etc)• Climate/geography• Job security• Political freedom• Gender Equality