1. MACROECONOMICS!

2. Measure health of the economy Guide government policy
Macroeconomics: the study of the economy as a whole.
Goals:
Measure health of the economy
Guide government policy

3. For all countries there are three major policy goals:
Promote Economic Growth
Limit Unemployment
Limit Inflation

4. Promote Economic Growth How does a country measure
Goal #1
Promote Economic Growth
How does a country measure
economic growth?

5. How do we know how well the economy is doing?
Economists collect statistics on production, income, investment, and savings.
The most famous statistic is GDP.
Gross Domestic Product (GDP): the dollar value of all final goods and services produced within a country’s borders in one year.
*Final Goods - GDP does not include the value of intermediate goods (goods used in the production of final goods and services)

6. What does GDP tell us? Uses of GDP
Basically, how much wealth a country produces
Uses of GDP
Compare to previous years (Is there growth?)
Compare policy changes (Did a new policy work?)
Compare to other countries (Are we better off?)
Countries by GDP (2014)
We’re number 1!

7. World map – land area

8. World map – population

9. World GDP Distribution

10. World GDP Distribution
Nominal GDP – 2014 rankings 10

11. U.S. State Rankings – Gross State Product

12. The GDP of US states is comparable to entire countries12

13. How can we measure economic growth?
% Change
in GDP =
Year 2 - Year 1
Year 1
X 100
Mordor’s GDP in 2007 was $4000
Mordor’s GDP in 2008 was $5000
What is the % Change in GDP?
Transylvania’s GDP in 2007 was $2,000
Transylvania’s GDP in 2008 was $2,100 13

14. What is NOT included in GDP?
Intermediate Goods
No Multiple Counting, Only Final Goods
EX: Price of finished car, not the radio, tire, etc.
2. Nonproduction Transactions
Financial Transactions (nothing produced)
Ex: Stocks, bonds, Real estate
Used Goods
Ex: Old cars, used clothes
3. Non-Market (Illegal) Activities
Ex: Illegal drugs, unpaid work

15. Calculating GDP Two Ways to calculate GDP:
1. Expenditures Approach - Add up all the spending on final goods and services produced in a given year.
2. Income Approach - Add up all the income from sales of final goods and services
*Same result; all money spent is income to someone else

17. Expenditures Approach
Four components of GDP:
Consumer Spending
Ex: $5 Little Caesar's Pizza
Investment Spending - When businesses put money back into their own business.
Ex: Machinery or tools
Government Spending
Ex: Bombs or tanks, NOT social security
Net Exports - Exports (X) – Imports (M)
Ex: Value of 3 Ford Fiestas minus 2 Honda Civics
GDP = C + I + G + Xn

18. Calculating GDP

19. Included or not Included in GDP?
For each situation, identify if it is included in GDP the identify the category C, I, G, or Xn
$10.00 for movie tickets
$5M increase in defense spending
$45 for a used economics textbook
Ford makes new $2M factory
$20K Toyota made in Mexico
$10K profit from selling stocks
$15K car made in US, sold in Canada
$10K Tuition to attend college
$120 Social Security payment to Bob
Farmer purchases new $100K tractor

20. Nominal GDP vs. Real GDP

21. What is the problem with this method?
How can you figure out which is the most popular movie of all time?
What is the problem with this method?
Nominal Box Office Receipts

22. How can you figure out which is the most popular movie of all time?
Real Box Office Receipts (adjusted for inflation)

23. The Problem with GDP
If a country’s GDP increased from $4 Billion to $5 Billion in one year, is the country experiencing economic growth? Did the country definitely produce 25% more products?
What is Inflation?
A rising general level of prices

24. Warm Up What is Macroeconomics? What is GDP?
Answer the following with your neighbor:
What is Macroeconomics?
What is GDP?
What are the four main components of GDP (using the expenditures approach)?
What’s NOT included in GDP?
What’s the difference between nominal and real GDP growth?
What’s the best movie of all time?

25. What’s Macroeconomics?
What is GDP?
What are the four main components of GDP?
What’s NOT included in GDP?
What’s the difference between Nominal and Real GDP?
What’s inflation?
What’s the best movie of all time?

27. Real vs. Nominal GDP
Nominal GDP is measured in current prices. Doesn’t account for inflation
Real GDP is expressed in constant, or unchanging, dollars
Real GDP adjusts for inflation.
REAL GDP IS THE BEST MEASURE OF ECONOMIC GROWTH

28. Real vs. Nominal GDP
2013
10 cars at $15,000 each = $150,000
10 trucks at $20,000 each = $200,000
Nominal GDP = $350,000
The GDP in year 2013 shows the dollar value of all final goods produced.
The nominal GDP in year 2014 is higher, which suggests that the economy is improving.
But did the economy really grow? How can we find out?
2014
10 cars at $16,000 each = $160,000
10 trucks at $21,000 each= $210,000
Nominal GDP = $370,000
Use 2013 Prices
2014 GDP is the same as 2013 GDP after the inflation adjustment
2014
10 cars at $15,000 each = $150,000
10 trucks at $20,000 each= $200,000
REAL GDP = $350,000

29. Real GDP “deflates” nominal GDP by adjusting for inflation in terms of a base year prices.

30. Does GDP accurately measure standard of living?
Example: Norway and Nigeria have roughly the same GDP ($500 Billion). Is Nigeria as wealthy as Norway?
Two adjustments:
1) divide GDP by population (GDP per capita)
2) adjust for cost of living – PPP (Purchasing Power Parity)

31. Country rankings – GDP per capita (PPP adjusted)

34. Why are some countries wealthier than others?
1. Economic System and Institutions
Capitalism vs. fascism, socialism, totalitarianism
Good governance vs. corruption
2. Physical Capital
Ex: Machinery, tools, and man-made resources.
Example#1: Bangladesh has over 100 million people but relatively few capital resources => poverty
3. Human Capital
An educated, knowledgeable workforce is more productive – E.g. Japan is wealthy despite limited natural resources
4. Natural Resources
Ex: Mauritania is mostly barren desert

35. Where-To-Be-Born Index (WTBBI)
Even better than GDP (PPP) per capita!
WTBBI Includes:
Average Income
Life expectancy
Divorce rates
Political freedoms
Corruption
Climate

38. Bottom 10

39. Warm Up
According to results from a Gallup poll of over 140,000 people in 143 different countries, the happiest* country in the world is Paraguay. Paraguay ranks 110th in the world in GDP per capita and 111th on the Human Development Index. How do you explain this apparent discrepancy?
*The survey defines happiness as “experiencing positive emotions on a daily basis”

40. THE BUSINESS CYCLE

41. The Business Cycle
The Business Cycle describes the fluctuations in economic activity (as measured by real GDP) that a national economy experiences over time

42. The Business Cycle Peak Peak Expansion Contraction Contraction
Trough

43. Expansion During a period of expansion: Wages increase
Unemployment is low
Consumers spend more money
High demand for goods/services
More businesses are launched
Getting a loan is easier
Businesses make more profits and stock prices rise

44. Peak When the business cycle peaks: The economy stops growing
Real GDP reaches a maximum
Businesses stop expanding and hiring workers
Economy begins to contract

45. Contraction

46. Contraction During a period of contraction:
Businesses cut back production and lay off workers
Unemployment increases
Wages fall
Consumers become pessimistic about the economy and decrease spending
Banks cut back on lending

47. Trough When the business cycle reaches a trough:
Real GDP “bottoms-out” (reaches a low point)
High unemployment and low spending
Stock prices drop
On the bright side, when an economy bottoms out, there’s nowhere to go but up!

48. Recession and Depression
A prolonged contraction is called a recession (contraction for over 6 months)
A really prolonged recession (generally a year or more) is called a depression

49. Causes of the Business Cycle
External “shocks” to the economy
e.g. sharp changes in oil prices, wars, droughts
Financial crises
e.g. the Great Depression and Recession