U.S. Macroeconomic Goals Stable Prices Low Unemployment High and Sustained Growth

Measuring the Economy Measure size = Measure temperature Measure your weight = Measure the U.S.Economy –Gross Domestic Product (GDP)

Gross Domestic Product GDP Gross Domestic Product (GDP)-The total dollar value of all final goods and services produced within a country’s borders during one calendar year. Total Dollar Value – Measure units produced by the country’s currency value. $$$$$$

Gross Domestic Product Final Goods and Services — Product is in its final form sold to customers. It does not include Intermediate Goods – products used in the production of final goods.

Gross Domestic Product –Ex. Woodcutter cuts down a tree ($100) –Sawmill processes into lumber ($200) –Furniture maker turns into table ($450) –Furniture dealer sells table for $750 –Consumer purchases the table and the value of the finished product is counted. What is the final value counted for GDP??

Gross Domestic Product Within a country’s borders –Ex. Coca Cola produced in Russia is not included. A Toyota produced in a plant in Tennessee is included. Why? Current Year — GDP counts goods produced within the year …not necessarily sold. Unsold inventories count. GDP does not count products such as used cars, second hand clothing. It was already counted the year it was first produced/sold.

Output Expenditure Model GDP = C + I + G + Xn C Personal consumption expenditure I Gross Business Investment G Government purchases of goods and services Xn (X-M ) Exports minus imports

GDP Factors C = Consumption expenditures- Consumer purchases Durable goods (life of > 1 years) ex. Cars Nondurable goods (< 1 year) ex. Food Services I = Gross Business Investment—total of all capital goods produced in 1 year in a country.  Fixed investment—housing, buildings, equipment  Inventory investment—Increase/decrease in total $ in raw materials, final goods, etc.

GDP Factors G = Government Purchases—Total $ that local, state, federal governments spend on goods and services. –Ex. Highways, education, national defense –Government aid does not count (it only transfers wealth).

GDP Factors Xn = Net Exports—The $ value of goods and services produced within the U.S. borders. –Exports: Goods produced in this country but sold in other countries. –Imports: Goods produced in other countries but sold in this country –XN = (X-M) = Exports minus Imports

Adjusting GDP for Price Increases As prices increase, so does GDP. Therefore, economists must calculate GDP in terms of real prices –Nominal GDP—Expressed in current prices of the period being measured. –Real GDP—Adjusted for price changes. –Price Index—set of statistics that allows economists to compare prices over time.

Limitations of GDP  Non-Market Activities — GDP measures only market transactions. Ex. If you make a product or provide a service and no one pays for it, it doesn’t count.  Underground Economy—Illegal and unreported legal activities.  Negative Externalities – Unintended side effects  Quality of Life – Additional goods and services does not necessarily mean better well being.

Eight Things Not Counted in GDP [no production] Second Hand Sales[no production] Public/Private Transfer Payments Purely Financial Transactions Intermediate Goods U.S. Corporations producing overseas Non-market transactions [household or volunteer work] Unreported Legal Business Activity Illegal Business Activity

Self Employment $255 O ther Legal $25 R ents & Royalties $ 30 C orporate Profits $50 Interest $55 Wages and Salaries $185 Drugs $120 Bribery $35 Gambling and Loan Sharking $10 Pornography $20 Fraud $30 Other Illegal $20 Prostitution $30 Stolen Goods $35 I llegal $300 B L egal $600 B What gets reported is the “Above Ground” W hat doesn’t get reported is the “Underground”

Influences on GDP What makes GDP rise or fall? in Aggregate Demand – the amounts of goods and services that consumers, firms, govt. and foreign buyers collectively desire to purchase at each possible price level. in Aggregate Supply – All goods and services produced by all firms in a nation at all possible prices.