1. Economic Well Being
Agec 217, Summer 2007

2. Economic Well Being
Macroeconomics
The study of the economy as a whole

3. Circular Flow Diagram (Mankiw)
Firms sell
Households buy
MARKETS
FOR
GOODS AND SERVICES
Revenue
Spending
Goods
and services
sold
Goods and
services
bought
FIRMS
Produce and sell
goods and services
Hire and use factors
of production
Buy and consume
goods and services
Own and sell factors
of production
HOUSEHOLDS
Households sell
Firms buy
MARKETS
FOR
FACTORS OF PRODUCTION
Factors of
production
Labor, land,
and capital
Wages, rent,
and profit
Income
= Flow of inputs
and outputs
= Flow of dollars
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4. Economic Well Being Macroeconomic Indicators
Employment and Unemployment
Income
Wealth
Inflation
Stock market indices
Interest rates
Retirement solvency
Output (GDP)

5. Economic Well Being

6. Economic Well Being Gross Domestic Product (GDP)
The market value of all final goods and services produced within a country in a given period of time
Final goods (intermediate goods not included)
Produced within borders, by citizens or foreigners
Time period: typically one year

7. GDP Gross Domestic Product = C + I + G + NX C  Consumption
I  Investment
G  Government Spending
NX  Net Exports
Net Exports = Exports - Imports

8. GDP Per capita GDP Nominal GDP Real GDP
Gross Domestic Product per person in a country
Nominal GDP
Uses prices in the year of the measurement
Real GDP
Uses prices for a “base” year to enable year to year comparisons

9. Total in Trillions of Dollars
GDP Values (US, 2001)
Total in Trillions of Dollars
Percent of Total
Consumption (C)
$7.0
69%
Investment (I)
$1.6
16%
Government Purchases (G)
$1.9
18%
Net Exports (NX)
-$0.3
-3%
Total
$10.1
100%

10. Historical GDP

11. GDP Measured Assume a diet of Pizza and Soda
2005: 500 pizza slices and 300 sodas
Prices: pizza = $1.00 and soda = $0.50
2006: 550 pizza slices and 330 sodas
Prices: pizza = $1.10 and soda = $1.00

12. GDP Measured Nominal GDP’s 2005 2006 Percent change = 44% growth
500 * $ * $0.50 = $650
2006
550 * $ * $1.00 = $935
Percent change = 44% growth

13. GDP Measured Real GDP’s (Base year = 2005) 2005 2006
500 * $ * $0.50 = $650
2006
550 * $ * $0.50 = $715
Percent change = 10% growth

14. GDP Measured GDP Deflator (measure of inflation) for base year
(Inflation: the percent increase in price level)
Calculation
Nominal GDP / Real GDP * 100
2005 (2005 base)
GDP Deflator = ($650 / $650) * 100 = 100
2006 (2005 base)
GDP Deflator = ($935 / $715) * 100 = 131

15. GDP Measured Using the deflator Calulation 2006
Nominal GDP / GDP Deflator * 100 = Real GDP
2006
($935 /131) * 100= $715

16. GDP Recession: Two quarters of declining real GDP
Depression: A severe or long recession

18. GDP
Recession: Negative % change in real GDP for two consecutive quarters
% Change GDP =
(Current Period GDP – Previous Period GDP) *100
Previous Previous GDP

19. GDP rationale
Real GDP per capita is a measure of income and buying power in an economy. It measures our ability to produce the items we need and desire.
Recessions as measured by GDP often arrive with stock market drops beforehand and higher unemployment afterwards.

20. Critiques of GDP
Household Income and GDP

21. Critiques of GDP
Consumer Confidence Index (Conference Board): Is it predictive of actual conditions?
1. Current business conditions.
2. Business conditions for the next six months.
3. Current employment conditions.
4. Employment conditions for the next six months.
5. Total family income for the next six months.
Frogs in water

23. Critiques of GDP Human Development Index Life Expectancy
Education (literacy and enrollment)
GDP

24. Critiques of GDP
Human Development Index

25. Critiques of GDP
What we spend money on is not always positive (car accident).
GDP does not include how much time we spend on labor
Some of production has environmental impacts, for which the costs are not always measured

26. Summary
GDP is comparatively easy to measure and consistently used to determine a country’s overall economic health as it has links to many measures of well being. However, GDP may not capture all aspects of well being that are important to a nation’s citizens.