1. WELCOME TO SEMINAR 7 February 18, Wed. 10-11 pm ET
MT445-01
MANAGERIAL ECONOMICS
INSTRUCTOR: PAUL CHOI, PH.D.

2. LIVE SEMINARS (Wednesday 10-11 PM ET)
Live Seminar Schedule:
• Live Seminar 1: January 7 (Wednesday pm ET)
• Live Seminar 2: January 14 (Wednesday pm ET)
• Live Seminar 3: January 21 (Wednesday pm ET)
• Live Seminar 4: January 28 (Wednesday pm ET)
• Live Seminar 5: February 4 (Wednesday pm ET)
• Live Seminar 6: February 11 (Wednesday pm ET)
• Live Seminar 7: February 18 (Wednesday pm ET)
• Live Seminar 8: February 25 (Wednesday pm ET)
• Live Seminar 9: March 4 (Wednesday pm ET)
• Live Seminar 10: March 11 (Wednesday pm ET)
• It is strongly suggested that you attend the graded seminar at the regularly scheduled time. If you are unable to attend the seminar, you can complete the following assignment.

3. UNIT 7 READING
Chapter 19 discusses how total production is measured; the GDP as a measure of well being; the difference between real GDP and nominal GDP; and other measures of total production and total income.

4. UNIT 7 READING
Chapter 21 discusses long-run economic growth; the role of the financial system in facilitating long-run economic growth; and the business cycle.

5. UNIT 7 READING
Chapter 22 discusses economic growth over time and around the world; the economic growth model; fluctuations in productivity growth in the United States; why many countries have not experienced economic growth; and government policies that foster economic growth.

6. READING: CHAPTER 19 Measuring Total Production: Gross Domestic Product
Gross Domestic Product (GDP): The market value of all final goods and services produced in a country during a period of time, typically one year.
GDP is Measured Using Market Values, Not Quantities

7. READING: CHAPTER 19 Measuring Total Production: Gross Domestic Product
GDP Includes Only the Market Value of Final Goods
Final Good or Service: A good or service purchased by a final user.
Intermediate Good or Service: A good or service that is an input into another good or service, such as tire on a truck.

8. READING: CHAPTER 19 Gross Domestic Product Measures Total Production
Production, Income, and the Circular-Flow Diagram
Transfer Payments: Payments by the government to individuals for which the government does not receive a new good or service in return.

9. READING: CHAPTER 19 Gross Domestic Product Measures Total Production
Components of GDP
Personal Consumption Expenditures, or “Consumption”: Spending by households on goods and services, not including spending on new houses.
Gross Private Domestic Investment, or “Investment”: Spending by firms on new factories, office buildings, machinery, and additions to inventories, and spending by households on new houses.

10. READING: CHAPTER 19 Gross Domestic Product Measures Total Production
Components of GDP
Government Consumption and Gross Investment, or “Government Purchases”: Spending by federal, state, and local governments on goods and services.
Net Exports of Goods and Services, or “Net Exports”: Exports minus imports

11. READING: CHAPTER 19 Gross Domestic Product Measures Total Production
An Equation for GDP and Some Actual Values
• Consumer spending on services is greater than the sum of spending on durable and nondurable goods.
• Business fixed investment is the largest component of investment.
•Purchases made by state and local governments are greater than purchases made by the federal government.
•Imports are greater than exports, so net exports are negative

12. READING: CHAPTER 19 Does GDP Measure What We Want It to Measure?
Shortcomings in GDP as a Measure
Household Production: Household production refers to goods and services people produce for themselves.
The Underground Economy: Buying and selling of goods and services that is concealed from the government to avoid taxes or regulations or because the goods and services are illegal.

13. READING: CHAPTER 19 Does GDP Measure What We Want It to Measure?
Shortcomings in GDP as a Measure
- The Value of Leisure is Not Included in GDP.
- GDP Is Not Adjusted for Pollution or Other Negative Effects of Production.
- GDP Is Not Adjusted for Changes in Crime and Other Social Problems.
- GDP Measures the Size of the Pie but Not How the Pie Is Divided Up.

14. READING: CHAPTER 19 Real GDP versus Nominal GDP Calculating Real GDP
Real GDP: The value of final goods and services evaluated at base-year prices.
Nominal GDP: The value of final goods and services evaluated at current-year prices.

15. READING: CHAPTER 19
Real GDP versus Nominal GDP

16. READING: CHAPTER 19 Real GDP versus Nominal GDP The GDP Deflator
Price Level: A measure of the average prices of goods and services in the economy.
GDP Deflator: A measure of the price level, calculated by dividing nominal GDP by real GDP and multiplying by 100.
GDP Deflator = (Nominal GDP/Real GDP) x 100

17. READING: CHAPTER 21 Long-Run Economic Growth
Long-Run Economic Growth: The process by which rising productivity increases the average standard of living.
• Long-run economic growth is the sustained upward trend in the economy’s output over time.
• A country can achieve a permanent increase in the standard of living of its citizens only through long-run growth.
• A central concern of macroeconomics is what determines long-run economic growth.

18. READING: CHAPTER 21 Long-Run Economic Growth
Calculating Growth Rates and the Rule of 70
Number of Years to Double = 70/Growth Rate
What Determines the Rate of Long-Run Growth?
Labor Productivity: The quantity of goods and services that can be produced by one worker or by one hour of work.

19. READING: CHAPTER 21 Long-Run Economic Growth
What Determines the Rate of Long-Run Growth?
Increases in Capital per Hour Worked
Capital: Manufactured goods that are used to produce other goods and services.
Technological Change
- Economic growth depends more on technological change than on increases in capital per hour worked.
Technological change is an increase in the quantity of output firms can produce using a given quantity of inputs.

20. READING: CHAPTER 21 Long-Run Economic Growth Potential Real GDP
Potential GDP: The level of GDP attained when all firms are producing at capacity.

21. READING: CHAPTER 21 Saving, Investment, and Financial System
Financial System: The system of financial markets and financial intermediaries through which firms acquire funds from households.

22. READING: CHAPTER 21 Saving, Investment, and Financial System
An Overview of the Financial System
Financial Markets: Markets where financial securities, such as stocks and bonds, are bought and sold.
Financial Intermediaries: Firms, such as banks, mutual funds, pension funds, and insurance companies, that borrow funds from savers and lend them to borrowers.

23. READING: CHAPTER 21 Saving, Investment, and Financial System
The Macroeconomics of Saving and Investment
Y = C + I + G + NX
Y = C + I + G
I = Y – C – G
Sprivate = Y + TR – C – T
Spublic = T – G - TR

24. READING: CHAPTER 21 Saving, Investment, and Financial System
The Macroeconomics of Saving and Investment
S = Sprivate + Spublic or
S = (Y + TR – C – T) + (T – G – TR) or
S = Y - C – G
So, we can conclude that total saving must be equal total investment: S = I

25. READING: CHAPTER 21 Saving, Investment, and Financial System
The Market for Loanable Funds
Market for Loanable Funds: The interaction of borrowers and lenders that determines the market interest rate and the liquidity of loanable funds exchanged.

26. READING: CHAPTER 21 Saving, Investment, and Financial System
The Market for Loanable Funds
Explaining Movements in Saving, Investment, and Interest Rates
Crowding Out: A decline in private expenditures as a result of an increase in government purchases

27. READING: CHAPTER 21 The Business Cycle Business Cycle
Business Cycle: Alternating periods of economic expansion and economic recession.

28. READING: CHAPTER 21
Business Cycle

29. READING: CHAPTER 21 The Business Cycle Recession
The National Bureau of Economic Research (NBER) has the following broader definition: “A recession is a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income, and wholesale-retail trade.”

30. READING: CHAPTER 21 The Business Cycle Why Is the Economy More Stable?
• The increasing importance of services and the declining importance of goods.
• The establishment of unemployment insurance and other government transfer programs that provide funds to the unemployed.
• Active federal government policies to stabilize the economy.

31. READING: CHAPTER 22 Economic Growth over Time and around the World
Economic Growth from 1,000,000 BC to the Present
Industrial Revolution: The application of mechanical power to the production of goods, beginning in England around 1750.

32. READING: CHAPTER 22 Economic Growth over Time and around the World
Small Differences in Growth Rates Are Important
In the long run, small differences in economic growth rates result in big differences in living standards.
Why Do Growth Rates Matter?
Growth rates matter because an economy that grows too slowly fails to raise living standards.

33. READING: CHAPTER 22 What Determines How Fast Economies Grow?
Economic Growth Model: A model that explains growth rates in real GDP per capita over the long run.
Labor Productivity: The quantity of goods and services that can be produced by one worker or by one hour of work.
Technological Change: A change in the quantity of output a firm can produce using a given quantity of inputs.

34. READING: CHAPTER 22 What Determines How Fast Economies Grow?
There Are Three Main Sources of Technological Change:
• Better machinery and equipment
• Increases in human capital
Human capital – The accumulated knowledge and skills that workers acquire from education and training or from their life experiences.
• Better means of organizing and managing production

35. READING: CHAPTER 22 What Determines How Fast Economies Grow?
The Per-Worker Production Function
• Per-Worker Production Function: The relationship between real GDP per hour worked and capital per hour worked, holding the level of technology constant.

36. READING: CHAPTER 22 What Determines How Fast Economies Grow?
Which Is More Important for Economic Growth: More Capital or Technological Change?
• Technological change helps economies avoid diminishing returns to capital.

37. READING: CHAPTER 22 What Determines How Fast Economies Grow?
New Growth Theory
• New Growth Theory: A model of long-run economic growth which emphasizes that technological change is influenced by economic incentives and so is determined by the working of the market system.

38. READING: CHAPTER 22 Why Isn’t the Whole World Rich?
Catch-Up: Sometimes, but Not Always
• Catch-Up: The prediction that the level of GDP per capita (or income per capita) in poor countries will grow faster than in rich countries.

39. READING: CHAPTER 22 Why Isn’t the Whole World Rich?
Why Don’t More Low-Income Countries Experience Rapid Growth?
Failure to Enforce the Rule of Law
• Property Rights: The rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it.
• Rule of Law: The ability of a government to enforce the laws of the country, particularly with respect to protecting private property and enforcing contracts.

40. READING: CHAPTER 22 Why Isn’t the Whole World Rich?
Why Don’t More Low-Income Countries Experience Rapid Growth?
Wars and Revolutions
• Wars have made it impossible for countries such as Afghanistan, Angola, Ethiopia, the Central African Republic and the Congo to accumulate capital or adopt new technologies.

41. READING: CHAPTER 22 Why Isn’t the Whole World Rich?
Why Don’t More Low-Income Countries Experience Rapid Growth?
Poor Public Education and Health
• Many low-income countries have weak public school systems, so many workers are unable to read and write.
People who are sick work less and are less productive when they do work.

42. READING: CHAPTER 22 Why Isn’t the Whole World Rich?
Why Don’t More Low-Income Countries Experience Rapid Growth?
Low Rates of Saving and Investment
• The low savings rates in developing countries contribute to a vicious cycle of poverty.

43. READING: CHAPTER 22 Why Isn’t the Whole World Rich?
The Benefits of Globalization
• Foreign Direct Investment (FDI): The purchase or building by a corporation of a facility in a foreign country.
• Foreign Portfolio Investment: The purchase by an individual or a firm of stock or bonds issued in another country.
• Globalization: The process of countries becoming more open to foreign trade and investment.

44. READING: CHAPTER 22 Growth Policies
We have seen that even small differences in growth rates compounded over the years can lead to major differences in standards of living.
Therefore, there is potentially a very high payoff to government policies that increase growth rates.
- Enhancing Property Rights and the Rule of Law
- Improving Health and Education
- Policies with Respect to Technology
- Policies with Respect to Saving and Investment.

45. UNIT 7 DISCUSSION
Topic 1
The national income accounts measure productivity, spending, and income; but these accounts were not designed to measure economic welfare. Discuss aspects of economic welfare ignored in GDP. HINT: Do a “Google” search on the Genuine Progress Indicator and compare this with GDP in terms of measuring economic welfare.

46. UNIT 7 DISCUSSION
Topic 2
What factors might contribute to a low growth rates in a country? Why do some poor countries, such as Botswana, experience higher growth rates than others when all face the same challenges such as the HIV epidemic? Compare growth rates across countries by visiting The World Bank website ( How does GDP growth (GDP growth (annual %)) compare across developed countries such as the U.S. and poorer countries such as Nigeria. Why might growth rates of developed nations be lower than those of poorer countries?

47. UNIT 7 ASSIGNMENT
Instructions Summary: Please Read Unit 7 Assignment Instructions
• Please answer the following questions located in the template document. Submit the file as a Microsoft Word ® document to the Dropbox when completed.

48. SEMINAR Read About Graded Seminars
Attending seminars is important to your academic success. They (seminars) will allow you to review the important concepts that are presented in each unit, discuss work issues in your lives that pertain to these concepts, ask your instructor questions and allow you to come together in real time with your fellow classmates.
There will be a seminar in units 1 through 10 in this course. You must either attend the seminar or complete the Alternative Seminar Assignment in order to obtain the points for this part of class.

49. UNIT 7 SEMINAR Unit 7 Alternative Assignment:
• It is strongly suggested that you attend the graded seminar at the regularly scheduled time. If you are unable to attend the seminar, you must complete the following alternative assignment to earn points for this part of the class.
View this week’s archived Seminar and write a 1 page paper, double spaced that summarizes the Seminar and what you learned.
Once completed, submit your alternative assignment to the Seminar Dropbox.