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 EmploymentSelf Employment

$255$255

OOther ther Legal $25Legal $25RRents & ents & RoyaltiesRoyalties $ $3030

CCorporate

orporate Profits $50

Profits $50

Interest $55

Interest $55

Wages andWages andSalaries $185Salaries $185

Drugs $120Drugs $120Bribery $35

Bribery $35Gambling andGambling andLoan Sharking $10

Loan Sharking $10

Pornography $20Pornography $20

Fraud $30

Fraud $30

Other I

llegal $

20

Other I

llegal $

20

Prost

itutio

n $30

Prost

itutio

n $30

Stol

en G

oods

$35

Sto

len

Goo

ds $

35

IIllegalllegal$300 B$300 B

LLegalegal$600 B$600 B

What gets reported isWhat gets reported isthe “Above Ground”the “Above Ground”

WWhat hat doesn’t get reporteddoesn’t get reportedis the “Underground”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.