Macroeconomics

1
Macroeconomics

• Chapter 05 Measuring Total Output GDP
• Spring 20071

2
Gross Domestic Product

• The market value of all final goods and services
  produced annually.
• Example Wilmers Widgets, Inc. produced and
  sold 200,000 widgets in 2004 and had sales
  revenue of 4,000,000. Wilmers production had a
  market value of 4,000,000 and thus added
  4,000,000 to GDP in 2004. In 2005, Wilmers
  produced and sold 220,000 widgets and had sales
  revenue of 4,600,000. Thus, Wilmers production
  added 4,600,000 to GDP in 2005.

3
Exclusions from GDP

• Intermediate Goods
• An intermediate good has not yet reached its
  final user, but rather is an input in the
  production of another good.
• Nonproduction transactions
• Used goods
• Financial transactions
• Transfer payments

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Exclusions from GDP (continued)

• Nonmarket production
• Do-it-yourself production is an example of
  nonmarket production.
• Underground production
• Production may be unreported because it is
  illegal or because the producer is evading
  taxation.

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Exclusions from GDP (continued)

• Leisure
• An increase or a decrease in leisure time affects
  the quality of life, but does not directly affect
  production.
• Economic bads
• No adjustment is made to GDP for pollution or for
  unwanted destruction of property.

6
Two Measures of Total Output

• Sum of Total Expenditures
• (Gross Domestic Product).
• Sum of all payments to resource owners
• (National Income).

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Total Expenditures

• Consumption
• Investment
• new capital goods
• changes in business inventories
• new residential housing
• Government purchases
• Net exports

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Net Exports

• Net exports
• exports minus imports.
• Exports
• total foreign purchases of domestic goods.
• Imports
• total domestic purchases of foreign goods.

9
Total Expenditures for 2004

• Consumption 8,214
  billion
• Investment 1,928
  billion
• Government Purchases 2,216 billion
• Net Exports - 624
  billion
• Gross Domestic Product 11,734 billion

10
National Income

• Employee compensation
• Proprietors income
• Corporate profits
• Rental income
• Net interest income

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Per Capita Output

• When comparing different economies, per capita
  output numbers may be more informative than total
  output numbers.
• e.g. Indias total output is much greater than
  Switzerlands, but Switzerlands per capita GDP
  is over ten times higher than Indias.

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Per Capita Personal Income

• There is significant variation in the per capita
  personal income in the different states.

13
Real GDP

• GDP adjusted for changes in the price level
• Example GDP in 1990 was 5,803B and in 1991 was
  5,996B. CPI in 1990 was 130.7 and in 1991 was
  136.2.
• What was Real GDP in 1991, adjusted to the 1990
  price level?
• Nominal GDP 1991 (CPI 1991 CPI 1990)
• 5,996B (136.2 130.7)
• 5,996B 1.0421
• 5,754B

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Historical Data on Nominal and Real GDP

• From 1981 to 2005, U.S. nominal GDP nearly
  quadrupled.
• From 1981 to 2005, U.S. Real GDP increased by
  about 110 percent.

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U.S. Nominal and Real GDP
Year Nominal GDP Real GDP (2000 Base)

• 1998 8,747 billion 9,067
  billion
• 1999 9,268 billion 9,470
  billion
• 2000 9,817 billion 9,817
  billion
• 2001 10,128 billion 9,891
  billion
• 2002 10,470 billion 10,049
  billion
• 2003 10,971 billion 10,321
  billion
• 11,734 billion 10,756 billion
  
• 12,480 billion 11,130 billion
  

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The Business Cycle

• Expansion
• when Real GDP is increasing.
• Peak
• the highest phase of the business cycle.
• Contraction
• when Real GDP is decreasing.
• Trough
• the lowest phase of the business cycle.

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Circular Flow Diagram

• A simple circular flow diagram illustrates the
  flow of goods and services through product
  markets and the flow of resources through
  resource markets.