Download GDP

Macroeconomic Issues
AMBA MACROECONOMICS I
LECTURER: JACK WU
Recent Hot Macroeconomic Issues
 Sovereign Bond Crisis in Europe
 Recession and QE policy in America
 American Fiscal Cliff
 Japan’s An-Bei Economics
 Cyprus Bank Crisis
 Inflation and Soft Landing in China

Major Macroeconomic Concerns
 National Income: Low Economic Growth Rate
 Employment Opportunity: High
Unemployment Rate
 Cost of Living: High Inflation Rate
 Trade Surplus: Low Exchange
Rate(Depreciation)
How to Measure National Income?
 Gross Domestic Product (GDP)
 Gross National Product (GNP)
 GDP (Purchasing Power Parity)
Economy’s Income and Expenditure
 When judging whether the economy is doing well
or poorly, it is natural to look at the total income
that everyone in the economy is earning.
 For an economy as a whole, income must equal
expenditure because:
Every transaction has a buyer and a seller.
 Every dollar of spending by some buyer is a dollar of
income for some seller.

MARKETS
FOR
GOODS AND SERVICES
•Firms sell
Goods
•Households buy
and services
sold
Revenue
Wages, rent,
and profit
Goods and
services
bought
HOUSEHOLDS
•Buy and consume
goods and services
•Own and sell factors
of production
FIRMS
•Produce and sell
goods and services
•Hire and use factors
of production
Factors of
production
Spending
MARKETS
FOR
FACTORS OF PRODUCTION
•Households sell
•Firms buy
Labor, land,
and capital
Income
= Flow of inputs
and outputs
= Flow of dollars
Copyright © 2004 South-Western
Gross Domestic Product
 Gross domestic product (GDP) is a measure of the
income and expenditures of an economy.
 It is the total “Market value” of “all final” “goods
and services” “produced” “within a country”
in a “given period of time”.
Components of GDP
 GDP includes all items produced in the economy and
sold legally in markets.
 What Is Not Counted in GDP?


GDP excludes most items that are produced and consumed at
home and that never enter the marketplace.
It excludes items produced and sold illicitly, such as illegal
drugs.
Formula of GDP
 GDP (Y) is the sum of the following:
 Consumption (C)
 Investment (I)
 Government Purchases (G)
 Net Exports (NX)
Y = C + I + G + NX
Components: C and I
 Consumption (C):
 The spending by households on goods and services, with the
exception of purchases of new housing.
 Investment (I):
 The spending on capital equipment, inventories, and
structures, including new housing.
Components: G and NX
 Government Purchases (G):
 The spending on goods and services by local, state, and
federal governments.
 Does not include transfer payments because they are not
made in exchange for currently produced goods or
services.
 Net Exports (NX):
 Exports minus imports.
Nominal Versus Real GDP
 Nominal GDP values the production of goods and
services at current prices.
 Real GDP values the production of goods and
services at constant prices.
GDP deflator
 An accurate view of the economy requires adjusting
nominal to real GDP by using the GDP deflator.
 The GDP deflator is a measure of the price level
calculated as the ratio of nominal GDP to real GDP
times 100.
 It tells us the rise in nominal GDP that is attributable
to a rise in prices rather than a rise in the quantities
produced.
The GDP Deflator
 Converting Nominal GDP to Real GDP
 Nominal GDP is converted to real GDP as follows:
Real GDP20XX
Nominal GDP20XX

 100
GDP deflator20XX
GDP and Economic Well-Being
 GDP is the best single measure of the economic
well-being of a society.
 GDP per person tells us the income and
expenditure of the average person in the economy.
 Higher GDP per person indicates a higher standard
of living.
 GDP is not a perfect measure of the happiness or
quality of life, however.
GDP and Economic Well-Being
 Some things that contribute to well-being are not
included in GDP.



The value of leisure.
The value of a clean environment.
The value of almost all activity that takes place outside of
markets, such as the value of the time parents spend with their
children and the value of volunteer work.
GDP(PPP)
 Gross Domestic Product (GDP) at Purchasing Power
Parity (PPP)
Gross National Product
 GNP is the total income earned by a nation’s
permanent residents. It differs from GDP by
including income that citizens earn abroad and
excluding income that foreigners earn here.
Green GDP
 Green GDP is an index of economic growth with the
environmental consequences of that growth factored
in.
 Green GDP=Traditional GDPenvironmental/ecological costs
GDP Per Capita Ranking
 http://en.wikipedia.org/wiki/List_of_countries_by
_GDP_%28nominal%29_per_capita
 http://en.wikipedia.org/wiki/List_of_countries_by
_GDP_(PPP)_per_capita
Consumer Price Index
 The consumer price index (CPI) is a measure of the
overall cost of the goods and services bought by a
typical consumer.
 It is used to monitor changes in the cost of living
over time.
 When the CPI rises, the typical family has to spend
more dollars to maintain the same standard of
living.
Calculating CPI: steps
 Fix the Basket
 Find the Prices
 Compute the Basket’s Cost
 Choose a Base Year and Compute the Index
Calculating Inflation Rate
 Compute the inflation rate: The
inflation rate is the percentage change in
the price index from the preceding period.
Inflation Rate in Year 2 =
CPI in Year 2 - CPI in Year 1
 100
CPI in Year 1
GDP deflator and CPI
 Economists and policymakers monitor both the GDP
deflator and the consumer price index to gauge how quickly
prices are rising.
 There are two important differences between the indexes
that can cause them to diverge.
 The GDP deflator reflects the prices of all goods and
services produced domestically, whereas...
 …the consumer price index reflects the prices of all goods
and services bought by consumers.
GDP deflator and CPI
 The consumer price index compares the price of a
fixed basket of goods and services to the price of
the basket in the base year
 …whereas the GDP deflator compares the price of
currently produced goods and services to the price
of the same goods and services in the base year.
Correcting Economic Variables for
Effects of Inflation
 Price indexes are used to correct for the
effects of inflation when comparing dollar
figures from different times.
Example
Salary2001
Price level in 2001
 Salary1931 
Price level in 1931
177
 $80,000 
15.2
 $931,579
Indexation
 When some dollar amount is automatically corrected
for inflation by law or contract, the amount is said to
be indexed for inflation.
Business Cycle I
 The term business cycle or economic cycle refers to
the fluctuations of economic activity (business
fluctuations) around its long-term growth trend.
Business Cycle II
 The cycle involves shifts over time between periods
of relatively rapid growth of output (recovery and
prosperity), and periods of relative stagnation or
decline (contraction or recession).
Business Cycle III
 These fluctuations are often measured using the real
GDP. Despite being termed cycles, these fluctuations
in economic growth and decline do not follow a
purely mechanical or predictable periodic pattern.
Types of Business Cycle
 A number of types of business cycles, in the
traditional sense of a fluctuation within a regular
period have been proposed. The main types of
business cycles enumerated by Joseph Schumpeter.
Juglar Cycle
 In 1860, French economist Clement Juglar identified
the presence of 8 to 11 year cycles. In Business Cycles,
Schumpeter suggested this cycle be named after
Juglar. These cycles are made up of four stages, each
linked to the variation in prices, production and
interest rates.
Four stages
 expansion = increase in production and prices ,
and low interests rates.
 crisis = stock exchanges crash and bankruptcies of
several companies occur.
 recession = decrease in price and in output, high
interests rates.
 recovery= stocks recover thanks to the fall in prices
and incomes.
Recession
 A recession is a contraction phase of the business
cycle, or "a period of reduced economic activity.
Recession and Depression
 The U.S. based NBER defines a recession more
specifically as "a significant decline in economic
activity spread across the economy, lasting more
than a few months. A sustained recession may
become a depression.
Attributes of Recession
 A recession has many attributes that can occur
simultaneously and can include declines in
coincident measures of overall economic activity
such as employment, investment, and corporate
profits.
Causes of Recession
 Recessions are the result of falling demand and may
be associated with falling prices (deflation), or
sharply rising prices (inflation) or a combination of
rising prices and stagnant economic growth
(stagflation). A severe or prolonged recession is
referred to as an economic depression.
Possible Predictors of Recession
 A significant stock market drop has often preceded
the beginning of a recession.
 The three-month change in the unemployment rate.
 Index of Leading Indicators
Index of Leading Indicators
 The Index of Leading Indicators is an economic
index intended to estimate future economic activity.
The index is calculated based on ten key variables
that have historically turned downward before a
recession and upward before an expansion.
Recession’s Warning System
 The index of leading indicators can provide an early
warning system so that policymakers can shift
toward macroeconomic stimulus when the index fails.
Ten key variables
 Average number of initial applications for unemployment insurance
 Number of manufacturers' new orders for consumer goods and








materials
Speed of delivery of new merchandise to vendors from suppliers
Amount of new orders for capital goods unrelated to defense
Amount of new building permits for residential buildings
The S&P 500 stock index
Inflation-adjusted money supply (M2)
Spread between long and short interest rates
Consumer sentiment
Average weekly hours worked by manufacturing workers
Monitoring Indicators
 Red Light: Very hot
 Yellow Red light: hot
 Green light: stable
 Yellow blue light: cool/poor
 Blue light: very cool/poor