- The government realized after WWII that we weren't collecting very good economic data.
- The world economy was "blind sided" by the Great Depression because there was no data to study
- Now-a-days we have plenty of data that is continually updated (and flows to consumers as well as the gov't)
- In the past the economy has grown by 3.5%, if inflation rates are in double digits it's bad, 2-3% is good.
- GDP is a measure of the current market value of production (Only included in the GDP for the year the item was built)
- You must be talking about market value of current production, not current sales
- Market value causes a problem because it changes year to year
- Even if the production stays the same, inflation causes GDP to increase
- Market value causes changes to market production and price
- Inferior goods are not included in GDP
- Only counted when item is sold to final consumer, tires on a car are counted in the price of the car, not the amount GM paid Firestone for the tires
- Distinguishing goods sold to producers and goods sold to consumers
- When GM buys tires, it is not included in GDP (double counting would occur when car is sold if they were)
- Gov't has to take into account that when goods are sold, they are not necessarily sold to the final consumer
- Gross and Net Domestic Product
- Net DP includes depreciation
- Non-market production and the underground economy are not included (we would like to include but it's not tracked)
- Working on your own car, the service is production but is not included in GDP...should be but it can't be tracked via tax information and transaction processing
- Cash transactions sometimes cannot be tracked by the government
- In US the underground economy is less than 10% of economic activity, in some countries it can account for up to 50%
- 4 ways to categorize expenditures
- Consumption Expenditures (Car sold through dealer to everyday person)
- 2/3 (60-70%) of our production is produced for everyday people
- Investment Expenditures
- Business Direct (Car sold to business for it's sales force) LARGEST CATEGORY
- Residential Construction Expenditures 2ND LARGEST CATEGORY
- Inventory investment
- Volatile component with between 3-20% of GDP (Lower when economy is doing good, higher when bad)
- Government Expenditures
- Differentiation of gov't purchases and transfer activities
- Social Security isn't purchases by gov't it's transfer activities because it's transferred to someone else
- Unemployment and welfare payments are also transfer activities
- Around 20% of GDP
- Net Exports
- Can be sold to foreign final consumers, businesses, or governments
- Falling dollar causes changes in net exports
- Net National Product (NDP) is equal to GDP minus depreciation
- Sum of
- National Income is equal to NDP minus indirect taxes and other items
- Sum of all incomes
- Personal Disposable Income
- Includes income we earn and any transfer payments we receive
- PDI is income minus taxes paid
- GDP Deflator, Real GDP, and Nominal GDP
- Rather than measuring market value of what is produced, measure the # of items produced (but we can't do this)
- Neting out inflation
- GDP Deflator is the broadest price index (Aggregate price level relative to the base last year). Can be used to calculate inflation between different years. Price Index picks up on the general gist of prices, not any one product or even market...prices in the economy as an average.
- Real GDP is the estimate of the quantity of the current production of final goods and services (Removes price inflation). Market values (price increase/decrease) distort the measure of GDP telling us how productive we are and how much the economy has expanded/contracted.
- Nominal GDP is current market value of all currently produced final goods and services
- Chain Weighted Real GDP
- As you get further from the base year, the price index causes problems. As prices change, people change their behaviors. The Bureau of Economic Analysis (BEA) averages prices in the current year with prices in the previous year to compensate for these changes when calculating Real GDP. GDP Deflator assumes production has stayed the same, poses a distortion problem when calculating Real GDP.
- Chain Weighting makes a running average of prices over the previous years
- Potential GDP and Variations in Output
- Potential estimates the level of GDP if labor and capital were being fully utilized
- Actual tends to fluctuate around Potential GDP
- Monetary Policy - controlling the money supply to stabilize the growth in actual GDP
- Fiscal Policy - changing the level of taxes and government expenditures to stabilize the growth in actual GDP
- Inflation measures the rate of price change in general
- Unemployment measure the unemployed workforce
- Analyzing these variables is the hard part
- Accounting Identities
- Assumptions: Omit foreign sector, ignore indirect taxes, and discrepancies, ignore depreciation, no retained earnings, SS directly assessed to households, ignore business transfers
- With these assumptions, national product is the same as national income
- Identities:
T == Tx - Tr = net taxes
Yd == Y - Tx +Tr == Y - T = disposable income
Y == C + Ir + G = national income
C = consumption
G = government spending
Ir = realized investment
Yd == C + S
S = saving
^ In Book and you need to know
Dating Business Cycles (Page 29)
- Peaks and Troughs (Expansion and Recession) (4 years, 10 months)
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