Lesson 3. John Maynard Keynes and Fiscal Policy

Transcription

1 Unit 4 John Maynard Keynes and Fiscal Policy 6-1 Lesson 3 Krugman, Module 10 pp Module 11 pp Module Objectives What is GDP? How is GDP Measured? The Income Method The Expenditures Method. Limitations of the GDP Measure 6-2 KEYNE S THREE QUESTIONS WHERE ARE WE NOW? WHERE WERE WE? WHERE SHOULD WE BE? 6-3 1

2 THE CIRCULAR FLOW THE CIRCULAR FLOW 6-6 2

3 6-7 National Income Accounting Expenditure Approach Household Consumption Business Investment Government Purchases Expenditures By Foreigners G = D= P Income Approach Wages Rents Interest Profits Gross Domestic Product GDP National Income Accounting A Monetary Measure Exclude Previous year transactions Intermediate Goods Non-productive transactions Non-recorded transactions Other countries goods (imports) 6-8 Expenditure Approach Who Buys Our Stuff? Four components: Consumption (C) Investment (I) Government Purchases (G) Exports (X) These components add up to GDP: Y = C I G X N 6-9 3

4 Expenditure Approach Putting It All Together: GDP = C I g G X n Gross Investment I g = Net Investment Depreciation (KCA) Net Exports X n = Exports (X) Imports (M) 6-10 Expenditure Approach Gross Investment - Depreciation Net Investment = Gross Investment Net Investment Depreciation Increased Stock of Capital Consumption & Government Spending Stock of Capital January 1 Year s GDP December Income Approach National Income (NY) wages rent interest profits Kapital Consumption Allowance Indirect Business Taxes Putting It All Together: GDP = NY KCA IBT

5 6-13 GDP Approaches Compared Accounting Statement for the U.S. Economy, 2005 in Billions Receipts Allocations Expenditures Approach Income Approach Personal Consumption (C) $ 300 Wages Gross Private Domestic Investment (I g ) Government Purchases (G) Net Exports (X n ) Rent 200 Interest 150 Individual Profit -25 Corporate Profit National Income $ $545 Indirect Business Taxes Depreciation Gross Domestic Product 6-14 $ 625 Gross Domestic Product $

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7 6-19 Then Why Do We Care About GDP? Having a large GDP enables a country to afford better schools, a cleaner environment, health care, etc. Many indicators of the quality of life are positively correlated with GDP. For example 6-20 GDP and Life Expectancy in 12 Countries Life expectancy (in years) Indonesia China India Mexico Brazil Russia Japan Germany 60 Pakistan 55 Bangladesh Nigeria 50 $0 $10,000 $20,000 $30,000 $40,000 Real GDP per capita, 2002 U.S

8 GDP and Economic Well-Being Real GDP per capita is the main indicator of the average person s standard of living. But GDP is not a perfect measure of well-being. Robert Kennedy issued a very eloquent yet harsh criticism of GDP: 6-22 Gross Domestic Product does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our faith, the intelligence of our public debate or the integrity of our public officials. It measures neither our courage, nor our wisdom, nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile, and it can tell us everything about America except why we are proud that we are Americans. - Senator Robert Kennedy, GDP Does Not Value: the quality of the environment leisure time non-market activity, such as the child care a parent provides his or her child at home an equitable distribution of income

9 Shortcomings of GDP Nonmarket Activities Leisure Improved Product Quality The Underground Economy GDP and the Environment Composition and Distribution of the Output Noneconomic Sources of Well-Being 6-25 Shortcomings of GDP Underground Economy as a Percentage of GDP - Select Nations Percentage of GDP Greece Italy Spain Portugal Belgium Sweden Germany France Holland United Kingdom Japan United States Switzerland 6-26 GLOBAL PERSPECTIVE Source: Journal of Economic Literature 9