Recall from Econ 200:

Transcription

1 Chapter 2: The Data of Macroeconomics Recall from Econ 200: Macroeconomics is the study of the economy a whole, including growth in incomes, changes in price, and the rate of unemployment. Macroeconomists attempt to explain economic events and device policies to improve economic performance. In this chapter, you will learn the meaning and measurement of the most important macroeconomic statistics: Gross Domestic Product (GDP) The Consumer Price Index (CPI) The unemployment rate slide 0 slide 1 Gross Domestic Product: Expenditure and Income Two definitions: Total expenditure on domestically-produced final goods and services over a given time period. Total income earned by domestically-located factors of production in a given time period. The Circular Flow Income ($) Labor Households Firms Expenditure equals income because every dollar spent by a buyer becomes income to the seller. Goods Expenditure ($) slide 2 slide 3 Questions Inner loop: Households provide labor to the firm. In return, firms produce and sell the output to households. Outer loop: (=GDP) Flow of dollars: firms pay workers wages and make profit. Wages+ profits = total income. This is the upper loop. Notice that firm owners are also households themselves, so the flow of total income (including profits) to households is legitimate. Household spend their income to buy the goods from firms. That s the lower loop. There is a one to one relationship between income and expenditure. Suppose an economy produces four apples and three oranges. How do we calculate GDP? QA=4, PA=$0.5 QO=3, PO=$1 slide 4 slide 5 1

2 What if you decide not to spend all your income? Suppose you buy a burger from McDonald s for 5TL. McDonald s paid 2 TL for the meat How much does total expenditure (i.e. GDP) increase? In the calculation of GDP, only final goods are counted to avoid double-counting One way to establish this framework is through value added: At each stage of production, only add the contribution at that stage which is calculated as the difference between the firm s output and the value of intermediate goods that the firm purchases slide 6 slide 7 Value added Exercise: (Problem 2, p. 4) Definition: A firm s value added is: the value of its output minus the value of the intermediate goods the firm used to produce that output. A farmer grows a bushel of wheat and sells it to a miller for $1.00. The miller turns the wheat into flour and sells it to a baker for $3.00. The baker uses the flour to make a loaf of bread and sells it to an engineer for $6.00. The engineer eats the bread. Compute & compare value added at each stage of production and GDP slide 8 slide 9 Final goods, value added, and GDP GDP = value of final goods produced = sum of value added at all stages of production. The value of the final goods already includes the value of the intermediate goods, so including intermediate and final goods in GDP would be double-counting. Intermediate goods are not included in GDP to avoid double-counting. How about used goods? slide 10 slide 11 2

3 Question Suppose you buy a second hand car for 20,000 TL. What is the change in GDP? Does your answer change if you use the income, or the expenditure, or the value added approaches? The expenditure components of GDP consumption investment government spending net exports slide 12 slide 13 Consumption (C) Notes on Consumption definition: The value of all goods and services bought by households. Includes: durable goods last a long time ex: cars, home appliances nondurable goods last a short time ex: food, clothing services work done for consumers ex: dry cleaning, air travel. A consumer s spending on a new house counts under investment, not consumption. More on this in a few moments, when we get to Investment. A tenant s spending on rent counts under services -- rent is considered spending on housing services. slide 14 slide 15 U.S. consumption, 2005 How does this picture look like for Turkey? Consumption Durables Nondurables $ billions $8, , ,564.4 % of GDP 70.0% Look at the Excel Spreadsheet Word of caution: It looks like an exact comparison is not possible due to accounting differences Residential housing is included under C in Turkey Services 5, slide 16 slide 17 3

4 Investment (I) Definition 1: Spending on [the factor of production] capital. Definition 2: Spending on goods bought for future use Includes: business fixed investment Spending on plant and equipment that firms will use to produce other goods & services. residential fixed investment Spending on housing units by consumers and landlords. inventory investment The change in the value of all firms inventories. slide 18 Notes on Investment In definition #1, note that aggregate investment equals total spending on newly produced capital goods. If I pay $1000 for a used computer for my business, then I m doing $1000 of investment, but the person who sold it to me is doing $1000 of disinvestment, so there is no net impact on aggregate investment. slide 19 Notes on Inventories Inventories are treated as part of a firm s expenditure on its investment and hence counted as part of GDP. Inventory (up) GDP (up) However, note that a decrease in inventory >decrease in GDP. When the firm sells out from its inventory, the decline in inventories is offset by the increase in C: no impact on GDP. If total inventories are $10 billion at the beginning of the year, and $12 billion at the end, then inventory investment equals $2 billion for the year. Note that inventory investment can be negative (which means inventories fell over the year). slide 20 slide 21 A question for you: Why output = expenditure Suppose a firm produces $10 million worth of final goods but only sells $9 million worth. Does this violate the expenditure = output identity? Unsold output goes into inventory, and is counted as inventory investment whether or not the inventory buildup was intentional. In effect, we are assuming that firms purchase their unsold output. slide 22 slide 23 4

5 Question Suppose you start a new business. Make 20 designer dresses, pay wages to your employees but nobody buys your dresses. How does your business affect the GDP? Expenditure approach: Income approach: slide 24 5