ECO155L19.doc 1 OKAY SO WHAT WE WANT TO DO IS WE WANT TO DISTINGUISH BETWEEN NOMINAL AND REAL GROSS DOMESTIC PRODUCT. WE SORT OF

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1 ECO155L19.doc 1 OKAY SO WHAT WE WANT TO DO IS WE WANT TO DISTINGUISH BETWEEN NOMINAL AND REAL GROSS DOMESTIC PRODUCT. WE SORT OF GOT A LITTLE BIT OF A MATHEMATICAL CALCULATION TO GO THROUGH HERE. THESE ARE THE NUMBERS I PUT ON THE BOARD THE LAST TIME. WHAT WE HAD WAS FIVE DIFFERENT GOODS A, B, C, D, AND E. THEN WE HAVE TWO DIFFERENT YEARS THAT WE RE INTERESTED IN YEAR 1 AND YEAR 2. SO SUPPOSE A, B, C, D, AND E IS ALL THAT OUR ECONOMY PRODUCES. WHAT WE VE GOT HERE IS THE NUMBER OF UNITS OF EACH GOOD PRODUCED IN YEAR ONE. YOU LL NOTICE OVER HERE THAT WE VE GOT QUANTITIES FOR YEAR TWO. LET S JUST KIND OF EYEBALL THOSE AND SEE THAT IN FOR GOOD A PRODUCTION WENT UP FROM ONE TO TWO. IT WENT DOWN FOR PRODUCT B FROM 20 TO 15 UNITS. PRODUCT C WAS DOWN A LITTLE BIT. PRODUCT D WAS UP A LITTLE BIT. THE SAME FOR PRODUCT E. SO WHAT WE HAVE IS KIND OF A MIXED BAG THERE. SOME THINGS WERE PRODUCED A LITTLE MORE AND SOME THINGS WERE PRODUCED A LITTLE LESS. SOME THINGS WERE PRODUCED AT THE SAME AMOUNT. UNDER THE CIRCUMSTANCES, WHAT YOU MIGHT BE WONDERING IS GOSH, IS THIS ECONOMY STRONGER OR WEAKER IN YEAR TWO THAN IT WAS IN YEAR ONE? LIKE I SAY SOME THINGS WERE PRODUCED IN 50% MORE AND WE HAD SOME THINGS HERE WHERE WE WENT DOWN. IS THE ECONOMY STRONGER OR WEAKER? WELL, THE WAY THAT WE ANSWER THAT QUESTION IS WE ASK ABOUT REAL GROSS DOMESTIC PRODUCT.

2 ECO155L19.doc 2 FIRST OF ALL, THIS IS GROSS DOMESTIC PRODUCT, GDP IN YEAR ONE. THAT S JUST NOMINAL GDP. THAT IS TO SAY, WE JUST TAKE ALL OF THE GOODS, ALL THE QUANTITIES AND MULTIPLY THEM BY THE PRICES FOR ANY GIVEN YEAR. THAT SAYS FOR YEAR ONE THE CONTRIBUTION TO GDP PRODUCTION OF EACH GOOD WAS SHOWN HERE. WE ADD THEM ALL UP. THE SIGMA SIGN THAT S THE SUM OF ALL THESE ITEMS IS $150. SO GROSS DOMESTIC PRODUCT IN YEAR ONE WAS $150. IT S THE MARKET VALUE OF ALL NEW PRODUCTION OF GOODS AND SERVICES. IN YEAR TWO WHAT WE HAVE IS SORT OF LIKE THE DEAL WE HAD WITH PRODUCTION. WE HAD QUANTITIES, SOME OF THEM WERE HIGHER AND SOME WERE LOWER. WHAT WE HAVE HERE IS SOME PRICES ARE HIGHER. HERE S WHERE A PRICE OF GOOD A WENT FROM $1 TO $2 FROM YEAR ONE TO TWO. SOME OTHER THINGS WENT DOWN IN PRICE. HERE S SOMETHING, GOOD E WAS $3 IN YEAR ONE AND NOW IT S $2 IN YEAR TWO. SOME THINGS PRICES WENT UP AND SOME WENT DOWN. IF WE WANT TO COME OVER HERE AND CALCULATE GROSS DOMESTIC PRODUCT AGAIN NOMINAL. WHEN I SAY NOMINAL, I MEAN THAT S JUST THE MARKET VALUE, THE CURRENT PRICES WITHOUT ANY FURTHER ADJUSTMENT. WE JUST USE THE PRICES WE OBSERVE. BUT WE VE GOT THE PRICES AND THE QUANTITIES AND WE MULTIPLY THOSE TOGETHER. THEY ALL ADD UP TO $180. LET S DO A CALCULATION REAL QUICKLY. WHAT S THE PERCENTAGE CHANGE IN GDP? BY THE WAY IT S ALMOST ALWAYS DEPENDING ON WHO YOU RE TALKING TO, NOMINAL.

3 ECO155L19.doc 3 THE WAY THEY MEAN REAL IS IF THEY SAY REAL. THE PERCENTAGE CHANGE IN GDP IS THE PERCENTAGE CHANGE IN GDP DIVIDED BY THE ORIGINAL GDP. THE CHANGE LOOKS LIKE $30 DIVIDED BY THE ORIGINAL OF $150. SO WHAT WE GET IS.2 = 20%. THAT S JUST THE PERCENTAGE CHANGE IN NOMINAL GDP. THAT IS A BIG CHANGE BY THE WAY. NORMALLY WHAT WE WOULD EXPECT GDP TO DO IS REALLY TWO THINGS. IT INCLUDES THE EFFECTS OF REAL GROWTH IN THE ECONOMY THAT IS TO SAY THE CHANGES IN THE Q, QUANTITIES PRODUCED, ALSO THE CHANGES IN P, AND THE PRICES THAT WE CHARGE. SO NORMALLY WHAT I WOULD EXPECT AS THE REAL COMPONENT OF GDP TO GROW BY 2 TO 3% A YEAR. THEN THE NOMINAL COMPONENT WHATEVER THE INFLATION RATE IS, BUT THAT MIGHT BE 2% A YEAR. SO WHAT YOU WOULD NORMALLY EXPECT IS 4 OR 5% GROWTH IN GDP. HERE IT IS 20% SO THAT IS A HUGE NUMBER. ANYWAY, NOW WE WANT TO TALK ABOUT REAL GDP. HERE S WHAT REAL GDP SAYS OR TRIES TO ANSWER HOW MUCH IS GDP IN YEAR TWO IF PRICES HADN T CHANGED? THAT WOULD BE REAL GDP. REAL GDP FOR YEAR TWO IS THE VALUE OF PRODUCTION IN YEAR TWO BUT KEEPING PRICES WHERE THEY WERE IN YEAR ONE. WE LL TALK ABOUT THAT AGAIN IN JUST A SECOND. SO WHAT WE HAVE NOW IS P1 TIMES Q2. LOOK AND SEE WHAT FORMULA SAYS THERE. GDP IN YEAR TWO, WELL THAT REFLECTS THE AMOUNT OF PRODUCTION, THE QUANTITIES THAT WE PRODUCE IN YEAR TWO. BUT WE RE GOING TO LEAVE PRICES AT

4 ECO155L19.doc 4 THEIR P1 LEVEL, THEIR YEAR ONE LEVEL. SO LET S JUST GO THROUGH AND MULTIPLY THE PRICE IN YEAR ONE TIMES THE QUANTITY IN YEAR TWO. WHAT DO WE HAVE HERE? FIFTEEN DOLLARS FOR GOOD A. GOOD B IS TWO TIMES FIFTEEN IS THIRTY. GOOD C IS ONE TIMES TWENTY-FIVE IS TWENTY-FIVE. GOOD D IS TWO DOLLARS TIMES TWENTY-FIVE IS FIFTY. GOOD E IS THREE DOLLARS TIMES TEN UNITS IS THIRTY. WE ADD THESE UP AND GET 150. THE ANSWER IS GDP IS THE SAME IN YEAR ONE AND YEAR TWO IF PRICES STAY THE SAME. THAT IS TO SAY IF WE HAD NOT HAD ANY INFLATION, IF PRICES REMAINED EXACTLY THE SAME, INFLATION REMEMBER IS A RISE IN PRICE LEVEL. IF WE DID NOT HAVE ANY INFLATION, PRICES JUST REMAINED WHERE THEY HAD BEEN AND ALL THAT HAPPENED IN YEAR TWO IS WE JUST PRODUCED NEW QUANTITIES. THAT TELLS US THE REAL GDP IN YEAR TWO. WHAT WE SEE HERE IS REAL GDP HERE IN YEAR TWO IS EXACTLY EQUAL TO GDP IN YEAR ONE. THERE WAS NO GROWTH IN THIS ECONOMY. THE ECONOMY DID PRODUCE MORE OF CERTAIN THINGS. FOR EXAMPLE AND WE VE ALREADY SAID THIS BEFORE, PRODUCT A WE GOT FIFTY PERCENT MORE OF THAT. THERE S OTHER THINGS THAT WE PRODUCED LESS OF. PRODUCT C WENT DOWN FROM THIRTY TO TWENTY-FIVE. SO PRODUCT B WENT DOWN FROM TWENTY TO FIFTEEN. IN GENERAL, WE HAD SOME GROWTH IN SOME SECTORS IN THE ECONOMY AND SOME CONTRACTION IN OTHER SECTORS OF THE ECONOMY. THE OVERALL ECONOMY IS PRODUCING THE

5 ECO155L19.doc 5 SAME AMOUNT OF REAL GROSS DOMESTIC PRODUCT. QUESTIONS ABOUT THIS? WHAT S THE CHANCES OF THAT HAPPENING? I SWEAR I JUST MADE THOSE NUMBERS UP AS I WAS GOING THE OTHER DAY. I PUT THEM IN THERE AND I WAS KIND OF INTERESTED TO SEE IF REAL GDP WENT UP OR DOWN MYSELF BECAUSE IT WAS A MIXED BAG. SO THE ANSWER IS IT DIDN T CHANGE. ANY QUESTIONS ABOUT THIS? LET S PRETEND JUST FOR ONE SECOND JUST SO WE CAN DO ANOTHER CALCULATION. LET S PRETEND THAT REAL GDP HAD GONE UP TO 160 DOLLARS. THEN WE WOULD HAVE DONE A CALCULATION PERCENTAGE CHANGE IN REAL GDP WOULD HAVE BEEN 10 DOLLARS. THE ORIGINAL IS 150. SO THEN THE GROWTH WOULD HAVE BEEN ABOUT.067 = 6.7%. I BETTER GET THE CALCULATOR OUT. 10 DIVIDED BY 150. I DIDN T NEED THE CALCULATOR. WHAT CAN I SAY? ANYWAY, THAT IS IF WE HAD SOME GROWTH. THE ONLY REASON I PUT THIS 160 IN IS JUST TO GIVE US AN OPPORTUNITY TO DO A CALCULATION. MY NOTES SAY CALCULATE PERCENTAGE CHANGE. SO I THOUGHT I WOULD DO THAT A COUPLE OF TIMES. THE NUMBERS WE HAVE HERE JUST TELL US THE ECONOMY DID NOT GROW. OKAY, IF THE ECONOMY DIDN T GROW. THE REALITY IS THIS IS 150. THIS IS A 0 AND THAT IS A 0. IF THE ECONOMY DID NOT GROW FROM YEAR ONE TO YEAR TWO. I MEAN DID NOT GROW IN THIS QUANTITY SENSE. THEN HOW IS IT THAT NOMINAL GDP WENT UP 20%? PRICES WENT UP. THERE S TWO DIFFERENT COMPONENTS TO OUR GDP. GDP= P * Q. THIS IS

6 ECO155L19.doc 6 ALL OF THE P S TIMES ALL OF THE Q S. I LL PUT THAT SIGMA SIGN UP THERE TO MEAN WE RE GOING TO MULTIPLY THEM AND THEN ADD THEM TOGETHER. BUT THE POINT IS THAT WHEN WE RE CALCULATING GROSS DOMESTIC PRODUCT, THAT S GOT TWO DIFFERENT PARTS TO IT, TWO DIFFERENT COMPONENTS. ONE COMPONENT OF GROSS DOMESTIC PRODUCT WAS THE PRICES, THE MARKET VALUATION. THE OTHER ONE IS THE QUANTITIES WE PRODUCE. I M SAYING IF GDP GOES UP BY 20%, AND IF Q GOES UP BY 0%, IT DOESN T GO UP AT ALL. THERE S ONLY ONE WAY FOR GDP TO HAVE GONE UP AND THIS IS TO SAY THAT PRICE VARIABLE ROSE BY ABOUT 20%. ARE YOU WITH ME? IT S THE SAME THING WITH YOU OR ME. MY INCOME COULD GO UP. LIKE LAST YEAR I EARNED $10,000. THIS YEAR I EARNED $11,000. BUT EVEN THOUGH MY PAY HAS GONE UP 10% THAT COULD HAVE BEEN DUE TO AN INCREASE IN THE VALUE OF WHAT I PRODUCE OR IT WAS AN INFLATIONARY PRICE INCREASE OR WAGE INCREASE IN THIS PARTICULAR CASE. SO IT S THOSE TWO COMPONENTS. LET ME THROW UP ANOTHER TERM HERE THAT NOW THAT WE HAVE GOT THESE REAL AND NOMINAL STRAIGHT, WE CAN TALK ABOUT THE GDP DEFLATOR. I LL CALL IT A PRICE DEFLATOR. I M GOING TO USE A FUNNY LOOKING P TO BE THAT PRICE DEFLATOR. PRICE DEFLATOR EQUALS NOMINAL GDP OVER REAL GDP TIMES 100. THIS GDP PRICE DEFLATOR CAN BE THOUGHT OF AS THE PRICE INDEX FOR GDP. YOU REMEMBER WE ALREADY TALKED ABOUT A CONSUMER PRICE INDEX.

7 ECO155L19.doc 7 THE CONSUMER PRICE INDEX WAS AN INDEX OF CONSUMER PRICES AND THAT S WHY THEY CALL IT THAT BY THE WAY. ANYWAY, THE CONSUMER PRICE INDEX WAS AN INDEX OF CONSUMER PRICES. WHAT WE DID IS WE HAD THE CONSUMER S MARKET BASKET. WE PUT PRICES ON IT AND PRICED THAT BASKET OVER TIME. THIS IS ANOTHER PRICE INDEX. IT S A BROADER PRICE INDEX. THE CONSUMER PRICE INDEX THAT WE VE ALREADY TALKED ABOUT BEFORE LOOKS AT THE COST OF CONSUMER GOODS THROUGH TIME. THIS IS NOT THE PRICE OF CONSUMER GOOD THROUGH TIME. THIS IS THE PRICE OF EVERYTHING THROUGH TIME, EVERY NEW GOOD AND SERVICE. EVERY NEW GOOD AND SERVICE HAS ITS OWN ENTRY INTO THIS NOMINAL AND REAL GDP. SO EVERY PARTICULAR GOOD AND SERVICE HAS THE ABILITY TO AFFECT THIS GDP PRICE DEFLATOR. SO NOW LET ME WRITE SOMETHING DOWN HERE. HERE S NOMINAL GDP. LET S TALK ABOUT WE HAD YEAR ONE AND YEAR TWO. BY THE WAY, LET S TALK ABOUT YEAR ONE AND YEAR TWO. HERE S NOMINAL GDP IN YEAR TWO IS EQUAL TO P2 TIMES Q2. REAL GDP IS YEAR TWO IS THIS P1 TIMES Q2 TIMES 100. NOW THIS IS NOT REALLY LEGAL MATHEMATICS TO DO THIS BUT I M GOING TO DO IT ANYWAY BECAUSE I M KIND OF A RENEGADE MATHEMATICIAN. IF YOU THINK ABOUT THOSE Q2 S CANCELING EACH OTHER OUT, THE ONE IN THE NUMERATOR AND THE ONE IN THE DENOMINATOR, WHAT YOU CAN SEE IS THAT THIS PRICE DEFLATOR IS KIND OF P2 OVER P1. HEY THAT S KIND OF WHAT I WAS

8 ECO155L19.doc 8 LOOKING FOR. I WANTED TO KNOW HOW MUCH HIGHER P2 IS IN YEAR TWO THAN THEY WERE IN YEAR ONE. QUESTIONS ABOUT THIS? NOW LET ME SEE IF I CAN T GET US A NUMBER HERE, SOMETHING FROM THE SURVEY OF CURRENT BUSINESS, SOMETHING THAT IS A LITTLE BIT MORE UP TO DATE AND A LITTLE MORE REAL. I SHOULDN T SAY REAL IN THAT SENSE, A LITTLE MORE REALISTIC. I GAVE YOU SOME NUMBERS THE OTHER DAY. IF YOU LL REMEMBER I HAD GDP UP HERE. THEN I HAD CONSUMPTION, INVESTMENT, GOVERNMENT SPENDING, AND NET EXPORTS. I PUT AMOUNTS OF MONEY UP THERE FOR EACH ONE IF YOU REMEMBER. I SAID THE TOTAL IS, I CAN T REMEMBER IF I EVER TOLD YOU A TOTAL BUT LET S WRITE ONE DOWN, SEVEN FIVE SIX SIX POINT FIVE BILLION DOLLARS. I M JUST LOOKING FOR THIS FOR THAT WAS ACTUALLY WHEN I GAVE YOU THOSE NUMBERS REAL GDP. I DON T KNOW IF I TOLD YOU. YOU MAY WANT TO LOOK BACK IN YOUR NOTES AND SEE HOW WE LABELED THAT AT THE TIME. BUT THAT WAS REAL GDP WHEN I WAS GIVING THOSE NUMBERS. I CAN T REMEMBER IF I GAVE YOU THIS SPECIFIC BOTTOM LINE FIGURE OR SOMETHING CLOSE TO IT. ANYWAY, WE VE GOT REAL GDP FOR 1998 WAS SEVEN TRILLION FIVE HUNDRED SIXTY-SIX BILLION FIVE HUNDRED MILLION DOLLARS. THEN THE OTHER DAY WE WENT THROUGH THE COMPENSATION OF EMPLOYEES, THE RENT, THE INTEREST, THE PROPRIETORS, THE INCOME, THE CORPORATE PROFITS, AND SO FORTH. I GAVE YOU REAL GDP AGAIN. LET ME TRACK THAT DOWN. THIS IS INTERESTING STUFF NO MATTER

9 ECO155L19.doc 9 HOW YOU SLICE IT. THERE IT IS. SO THEN ANOTHER TIME I GAVE YOU NOMINAL GDP AND THAT WAS WHERE WE HAD THE WAGES PLUS THE RENT PLUS THE INTEREST AND PROFIT, ETC. THAT WAS NOMINAL GDP. THAT WAS ALSO FOR THE SAME YEAR, 1998, THE AMOUNT THAT THOSE ALL ADD UP TO. WELL, IT WASN T JUST THOSE. THEN WE HAD TO GO THROUGH AND THE INDIRECT BUSINESS TAXES AND THE DEPRECIATION, CAPITAL CONSUMPTION ALLOWANCE AND SO FORTH. BUT ANYWAY, UNDER THAT METHOD OF MEASUREMENT GDP IS EIGHTY-FIVE THIRTY- EIGHT BILLION DOLLARS. SORRY TO BE SO SLOW WITH THAT BUT I WANTED TO USE SOME ACTUAL NUMBERS. HERE S WHAT WE VE GOT. WE VE GOT FOR THE SAME YEAR 1998 TWO MEASURES OF GDP. ONE OF THEM IS REAL AND ONE OF THEM IS NOMINAL. SO WHAT WE LL DO IS WE LL DIVIDE THE NOMINAL THE 8538 BY 7566, THOSE ARE BOTH IN BILLIONS OF DOLLARS. I M SAYING THAT S TIMES 100. THAT SHOULD BE THE PRICE INDEX FOR LET ME GET THE CALCULATOR OUT. 85F38 DIVIDED BY 7566 TIMES 100 EQUALS MEANING WHAT? THE PRICE LEVEL IN 1998 WAS 12.8 % HIGHER THAN IT WAS IN THE BASE YEAR. IN THE YEAR WHEN WE STARTED COUNTING FORWARD AND WHAT YEAR WOULD THAT HAVE BEEN. I BELIEVE THAT IS IN 1992 DOLLARS. PRICES 12.8% HIGHER IN 1998 THAN IN THE BASE YEAR OF AGAIN I M SORRY THAT S NOT WRITING BETTER. WE WILL TALK ABOUT THE BASE YEAR IN JUST A SECOND. WE RE SAYING THAT PRICES

10 ECO155L19.doc 10 ARE NOW 12.8% HIGHER THAN THEY WOULD HAVE BEEN SIX YEARS BEFORE. NOW WHAT DO I MEAN BY THE BASE YEAR? THE BASE YEAR IS JUST ARBITRARILY CHOSEN. IT MAKES ABSOLUTELY DO DIFFERENCE. IN THE STORY OVER HERE, WE HAD OUR BASE YEAR WAS OUR STARTING YEAR OF YEAR ONE. SO THEN WHEN WE CAME THROUGH HERE AND CALCULATED OUR PRICE INDEX. OH MAYBE WE DIDN T GO THROUGH HERE AND CALCULATE THAT PRICE INDEX. I GUESS WE DIDN T. NOMINAL GDP IS 180. REAL GDP WE LL CALL THIS OUR BASE YEAR IS 150 TIMES 100. THIS IS EQUAL TO 120. THE INTERPRETATION OF THIS IS PRICES ARE 20% HIGHER IN YEAR TWO THAN THEY WERE IN YEAR ONE. SO IT S ALWAYS ON A COMPARISON BASIS. WHAT S HAPPENED TO THE PRICE INDEX SINCE THE BASE YEAR? OUR BASE YEAR WAS YEAR ONE BUT FOR THE GROSS DOMESTIC PRODUCT, WHEN THEY MEASURE REAL GDP, THEY MEASURE 1992 PRICES. LET ME COME BACK AND MODIFY THIS JUST SLIGHTLY. WE COULD SAY THESE WERE 1992 PRICES AND 1992 QUANTITIES. THIS WOULD BE 1992 NOMINAL GDP. THEN WE WOULD HAVE SWITCHED OVER HERE TO 1998 QUANTITIES, 1998 PRICES, AND THEN A 1998 NOMINAL GDP. I AM ONLY TRYING TO MAKE IT COMPERABLE TO WHAT WE HAVE OVER THERE. THEN THIS WOULD HAVE BEEN 1998 GDP EVALUATED AT 1992 PRICES. SO ALL WE RE REALLY DOING IS WE JUST PICK A PERIOD AS OUR BEGINNING OR BASE PERIOD FOR THIS. THEN ALL THESE OTHER CALCULATIONS ARE JUST WHAT WE SEE RIGHT HERE WHERE WE RE

11 ECO155L19.doc 11 BASICALLY CRANKING THROUGH, DOING THE MATH. THE HARDEST THING ABOUT THIS IS NOT THE MATH. THAT S PRETTY SIMPLE. THE HARDEST THING ABOUT IT IS WHAT YOUR OBJECTIVE IS. WHAT S YOUR ULTIMATE GOAL? IT TOOK ME A SECOND A MOMENT AGO WHEN I WAS TRYING TO THINK ABOUT WHAT I WANTED TO DO OVER HERE. SO IT TAKES YOU A SECOND TO JUST KIND OF PUT ALL THE PIECES TOGETHER. WE HAD THESE NUMBER ALREADY CALCULATED, NOMINAL GDP IN YEAR TWO, 180. WE HAVE ALREADY CALCULATED THE REAL GDP IN YEAR TWO. SO IT WAS A MATTER OF GOING THROUGH AND TALKING ABOUT OUR 20% INCREASE IN THE OVERALL PRICE LEVEL. ANYWAY, THERE S QUITE A BIT UP HERE. I THINK IF YOU WANT TO FOCUS ON SOMETHING, YOU SHOULD BE KIND OF COMFORTABLE WITH DOING ONE OF THESE CALCULATIONS. THIS MIGHT BE SOMETHING I GIVE YOU ON A TEST. I MIGHT SAY SOMETHING LIKE, THE FOLLOWING FOUR GOODS ARE IN THE ECONOMY. HERE S THE QUANTITIES PRODUCED IN THE BASE YEAR. HERE S THE PRICES IN THE BASE YEAR. HERE S THE QUANTITIES PRODUCED IN THE CURRENT YEAR, THIS YEAR. HERE S THE PRICES IN THE CURRENT YEAR, THIS YEAR. AND NOW, HOW MUCH IS GDP IN THE BASE YEAR? HOW MUCH IS GDP THIS YEAR? HOW MUCH HAS BEEN THE PERCENTAGE CHANGE IN GDP? WHAT S REAL GDP? THOSE SAME TYPES OF THINGS WE VE DONE RIGHT HERE. AND ALSO THOSE ARE THE THINGS THAT ARE IN YOUR TEXTBOOK. QUESTIONS?

12 ECO155L19.doc 12 LET S GO. I VE GOT JUST A FEW MORE MEASURES OF ECONOMIC ACTIVITY THAT WE WANT TO TALK ABOUT, MACROECONOMIC ACTIVITY. WE VE TALKED ABOUT GROSS DOMESTIC PRODUCT. LET S TALK ABOUT NET DOMESTIC PRODUCT, NDP. THE ONLY DIFFERENCE BETWEEN GROSS AND NET DOMESTIC PRODUCT IS JUST THAT FIRST WORD, GROSS VERSUS NET. SEE IF ANYBODY HAD EXPLAINED IT TO YOU LIKE THAT BEFORE YOU WOULD HAVE ALREADY KNOWN WHAT THIS IS. WHAT S THE DIFFERENCE BETWEEN GROSS AND NET? THE ANSWER IS THIS. GROSS DOMESTIC PRODUCT MINUS THE CCA THAT S THE CAPITAL CONSUMPTION ALLOWANCE. THAT WAS ONE OF THE THINGS WE TALKED ABOUT LAST TIME. ANOTHER WORD FOR THIS IS DEPRECIATION. THE IDEA IS THE FINAL VALUE OF ALL-NEW GOODS AND SERVICES THAT S GDP, MINUS THE CAPITAL GOODS THAT GOT WORN OUT DURING THE YEAR. IF YOU PRODUCE GOODS DURING THE YEAR. LET S SAY A VALUE OF THOSE GOODS IS 8 TRILLION DOLLARS WORTH OF GOODS IN A YEAR. BUT THEN IF YOU WEAR OUT JUST HYPOTHETICALLY HALF A TRILLION DOLLARS WORTH OF CAPITAL GOODS, THEN YOU FIRST HAVE TO REPLACE THOSE TO GET BACK TO YOUR STARTING POINT. SO YOU TAKE A HALF A TRILLION DOLLARS TO REPLACE THE CAPITAL GOODS THAT WORE OUT, THEN YOU RE ONLY LEFT WITH SEVEN AND A HALF TRILLION DOLLARS WORTH OF GOODS AND SERVICES TO BE CONSUMED AFTER YOU HAVE REPLACED THE CAPITAL GOODS. THAT S WHAT WE SEE HERE. THIS IS THE

13 ECO155L19.doc 13 VALUE OF ECONOMIC PRODUCTION AFTER WE HAVE REPLACED THE GOODS THAT HAVE WORN OUT DURING THE YEAR. SOME PEOPLE THINK THAT S A BETTER MEASURE OF ECONOMIC ACTIVITY, NET DOMESTIC PRODUCT, BECAUSE WHY COUNT GDP IF YOU HAD TO WEAR OUT SOME CAPITAL GOODS IN ORDER TO GET THAT GDP. YOU FIRST HAVE TO REPLACE THOSE CAPITAL GOODS. GET YOURSELF BACK TO WHERE YOU WERE IN THE STARTING POINT. AFTER YOU VE REPLACED THOSE, THEN GDP ALL YOU HAVE LEFT IS NDP. SO NET DOMESTIC PRODUCT, THE DIFFERENCE IN THE NET AND THE GROSS ARE THE WORN OUT CAPITAL EQUIPMENT. QUESTION? HOW ABOUT THIS ONE, PERSONAL INCOME. THERE S ONE I WANT TO TALK ABOUT BEFORE PERSONAL INCOME, NATIONAL INCOME. WE VE ALREADY TALKED ABOUT THIS. THAT S WHY I SKIPPED IT BUT WE REALLY DIDN T GIVE IT A NAME. THIS IS EQUAL TO COMPENSATION OF EMPLOYEES PLUS PROPRIETORS INCOME PLUS CORPORATE PROFITS PLUS RENTAL INCOME PLUS NET INTEREST. THE OTHER DAY WHEN WE WERE TALKING ABOUT INCOME APPROACH TO CALCULATING GDP WE WENT THROUGH THESE FIVE ITEMS. THOSE ADD UP TO NATIONAL INCOME. NATIONAL INCOME IF YOU WANT A DEFINITION IS THE INCOME OF THE FACTORS OF PRODUCTION OR THE PRODUCTIVE RESOURCES USED IN THE ECONOMY. HOW MUCH DO WE PAY WORKERS? HOW MUCH DO ENTREPRENEURS GET? HOW MUCH DO PROPERTY OWNERS WHO RENT GET? HOW MUCH DO PEOPLE WITH

14 ECO155L19.doc 14 CAPITAL TO LEND GET? SO YOU ADD UP THE INCOME OF THOSE REALLY FOUR DIFFERENT SECTORS BUT FIVE ITEMS AND YOU GET NATIONAL INCOME, INCOME OF THE FACTORS OF PRODUCTION. NOW PERSONAL INCOME. PERSONAL INCOME WE COULD DEFINE AS INCOME RECEIVED FROM ALL SOURCES WHETHER EARNED OR NOT. BUT YOU HAVE TO RECEIVE IT. LET ME JUST ADD THAT WORD RIGHT IN THERE. INCOME RECEIVED FROM ALL SOURCES WHETHER EARNED OR NOT, IT IS JUST RECEIVED SO WE CALL IT PERSONAL INCOME. NOW WHAT DOES PERSONAL INCOME EQUAL? FIRST OF ALL, THE FIRST SOURCE OF INCOME IS NATIONAL INCOME WHICH WE JUST TALKED ABOUT, THE COMPENSATION OF EMPLOYEES, RENT, PROFITS, ETC. THOSE THINGS ARE A NATIONAL INCOME. THOSE THINGS ARE THE BIGGEST PART OF NATIONAL INCOME BY FAR. THEN YOU HAVE TO RECEIVE IT SO WE ARE GOING TO START SUBTRACTING INCOME THAT YOU DID NOT RECEIVE. WE DO NOT RECEIVE UNDISTRIBUTED CORPORATE PROFITS. THAT IS IF YOU GO BACK HERE TO WHAT S IN NATIONAL INCOME. ONE OF THOSE THINGS IS CORPORATE PROFITS. WE INPUTTED TOTAL CORPORATE PROFITS. BUT NOW WE RE COMING BACK AND SUBTRACTING OUT THAT PART OF CORPORATE PROFITS THAT WE DON T RECEIVE; WE IN THE HOUSEHOLDS. CORPORATIONS DON T PAY THAT OUT TO US; THEY KEEP IT. HERE S THE SECOND THING WE SUBTRACT OUT, SOCIAL SECURITY TAXES PAID BY EMPLOYERS ON YOUR BEHALF. SOMETIMES YOU LL SEE

15 ECO155L19.doc 15 THIS DESCRIBED IN A SLIGHTLY DIFFERENT WAY, SOCIAL INSURANCE TAXES, ETC. THE IDEA IS THAT YOUR EMPLOYER IS PAYING OUT THE MONEY. LET S GO BACK TO THE FIRST ITEM HERE, COMPENSATION OF EMPLOYEES. THAT WAS IN NATIONAL INCOME. THERE WAS OTHER THINGS. YOUR EMPLOYER PAYS YOU WAGES BUT YOUR EMPLOYER ALSO GIVES YOU SOME FRINGE BENEFITS. ONE OF THOSE IS SENDING MONEY INTO THIS GOVERNMENT RETIRE SYSTEM, SOCIAL SECURITY SYSTEM. SO WHEN WE TALKED ABOUT THE EMPLOYEES COMPENSATION AND PUTTING IT INTO NATIONAL INCOME, THAT INCLUDES WHAT YOUR EMPLOYER PAYS INTO THE SOCIAL SECURITY SYSTEM. NOW WHAT WE ARE SAYING IS I M NOT INTERESTED IN WHAT THE EMPLOYER PAYS IN ON MY BEHALF. I WANT TO KNOW WHAT DO I COME HOME WITH? WHAT DO I GET? THE ANSWER IS, YOU DON T GET THOSE SOCIAL SECURITY TAXES YOUR EMPLOYER PAYS. SO WE LL SUBTRACT THAT FROM NATIONAL INCOME. A THIRD THING CORPORATE PROFITS TAXES. THAT S PART OF NATIONAL INCOME, THAT IS TO SAY TOTAL CORPORATE PROFITS WERE INCLUDED IN NATIONAL INCOME. BUT SOME OF THOSE CORPORATE PROFITS THE HOUSEHOLD SECTOR DOESN T GET. SOME OF THOSE CORPORATE PROFITS GET SENT OFF TO THE GOVERNMENT. SO THAT S NATIONAL INCOME THAT NEVER IS RECEIVED BY HOUSEHOLDS. FINALLY, WE ADD ONE IN, TRANSFER PAYMENTS. I THINK I VE USED THE TERM ONCE OR TWICE BEFORE BUT MAYBE YOUR UNFAMILIAR WITH IT. LET ME

16 ECO155L19.doc 16 DESCRIBE IT FOR YOU BRIEFLY. TRANSFER PAYMENTS ARE PAYMENTS THAT COME TO A PERSON IN EXCHANGE FOR NOTHING. IT S IN A SENSE A GIFT. BUT THE PERSON WHO RECEIVES IN THE MONEY DOESN T HAVE TO HAND ANYTHING BACK IN RETURN. AN EXAMPLE OF THE WOULD BE LIKE MY PAYCHECK. BUT THE GOVERNMENT DOESN T THINK THAT I M DOING NOTHING SO THEY WOULDN T CALL IT A TRANSFER PAYMENT. BUT LIKE IF I GOT A SOCIAL SECURITY BENEFIT. THAT WOULD BE WHERE I WOULD GO AT THE END OF THE MONTH AND GET THE CHECK. I GUESS THAT WOULD BE AT THE BEGINNING OF THE MONTH, THANK YOU. I DON T HAVE TO GO TO WORK. I DON T HAVE TO DO ANYTHING. THERE S JUST THIS MONEY COMING IN THE MAIL. UNEMPLOYMENT COMPENSATION WOULD BE ANOTHER EXAMPLE. SO WHAT WE VE DONE IS WE STARTED OFF WITH ALL THE INCOME OF ALL THE FACTORS OF PRODUCTION AND THEN WE REALIZED SOME OF THAT INCOME GETS DIVERTED TO OTHER PLACES SO IT S NOT RECEIVED. THEN INCOME FROM ALL SOURCES WHETHER ITS EARNED OR NOT, THERE S A LITTLE BIT OF INCOME THAT I MIGHT HAVE OR YOU MIGHT HAVE THAT YOU DIDN T EARN. IT JUST COMES IN THE MAIL AND THANK YOU VERY MUCH. TRANSFER PAYMENTS. SO THERE WE GO AS PERSONAL INCOME. FINALLY, IT S ALMOST FINALLY DISPOSABLE INCOME. THIS IS INCOME THAT THE INDIVIDUAL OR THE HOUSEHOLD HAS TO SPEND, SPENDABLE INCOME. THAT S EQUAL TO PERSONAL INCOME, THAT S

17 ECO155L19.doc 17 INCOME RECEIVED. SO ALL THE INCOME RECEIVED MINUS PERSONAL TAXES TELLS US OUR DISPOSABLE INCOME. AFTER YOU PAY YOUR TAXES AT THE END OF THE YEAR WHAT YOU RE LEFT WITH OUT OF YOUR PERSONAL INCOME THAT IS YOUR DISPOSABLE INCOME. THAT DISPOSABLE INCOME CAN BE USED IN TWO WAYS. DISPOSABLE INCOME IS USED IN TWO WAYS. ONE IS CONSUMPTION SPENDING. THE OTHER IS SAVING. THIS IS YOUR SPENDABLE INCOME. IT S YOUR INCOME AFTER ALL YOUR TAXES ARE PAID AND YOU CAN DO WHATEVER YOU WANT WITH IT AND THE ANSWER IS ANYTHING WITH YOU WANT TO DO WITH IT IS TWO THINGS. ONE IS YOU CAN SPEND IT. THE OTHER IS DON T SPEND IT. THAT IS CALLED SAVING. SOMETIMES WE HEAR SOMETHING CALLED A SAVING RATE. THAT S EQUAL TO SAVING DIVIDED BY DISPOSABLE INCOME. SO THAT IS THE PERCENT OF THAT DISPOSABLE INCOME OR TAKE HOME INCOME THAT YOU SAVE IS YOUR SAVING RATE. QUESTIONS ABOUT THAT? IN GENERAL HERE S WHAT HAPPENS. GROSS DOMESTIC PRODUCT S THE BIGGEST NUMBER. THEN WE SUBTRACT A FAIRLY SMALL AMOUNT FROM THAT, THIS DEPRECIATION. I DON T MEAN TO SAY IT S NOTHING. IT S A HUGE AMOUNT COMPARED TO WHAT I HAVE OR SPRINGFIELD HAS. IT S A FAIRLY SMALL NUMBER SO WHAT WE RE LEFT WITH IS NET DOMESTIC PRODUCT. IT S ALMOST AS BIG AS GDP. NATIONAL INCOME, WELL IT S A LITTLE BIT SMALLER THAN NET DOMESTIC PRODUCT BUT NOT A WHOLE LOT SMALLER. PERSONAL INCOME IS NATIONAL INCOME MINUS A FEW

18 ECO155L19.doc 18 THINGS BUT THEN PLUS A FEW THINGS, ONE THING IN PARTICULAR IS TRANSFER PAYMENTS. PERSONAL INCOME COULD BE BIGGER THAN NATIONAL INCOME. THESE THINGS ARE NOT THAT FAR APART IN TERMS OF SIZE. PERSONAL INCOME IS EQUAL TO NATIONAL INCOME MINUS THREE THINGS PLUS ONE THING. I M SAYING THESE THREE ARE ABOUT THE SAME SIZE AS THAT ONE. SO THERE S NOT A BIG DIFFERENCE BETWEEN THE SIZE OF NATIONAL INCOME AND THE SIZE OF PERSONAL INCOME. THEN PERSONAL INCOME IS BIGGER THAN DISPOSABLE INCOME BECAUSE DISPOSABLE INCOME EQUALS PERSONAL INCOME MINUS SOME TAXES. WELL THE TAXES ARE ALWAYS A POSITIVE NUMBER SO IT IS ALWAYS THE CASE THAT PERSONAL INCOME MINUS TAXES IS GOING TO LEAVE YOU AT THE SMALLER NUMBER. BY THE WAY YOU CAN TELL THE WITH YOUR PAYCHECK, WHAT YOUR TAKE HOME PAY IS. YOU ALWAYS START OF WITH YOUR PERSONAL INCOME. THEN IT SUBTRACTS OUT YOUR TAXES. THEN YOU RE LEFT WITH A SMALL AMOUNT TO TAKE HOME. THEN YOUR DISPOSABLE INCOME MINUS YOUR CONSUMPTION. THAT S HOW MUCH YOU SAVE. THIS SAVING RATE FOR MANY PEOPLE IS FOUR PERCENT, SIX PERCENT. FOR A LOT OF PEOPLE IT S IN THAT RANGE. THE U.S. ECONOMY AS A WHOLE HAS BEEN EVEN LOWER THAN THAT, TWO PERCENT, ONE PERCENT. SO NOT VERY MUCH SAVING TAKING PLACE IN THE UNITED STATES. WHY IS THAT? THE ANSWER IS IN RECENT YEARS; PEOPLE HAVEN T BEEN SAVING MUCH. LET ME COME BACK TO THIS. PEOPLE HAVE BEEN SPENDING MOST

19 ECO155L19.doc 19 ALL OF THEIR DISPOSABLE INCOME AND BEEN SAVING A SMALL AMOUNT. WHY IS THAT? THE ANSWER IS BECAUSE THE STOCK MARKET HAS BEEN VERY STRONG IN THE RECENT YEARS. THE STOCK MARKET IS GOING UP, THEN PEOPLE GAIN. WHEN THEY GAIN, THEY SAY WOW MY SAVINGS WENT UP. THEY DON T MEAN SAVINGS THE WAY WE RE TALKING ABOUT IT HERE. THEY MEAN ALL THAT STUFF I VE ACCUMULATED HERE IN THE PAST I VE SAVED FIFTY THOUSAND DOLLARS IN THE PAST. THIS YEAR THE STOCK MARKET WENT UP TWENTY PERCENT. SO FIFTY THOUSAND DOLLARS WORTH OF SAVINGS AT A TWENTY- PERCENT GAIN. I GAIN TEN THOUSAND DOLLARS THROUGH THE YEAR IN THE STOCK MARKET. IF I GAIN TEN THOUSAND DOLLARS, I START THINKING GOSH, MY SAVINGS HAVE BUILT UP. THEY WERE AT FIFTY THOUSAND. THEY WENT UP TO SIXTY THOUSAND. THAT S LIKE ME SAVING TEN THOUSAND DOLLARS. SO IN RECENT YEARS, PEOPLE HAVE BEEN LETTING THE STOCK MARKET TO GO UP AND HAVE BEEN PULLING FOR IT TO GO UP SO THEN AS A RESULT THEY DON T SAVE VERY MUCH OF THEIR CURRENT INCOME. IF THE STOCK MARKET DIDN T GO UP YEAR AFTER YEAR, THEN PEOPLE WOULD START THINKING GOSH, IF I WANT TO START REACHING MY RETIREMENT PLANS AND SO FORTH, I BETTER START PUTTING SOME SAVINGS AWAY. THEN THE SAVINGS RATE WOULD RISE. WHAT I M TELLING YOU IS THERE S MORE GOING ON THAN JUST WHAT WE RE TALKING ABOUT IN THIS PICTURE. THE MORE GOING ON IS WHAT S HAPPENING TO THE ASSET VALUES. SOME PEOPLE OF COURSE SAVE A

20 ECO155L19.doc 20 VERY LARGE AMOUNT. OTHERS DON T SAVE VERY MUCH AT ALL. I WOULD ENCOURAGE YOU TO SAVE A LARGE AMOUNT. BY THE WAY, THE SOONER YOU START SAVING, THE BETTER IT IS. WE TALKED ABOUT THAT RULE SEVENTY-TWO BEFORE. LET ME JUST GIVE YOU AN EXAMPLE HERE. SUPPOSE THAT YOUR RATE OF RETURN IS TWELVE PERCENT IN THE STOCK MARKET. I VE JUST SORT OF PICKED THIS TWELVE- PERCENT OUT. THEN T=6. EVERY SIX YEARS, YOU DOUBLE YOUR MONEY. WELL, SUPPOSE YOU PUT AWAY A THOUSAND DOLLARS AND YOUR AGE IS TWENTY. SO WHAT I M SAYING IS SIX YEARS LATER WHEN YOUR TWENTY-SIX, YOU VE GOT TWO THOUSAND DOLLARS. THAT S IF YOU DON T SAVE ANYTHING MORE BUT YOU JUST HAD THE TWELVE- PERCENT GAIN YEAR AFTER YEAR. THEN YOU VE DOUBLED YOUR MONEY AT AGE TWENTY-SIX. THEN AT AGE THIRTY-TWO WHEN YOU RE SIX YEARS OLDER, YOU VE GOT FOUR THOUSAND DOLLARS. WHEN YOU RE AGE THIRTY-EIGHT, SIX YEARS OLDER, YOU VE GOT EIGHT THOUSAND DOLLARS. AGE FORTY-FOUR YOU VE GOT SIXTEEN THOUSAND DOLLARS. AGE FIFTY YOU VE GOT THIRTY-TWO THOUSAND DOLLARS. AGE FIFTY-SIX YOU VE GOT SIXTY-FOUR THOUSAND DOLLARS. AGE SIXTY-TWO YOU VE GOT ONE HUNDRED TWENTY-EIGHT THOUSAND DOLLARS. SIXTY-EIGHT YOU VE GOT TWO HUNDRED FIFTY-SIX THOUSAND DOLLARS. THAT S REALLY A LONG WAY TO COME. YOU PUT A THOUSAND DOLLARS AWAY AND FORGET IT. THEN TIMES START PASSING. YOU

21 ECO155L19.doc 21 MIGHT GO AGE SIXTY-EIGHT. THAT S A LONG TIME BUT THAT S ABOUT THE AGE WHEN YOU WILL BE RETIRING SO YOU VE GOT THE TIME. WHERE ELSE ARE YOU GOING TO GO. YOU VE GOT TO WAIT. SO YOU WAIT FOR THOSE FORTY-EIGHT YEARS AND THAT THOUSAND DOLLARS TURNS INTO TWO HUNDRED FIFTY-SIX THOUSAND DOLLARS. BUT THE REAL KEY IS STARTING EARLY. IF YOU STARTED SAVING WHEN YOU WERE FORTY- FOUR. YOU PUT A THOUSAND DOLLARS AWAY. THEN IT IS JUST SIXTEEN THOUSAND AT THAT AGE. WHAT WOULD YOU RATHER HAVE? TWO HUNDRED FIFTY-SIX THOUSAND OR SIXTEEN THOUSAND. THAT S NOT A VERY SMART QUESTION. OBVIOUSLY YOU WOULD RATHER HAVE TWO HUNDRED FIFTY-SIX THOUSAND DOLLARS AS SIXTEEN. THIS IS SUCH A VAST DIFFERENCE BUT IT MAKES ALL THE DIFFERENCE IN THE WORLD WHEN YOU START SAVING. DID YOU START WHEN YOU WERE TWENTY OR FORTY? I VE DONE THESE NUMBERS BEFORE. WHEN YOU START OFF AT ZERO. SUPPOSE YOU PUT A THOUSAND DOLLARS AWAY, THEN IT DOUBLES A FEW MORE TIMES ABOUT THREE MORE TIMES. THIS BECOMES A HALF, A MILLION, THEN TWO MILLION DOLLARS. SO VAST AMOUNTS CAN BE SAVED BUT YOU NEED TO START EARLY. THAT S WHY I TOOK A MINUTE HERE IN CLASS TO ENCOURAGE YOU TO DO THAT. IF YOU DON T HAVE ANYTHING SAVED PUT SOMETHING AWAY IN THE STOCK MARKET. FIND A GOOD DIVERSIFIED MUTUAL FUND. PUT YOUR MONEY THERE AND THEN FORGET IT. DON T BE GOING BACK AND TOUCHING IT GOING I NEED

22 ECO155L19.doc 22 TO HAVE A NEW CAR. IF YOU NEED TO HAVE A NEW CAR THEN MAKE ARRANGEMENTS TO GET THE NEW CAR. IF YOU CAN T AFFORD PAYMENTS, THEN DON T BUY IT BUT DON T TOUCH THAT MONEY. IT S GOING TO DOUBLE EVERY SIX YEARS FOR YOU. LAST COUPLE POINTS WE WANT TO MAKE TODAY. WE RE FINISHING UP THIS MATERIAL NOW THAT WE VE BEEN TALKING ABOUT. WHAT WE VE DONE IN THIS UNIT OF MATERIAL IS WE VE TALKED ABOUT THREE VARIABLES. WE VE TALKED ABOUT THE CONSUMER PRICE INDEX. WE VE TALKED ABOUT THE UNEMPLOYMENT RATE. WE VE TALKED ABOUT GROSS DOMESTIC PRODUCT AND REAL GROSS DOMESTIC PRODUCT. THAT S WHAT WE VE TALKED ABOUT. LET S TALK ABOUT WHAT POLICY MAKERS LIKE AND WHAT AMERICANS LIKE. REALLY NOT JUST AMERICANS BUT PEOPLE OVERSEAS. WHAT DO PEOPLE LIKE? HERE S WHAT THEY PREFER. THEY LIKE STABLE PRICES. LET ME JUST WRITE THAT SLIGHTLY DIFFERENT. HERE S THE GOAL, PRICE STABILITY. THE GOAL OF POLICY MAKERS AND THE GOAL OF MOST AMERICANS IS WE DON T LIKE INFLATION. WE LIKE SORT OF A STABLE PRICE LEVEL. THAT DOES NOT MEAN THAT EVERY PRICE STAYS THE SAME YEAR AFTER YEAR. IT MEANS THAT THE AVERAGE PRICE STAYS THE SAME YEAR AFTER YEAR. SOME PRICES ARE GOING UP AND SOME PRICES ARE GOING DOWN. THE AVERAGE DOESN T GO ANYWHERE. THAT S THE GOAL.

23 ECO155L19.doc 23 UNEMPLOYMENT RATE, WE LIKE IT TO BE LOW ABOUT 4-5%. THAT S THE NATURAL RATE OF UNEMPLOYMENT. THAT S OUR GOAL. WE LIKE TO HAVE THE UNEMPLOYMENT RATE AT ABOUT THE NATURAL RATE. WE LIKE TO SAY THERE IS FULL EMPLOYMENT. WITH RESPECT TO REAL GROSS DOMESTIC PRODUCT WE LIKE TO HAVE SOME GROWTH ABOUT 2 ½ -3% PER YEAR. I M SAYING NOW THE REAL NOT NOMINAL GROSS DOMESTIC PRODUCT. NOMINAL GROSS DOMESTIC PRODUCT IS WHAT S HAPPENING ON THE REAL SIDE OF THE ECONOMY, PRODUCTION. BUT IT ALSO INCLUDES AN INFLATION IN THERE. I THINK IF WE HAVE PRICE STABILITY, NO INFLATION, AND WE VE GOT THE REAL GDP GROWING AT 2 ½ TO 3% EACH YEAR, NOMINAL GDP WILL GROW BY THE SAME 2 ½ OR 3%. THOSE ARE THE GOALS OF POLICY MAKERS. NOW WHAT WE RE GOING TO DO FOR THE REST OF THE SEMESTER IS WE'RE GOING TO TALK ABOUT POLICY MAKERS MAKE THIS HAPPEN. WHAT CAN THEY DO TO BRING THIS TO PASS? IF YOU REMEMBER WHAT WE TALKED ABOUT BEFORE, LET ME JUST KIND OF PUT THOSE UP AGAIN. WE VE GOT THE HOUSEHOLD SECTOR; WE HAVE THE BUSINESS SECTOR. IF YOU REMEMBER WE HAD BUSINESSES PRODUCING GOODS AND SERVICES. THEN WE HAD HOUSEHOLDS PAYING FOR THOSE GOODS AND SERVICES. YOU COULD THINK OF THIS AS AND BY THE WAY THERE WAS MORE TO THAT MODEL. WHAT YOU CAN THINK OF THIS AS HERE S THE GOODS GOING FROM BUSINESSES TO HOUSEHOLDS. HERE S THE DOLLARS COMING BACK IN

24 ECO155L19.doc 24 RETURN. YOU CAN THINK OF THE DOLLARS AS THE DEMAND SIDE OF THE ECONOMY. YOU CAN THINK OF THE PRODUCTION AS THE SUPPLY SIDE OF THE ECONOMY. SO WHAT WE WANT TO DO IN THE REST OF THE SEMESTER IS WE WANT TO UNDERSTAND THE DEMAND SIDE OF THE ECONOMY, THE SUPPLY SIDE OF THE ECONOMY AND HOW THOSE THINGS INTERACT TO INFLUENCE THE CONSUMER PRICE INDEX AND THE UNEMPLOYMENT RATE AND GDP. ONCE WE UNDERSTAND HOW THE DEMAND AND THE SUPPLY SIDE OF THE ECONOMY, WHAT DETERMINE THE INFLATION AND UNEMPLOYMENT RATE AND GDP, THEN THE NEXT STEP WILL BE HOW DO POLICY MAKERS CONTROL THEIR POLICIES TO INFLUENCE THESE VARIABLES. THAT IS THE NEXT UNIT OF MATERIAL. THAT IS WHERE WE WILL START NEXT TIME. SO LONG.