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Recent Hot Macroeconomic Issues
Sovereign Bond Crisis in EuropeRecession and QE policy in AmericaAmerican Fiscal CliffJapan’s An-Bei EconomicsCyprus Bank CrisisInflation and Soft Landing in China
Major Macroeconomic Concerns
National Income: Low Economic Growth Rate
Employment Opportunity: High Unemployment Rate
Cost of Living: High Inflation RateTrade 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.
Spending
Goods andservicesbought
Revenue
Goodsand servicessold
Labor, land,and capital
Income
= Flow of inputs and outputs
= Flow of dollars
Factors ofproduction
Wages, rent,and profit
FIRMS•Produce and sellgoods and services
•Hire and use factorsof production
•Buy and consumegoods and services
•Own and sell factorsof production
HOUSEHOLDS
•Households sell•Firms buy
MARKETSFOR
FACTORS OF PRODUCTION
•Firms sell•Households buy
MARKETSFOR
GOODS AND SERVICES
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:
R eal G D PN o m in a l G D P
G D P d efla to r2 0 X X2 0 X X
2 0 X X
1 0 0
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.
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 GDP- environmental/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 BasketFind the PricesCompute the Basket’s CostChoose a Base Year and Compute the IndexChoose 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.
In fla tio n R a te in Y ear 2 =C P I in Y ea r 2 - C P I in Y ea r 1
C P I in Y ea r 1 1 0 0
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
S ala ry S a la ryP rice lev e l in 2 0 0 1
P rice lev e l in 1 9 3 12 0 0 1 1 9 3 1
$ 8 0 ,.
$ 9 3 1,
0 0 01 7 7
1 5 2
5 7 9
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
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