Economics GDP 2011 - Lecture 3.pptx

7/28/2019 Economics GDP 2011 - Lecture 3.pptx

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MEASURING THE ECONOMY- GDP

ASSESSING THE ECONOMY- STATISTICS

BUSINESS CYCLES

DEFICITS/SURPLUSES AND DEBT

What can and should the government do?Fiscal and Monetary Policy


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GROSS DOMESTIC PRODUCT

MEASUREMENT OF THE TOTAL OUTPUTOF THE ECONOMY IN A GIVEN YEAR

CURRENT VALUE approx $13 Trillion


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Formula

CONSUMPUTION + INVESTMENT +GOVERNMENT SPENDING +(EXPORTS-IMPORTS)


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CONSUMPTION

65-70% OF GDP

RECORDED (ON THE BOOKS) SALE

OF ALL FINAL GOODS AND SERVICES

DOESNT INCLUDE ILLEGAL

TRANSACTIONS

RESALE OF GOODS

NO VALUE JUDGMENT


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INVESTMENT

10-15%

BUSINESS INVESTMENT

NOT STOCK!!!! NEW PLANTS, MACHINERY,

ITEMS USED TO PRODUCE A GOOD ORSERVICE

INVENTORY IS INCLUDED


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GOVERNMENT SPENDING

10-15 %

ALL GOVERNMENT SPENDING, BUTNOT TRANSFER PAYMENTS

FEDERAL (WASHINGTON D.C)

STATE (HARTFORD)

LOCAL (DARIEN)

GOOD TIMES GOVERNMENT SPENDINGLOWER THAN IN BAD TIMES


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EXPORTS & IMPORTS

APPROX 5%

GOODS AND SERVICE SOLD ABROAD(EXPORT)

GOODS AND SERVICE FROM ABROADPURCHASED IN THE US.


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Alternative way to measure GDP

Income approach

All money earned in a given year

Profits

Income

Dividends

Rental income

Expenditure GDP (C+I+G +(X-M))=IncomeGDP (see above)


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REAL GDP

GDP ADJUSTED TO REFLECTINFLATION OR DEFLATION

TO COMPARE APPLES TO APPLES

ALSO CALLED CONSTANT DOLLAR

GDP


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NOMINAL GDP

GDP IN CURRENT DOLLARS- NOTADJUSTED FOR PRICE INDEX (LEVEL)CHANGES


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PRICE INDEX

The Current Dollar (Nominal GDP) is adjustedby the Price Index. The Price Index isdetermined by the extent that inflation ordeflation has effected the value of a Dollar ($).

A year not too far off-- selected to act as thebase year.

Without any change in the value of the Dollar thePrice Index is 1.00

A 10% increase in prices would result in a Price Indexof 1.10 A 10% decrease in prices would result in a Price

index of .90


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Adjusting- The final word

The base year GDP is

BASE YEAR GDP divided by 1.00

Real (constant dollar GDP)= Nominal(current dollar GDP)

Subsequent Year GDP is Nominal GDP

divided by the New Price IndexGDPYR2/price index yr2

DOES GDP A GOOD


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DOES GDP A GOODMEASUREMENT FOR

EVALUATING THE ECONOMY? CREATED DURING THE DEPRESSION=

A period with 40% decrease in GDP Totals recorded output

What transactions are not recorded?

How much would they affect GDP

What should be recorded?

How much would it affect GDP


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IS GDP A MEASURE OFQUALITY OF LIFE?

GDP IS OFTEN USED AS A MEANS OFMEASURING ONE COUNTRIESOUTPUT OR WELL-BEING TO

ANOTHER


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MEASURING THE ECONOMY

Labor Department and CommerceDepartments

Bureau of Economic Statistics

GDP- Real GDP of 3-4.5% ->Good

Indicators

LeadingCoincident

Lagging


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Leading

Wheres the economy headed?

How to tell?

Construction permits


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Coincident

What statitistics can help us understandwhat the economy is doing at thismoment?

Housing Starts

Consumer sentiment


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Lagging

These #s should tell us how bad theeconomy was

Unemployment

Inflation


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Business Cycles Expansion- Peak-

Positive aspectGROWTH-Bigger pie toshare, possible Budget Surplus!

NegativeRisk of inflation

Recession- Trough Positive?-Not many, causes businesses to

streamline->become more efficient Low interest rates

Negative->loads->Unemployment, lowerincomes, social ills- BIG DEFICITS

As per R. Reagan- the Difference btw Recession and Depression?

If my neighbor loses his/her job->Recession

If I lose my job->Depression


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Budget surplus/deficit

Applies to Government Spending andRevenue

Revenue-

National level- Primarily income tax

Good times, revenue up, bad times sinks Progressive Tax magnifies good and bad times

Last yearas % of economy lowest on record-14.8% of economy


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Spending

Government purchases and expenditures

Expansion-go down? Maybe?

Recession- sky rocketSSSSS

COUNTERCYCLICAL POLICY-

Keynesian economics- jump start the economy through

government spending

Stimulus etc

AUTOMATIC STABILIZERS---UNEMPLOYMENTINSURANCE, WELFARE, FOOD STAMPS

Last year Government expenditures 25% of economy

60 year record!


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Deficits/Debt and Surplus

-Calculate Government Spending lessGovernment Revenue

If PositiveSurplus (rare), some saybad???

If Negative- Deficit (common) some saygood, unless unwieldly or if it crowds out

investment

Debtif you regularly run deficits youllcreate Debt (debt is accumulated deficits


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US Deficit/Debt 2009

Government expenditures HUGE

Government revenue- Historically incrediblylow!

ResultHUGE DEFICITs -10%+ OF ECONOMY-1.5 trillion dollars!!!

Both parties contribute to DeficitDemsspending side, Reps-revenue side

Current Debt- over $10 Trillionis thatbig? Deficits since 1960s except underCarter and Clinton


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What should government do?

Libertarians-NADA- Laissez-Fairehave faithitll all work out, dont screw up the machine

Everyone else---something!!!

FISCAL POLICY- TAX AND SPEND-

MONETARY POLICY- MONEY SUPPLY

FISCAL POLICY


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FISCAL POLICY Executive Branch and Legislative Branch

President Proposes- Congress passes billscreate laws

Tax and Spend- incentive---pass bills that reduce taxes and

spend more! Executive Branch

Office Management Budget-(OMB)

Council of Economic Advisors

Treasury, Commerce, Labor et. Al.

Congress

Congressional Budget OfficeCBO

House

Ways and Means Committee, Budget et. Al

Senate

Finance, Commerce et. Al

M t P li


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Monetary Policy Money, Money, and Mo Money!!!

Whos in Charge? THE FEDERAL RESERVE CREATED 1913- STABILIZE THE GROWTH OF THE MONEY

SUPPLY, OVERSEE AND REGULATE THE BANKINGINDUSTRY

Fed Reserve Chairman- appointed by President- 4 year term-TODAY BEN BERNANKE

A good Federal Reserve- Is INDEPENDENT OF THEPOLITICAL PROCESS!

Regulating the Thermostat Too hot-uh oh! Inflation?--slow down the economyincrease

interest rates

Too cold-uh oh! Unemployment?----heat up the economy-> lowerinterest rates

I fl ti /D fl ti


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Inflation/Deflation

Inflation->value of a $ declines, takes

more $$$ to buy the same set ofgoods/services

Deflation->value $ increases

Inflation helps people who borrow at fixedrates, hurts people who lend and peopleon a fixed income (deflation is opposite)

US inflation-current 2-3%, post WW2 highwas appr. 12% in the late 1970s

Hyperinflation- 100s of % increase


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Measuring Inflation/Deflation

GDP -> PRICE INDEX

Consumer inflation- CPIbasket of goods

Producer Price Inflation- PPI (cost ofresources for Producers)

All incorporate a base year as a unit ofmeasurement.

Problems lie with the basket of goodsimprovements-and bells and whistles oftenarent fully included.


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Employment/Unemployment

Labor Force ->population employed oractively looking for work (18-65)

Labor Participation Rate-> Labor Forcedivided by Total # of people 18-65

Unemployed- actively looking for work

Problems in measurement,underemployment, part-time employment,underground economy, those who gave uplooking


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Types of Unemployment

Structural- Changes in what societyproduces, how it produces it, where itproduces.

EG, auto worker unemployed in Mi. butposition for high tech Google unfilled in Cal.

Cyclical- Consistent with the businesscycle- good times low-bad times high

Frictional- EG Those who left their jobsvoluntarily but dont yet have another job

You can always count on rough 3 to 4%

unemployment

U l t R t t Al


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Unemployment Rate et. Al. Cyclical Unemployment tied to Phillips

Curve Inflation and Unemploymentinversely related.

Current Unemployment Rate 9%, peak

post War- early 1980s 10%. Depression?-25%

Problem today- Long Term Unemployed

social ill Stagflationlate 70s high inflation, high

unemployment and slow growth (pushedout Phillips Curve


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Other

GDP must grow by 2.5% to keepunemployment from rising

Entitlement programs will be a big problemin 10+ years maybe

Slow economy will exacerbate deficit/debtproblemsKeynes might sayso what

Laffer Curve low taxes-> more govtrevenue not true at current tax levels,though taxes do cause people to changetheir behavior and does increase

ndergro nd econom

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Economics GDP 2011 - Lecture 3.pptx