MACROECONOMICS Lecture 01 Oct.

23 2013 Gross domestic product (GDP) the market value of all final goods and services produced in a country during a period of time, typically one year The total market value of all final goods and services produced within the borders of an economy in a given year. GDP is measured using market values, not quantities. o We measure production by taking the value, in dollar terms, of all the goods and services produced.

Final good or service a good or service purchased by a final user Intermediate good or service a good or service that is an input into another good or service, such as a tire on a truck To avoid double counting, we do not include the value of immediate goods or services in calculating GDP GDP includes only the market value of final goods. GDP includes only production that takes place during the indicated time period, only current production.

2011: new build a house $400,000 GDP of $400,000 2012: old sell the house $450,000 no new GDP = 0 Organized way to calculate GDP total production/expenditures into categories Net exports exports minus imports GDP: Y = C (consumption) + I (investment) + G (government purchases) + NX (net exports = X M) Shortcoming of GDP as a Measure of Well-Being: The value of leisure is not included in GDP GDP is not adjusted for pollution or other negative effects of production GDP is not adjusted for changes in crime and other social problems GDP measures the size of the pie but not how the pie is divided up

Practical Matters in GDP Calculation: Production: Apples & Cars 2010 2011 PA 1 2 PC 10 20 QA 3 2 QC 5 4

Nominal GDPs - The value of final goods and services evaluated at current-year prices GDP2010 = PAxQA + PCxQC = 3 + 50 = $53 GDP2011 = PAxQA + PCxQC = 4 + 80 = $84 This doesnt make sense because production went down from 2010 to 2011 due to inflation of prices. How do we calculate the actual GDP? Real GDP The value of final goods and services evaluated at base-year prices If base-year is 2010. Real GDP in 2010 = P2010 x Q2010 = $53 Real GDP in 2011 = P2010 x Q2011 = (1x2) + (10x4) = $42 This GDP shows an accurate representation of the recession in the country.

Year 1 5 cars 10 computers

Prices $5 $1

Nominal GDP in Year 1 = Q1 x P1 = 25 + 10 = $35 Year 2 6 cars 8 computers Prices $6 $2

Nominal GDP in Year 2 = Q2 x P2 = 36 + 16 = $52 Real GDP evaluates Year 2s production at Year 1s prices. If Base Year = Year 1 Real GDP in Year 2 = Q2 x P1 = (6)(5) + (8)(1) = $38 economy did grow, but not as much as we thought based on nominal GDP (this is caused by inflation) Growth Rate = 3/35 = 8.6% Base year of US GDP = 2005 GDP Deflator = a measure of inflation = (Nominal GDP / Real GDP) x 100 Nominal GDP is equal to real GDP in the base year, so the value of the GDP price deflator will always be 100 in the base year. Inflation 2012: nominal = $15.5 trillion real = $13.5 deflator = $116 Deflator in 2012 = 116 Deflator in 2011 = 114 Inflation rate = the percentage increase in the price level from one year to the next Inflation rate 2011-2012 = (GDP DF12 GDP DF11)/GDP DF11 = 2/114 Consumer Price Index = an average of the prices of the goods and services purchased by the typical urban family of four CPI = (Expenditures in the current year / Expenditures in the base year) x 100 Inflation rate = percentage change in CPI To calculate real average hourly earnings for each year, divide nominal average hourly earnings by the CPI and multiply by 100.

Unemployment Labor force = the sum of employed and unemployed workers in the economy Unemployment rate = Percentage of labor force that is unemployed Discouraged workers = People who are available for work but have no looked for a job during the previous four weeks because they believe no jobs are available for them Unemployment rate = (Number of unemployed / Labor force) x 100 Labor force participation rate = Percentage of working-age population in labor force (Labor force / (Working age population)) x 100 Employment-population ratio = (Employment / Working age population) x 100