The Science of Macroeconomics,2,2 0 1 0 U P D A T E,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,Gross Domestic Product: Expenditure and Income,Two definitions: Total expenditure on domestically-produced final goods and services. Total income earned by domestically-located factors of production.,Expenditure equals income because every dollar spent by a buyer becomes income to the seller.,The Circular Flow,Households,Firms,Value added,Value added: The value of output minus the value of the intermediate goods used to produce that output,NOW YOU TRY: Identifying value-added,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 $6.00. The engineer eats the bread. Compute value added at each stage of production and GDP,Final goods, value added, and GDP,GDP = value of final goods produced = sum of value added at all stages of production. The value of the final goods already includes the value of the intermediate goods, so including intermediate and final goods in GDP would be double-counting.,The expenditure components of GDP,consumption, C investment, I government spending, G net exports, NX An important identity:Y = C + I + G + NX,value of total output,Consumption (C),durable goods last a long time e.g., cars, home appliances nondurable goods last a short time e.g., food, clothing services work done for consumers e.g., dry cleaning, air travel,definition: The value of all goods and services bought by households. Includes:,U.S. consumption, 2009,70.8%,$ 10,001,Investment (I),Spending on goods bought for future use (i.e., capital goods) Includes: Business fixed investment Spending on plant and equipment Residential fixed investment Spending by consumers and landlords on housing units Inventory investment The change in the value of all firms inventories,U.S. Investment, 2009,11.3%,$1,589,Investment vs. Capital,Note: Investment is spending on new capital. Example (assumes no depreciation): 1/1/2012: economy has $500b worth of capital during 2012: investment = $60b 1/1/2013: economy will have $560b worth of capital,Stocks vs. Flows,A flow is a quantity measured per unit of time. E.g., “U.S. investment was $2.5 trillion during 2010.”,A stock is a quantity measured at a point in time. E.g., “The U.S. capital stock was $26 trillion on January 1, 2010.”,Stocks vs. Flows - examples,the govt budget deficit,the govt debt,# of new college graduates this year,# of people with college degrees,a persons annual saving,a persons wealth,flow,stock,NOW YOU TRY: Stock or Flow?,the balance on your credit card statement how much you study economics outside of class the size of your compact disc collection the inflation rate the unemployment rate,Government spending (G),G includes all government spending on goods and services. G excludes transfer payments (e.g., unemployment insurance payments), because they do not represent spending on goods and services.,U.S. Government Spending, 2009,- Federal,20.6%,$2,915,Govt spending,- State & local,Defense,Non-defense,% of GDP,$ billions,U.S. Net Exports, 2009,NOW YOU TRY: An expenditure-output puzzle?,Suppose a firm: produces $10 million worth of final goods only sells $9 million worthDoes this violate the expenditure = output identity?,Why output = expenditure,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.,GDP: An important and versatile concept,We have now seen that GDP measures: total income total output total expenditure the sum of value-added at all stages in the production of final goods,GNP vs. GDP,Gross National Product (GNP): Total income earned by the nations factors of production, regardless of where located Gross Domestic Product (GDP): Total income earned by domestically-located factors of production, regardless of nationalityGNP GDP = factor payments from abroad minus factor payments to abroad Examples of factor payments: wages, profits, rent, interest & dividends on assets,NOW YOU TRY: Discussion Question,In your country, which would you want to be bigger, GDP or GNP? Why?,GNP vs. GDP in select countries, 2009,GNP and GDP in millions of current U.S. dollars,Real vs. nominal GDP,GDP is the value of all final goods and services produced. nominal GDP measures these values using current prices. real GDP measure these values using the prices of a base year.,NOW YOU TRY: Real & Nominal GDP,Compute nominal GDP in each year. Compute real GDP in each year using 2006 as the base year.,