macroeconomics how do we know which countries are economically successful?

MACROECONOMICSHow do we know which countries are

economically successful?

Copyright©2004 South-Western

What would we use to measure which people are most economically successful?

We would look at their INCOMEWe can do the same with an entire country!!We can look at all the income earned in one country in a year

orWe can look at the total value of everything that is produced in a country in one year

Total INCOME = Total PRODUCTIONHow?

It’s similar to people !


What if there were only two people in a country (economy)?

$500 = IncomeGoods and Services = $500

The value of all goods and services produced in this “economy”

= $500

We only look at one side to evaluate the size of this economy.


Total Product = Gross Domestic Product

●In order to measure the entire economy, we must look at MACROECONOMIC Indicators!

Gross Domestic Product (GDP) = The total value of everything produced in an economy in a given time period.

●In order to measure the entire economy, we must look at MACROECONOMIC Indicators!

Gross Domestic Product (GDP) = The total value of everything produced in an economy in a given time period.


Figure 1 The Circular-Flow Diagram

GOV.

GDP = C+I+G+X

IC

G


Circular Flow Diagram including Exports/Imports

Question:Suppose next year’s imports are much greater than exports. What will be the affect on next year’s GDP?Overall Decrease


Gross Domestic Product measures production

●Recent GDP figures (in millions)●2002-10,469●2003-10,971●2004-11,734●2005-12,479●2006-13,194●2007-13,737●2008-14,294●2009-14,219?

●Recent GDP figures (in millions)●2002-10,469●2003-10,971●2004-11,734●2005-12,479●2006-13,194●2007-13,737●2008-14,294●2009-14,219?

●GDP= C+I+G+X●C-Consumption-measures how much in consumption was

produced

●I-Investments-Measures how much businesses spend on their businesses

●G-Government Spending- measures how much the government bought

●X-Net exports-measures how much we sold and bought from abroad

●GDP= C+I+G+X●C-Consumption-measures how much in consumption was

produced

●I-Investments-Measures how much businesses spend on their businesses

●G-Government Spending- measures how much the government bought

●X-Net exports-measures how much we sold and bought from abroad


U.S. GDP By Sector

70%17%

19%

-6%

U.S. GDP

Consumer SpendingInvestmentGovernmentNet Exports

Table 1 GDP and Its Components



What are the rankings?

●World GDP Per Capita rankings●World GDP Rankings

●World GDP Per Capita rankings●World GDP Rankings

https://www.cia.gov/library/publications/the-world-factbook/rankorder/2004rank.html





Calculating Gross Domestic Product

●Y (GDP) = C+I+G+X■C= Consumption (Think consumers buying

stuff)■I = Investment (Think businesses investing in

their companies, like buildings, raw materials, land purchases etc.)

■G= Government (All purchases)■X= NET Exports= Exports - Imports (This

number is negative if we import more than we export)

●Y (GDP) = C+I+G+X■C= Consumption (Think consumers buying

stuff)■I = Investment (Think businesses investing in

their companies, like buildings, raw materials, land purchases etc.)

■G= Government (All purchases)■X= NET Exports= Exports - Imports (This

number is negative if we import more than we export)


Figure out the C, I, G, X, and the total GDP

1. You loan your best friend $20

2. Busy moms buy $16,000 worth of the new book “Feeding Teenagers”

3. You buy a “hot” stereo for $200

4. You pay $60 for a subscription to Teen Bop

5. Your Dad’s shop sells $5000 worth of plate glass for housing construction

6. The football team buys $1000 of chiropractic services.

7. A Japanese firm buys 30 IBM computers for $15k

8. You get your haircut for $15

1. You loan your best friend $20

2. Busy moms buy $16,000 worth of the new book “Feeding Teenagers”

3. You buy a “hot” stereo for $200

4. You pay $60 for a subscription to Teen Bop

5. Your Dad’s shop sells $5000 worth of plate glass for housing construction

6. The football team buys $1000 of chiropractic services.

7. A Japanese firm buys 30 IBM computers for $15k

8. You get your haircut for $15

9. Cover-up cosmetics has an unsold inventory of $30k

10. You buy a rusty thunderbird for $1000

11. Your Grandpa buys 3 shares of IBM for $450

12. You spend seven hours cleaning your room

13. McDonalds buys a new fry cooker for $1500

14. You buy a walkman made by Sony in Japan for $150

15. You pay $150 in income tax

9. Cover-up cosmetics has an unsold inventory of $30k

10. You buy a rusty thunderbird for $1000

11. Your Grandpa buys 3 shares of IBM for $450

12. You spend seven hours cleaning your room

13. McDonalds buys a new fry cooker for $1500

14. You buy a walkman made by Sony in Japan for $150

15. You pay $150 in income tax


How might GDP mislead?

●GDP = the total value (in $) of all products created in a country in a year.

● Is it possible that GDP could increase even IF there was NO increase in the number of goods and services produced in a country in a given year?

●THAT CAN HAPPEN…HOW?

INFLATION!

●GDP = the total value (in $) of all products created in a country in a year.

● Is it possible that GDP could increase even IF there was NO increase in the number of goods and services produced in a country in a given year?

●THAT CAN HAPPEN…HOW?

INFLATION!


Calculating REAL GDP vs. NOMINAL GDP

●In order to get a “real” idea of GDP we need to take out the effects of inflation on prices.

●We “deflate” nominal GDP to get REAL GDP.

● GDP deflator = (Nominal GDP/Base Year GDP) X 100

●In order to get a “real” idea of GDP we need to take out the effects of inflation on prices.

●We “deflate” nominal GDP to get REAL GDP.

● GDP deflator = (Nominal GDP/Base Year GDP) X 100


Calculating Nominal GDP

●Nominal GDP = Quantity * Price (Both Q and P are for the same year)

●Nominal GDP = Quantity * Price (Both Q and P are for the same year)

Table 2 Real and Nominal GDP



Calculating REAL GDP

●Choose a BASE Year■You will use BASE YEAR Prices to calculate GDP

for ANY Year, thus eliminating the affect of price changes!

■Real GDP = Quantity * Base Year Price

●Choose a BASE Year■You will use BASE YEAR Prices to calculate GDP

for ANY Year, thus eliminating the affect of price changes!

■Real GDP = Quantity * Base Year Price


Table 2 Real and Nominal GDP



Calculating GDP Deflator

●GDP Deflator = Nominal ●GDP Deflator = Nominal


Is this a good indicator?

●What about measuring an economy over time? What Problems will result with this format?

●Real vs. Nominal GDP

Nominal Real

●What about measuring an economy over time? What Problems will result with this format?

●Real vs. Nominal GDP

Nominal Real2003 10,971.2 10,320.62004 11,734.3 10,755.72005 12,479.4 11,131.12006 13,194.0 11,319.02007 13,737.0 11,491.02008 14,294.0 11,727.0


GDP Deflator

●Take Nominal GDP and Divide it by Real and multiply by 100.

●That gives us a number that can be used for comparison purposes.

Do Problems and Applications #5, 6 and 7 from page 517 for tomorrow.

●Take Nominal GDP and Divide it by Real and multiply by 100.

●That gives us a number that can be used for comparison purposes.

Do Problems and Applications #5, 6 and 7 from page 517 for tomorrow.


GDP vs GNP

●Gross Domestic Product-produced in a country■Y= C+I+G+ (E-M)

●Gross National Product-produced by a country■GNP= GDP + (Net investment income)■Ie. If America pays more $ in interest to foreign

countries than it receives from U.S. Assets held abroad, then its GNP will be lower than its GDP.

●Gross Domestic Product-produced in a country■Y= C+I+G+ (E-M)

●Gross National Product-produced by a country■GNP= GDP + (Net investment income)■Ie. If America pays more $ in interest to foreign

countries than it receives from U.S. Assets held abroad, then its GNP will be lower than its GDP.

macroeconomics how do we know which countries are economically successful?

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years gdp

gross domestic product

total value

country economy

year total income

c i g xcconsumption

total productionhow

total gdpyou