Macroeconomics

1. Macroeconomics James B. Wilcox RESOURCES PROVIDED BY: THE UNIVERSITY OF SOUTHERN MISSISSIPPI CENTER FOR ECONOMIC AND ENTREPRENEURSHIP EDUCATION, MISSISSIPPI STATE UNIVERSITY, & VIRTUAL ECONOMICS

2. Economics… is the study of how individuals and society choose, with or without the use of money, to employ scarce productive resources to produce various commodities over time and distribute them for consumption, now and in the future, among various people and groups in a society.

3. Introduction to Macroeconomics

4. Macroeconomics • Macro is the study of: • The structure and performance of a national economy • 4 important variables: • 1. GDP • Gross Domestic Product • 2. P • the price level • 3. UNE • national unemployment rate • 4. r • interest rate

5. U.S. Macro Economy • Very complicated • 95 million households • 20 million firms • 80 thousand governments

6. Macro Terms • Stock: • A quantity at a point in time • Flow: • A quantity during a period of time

7. Macro Terms • GDP, (Y) Gross Domestic Product: • Value of total production of all final goods and services during a period of time • Flow variable • Potential GDP (YN): • The economy’s maximum sustainable output when resources are allocated efficiently • not over-utilized nor under-utilized

8. Macro Terms • Unemployment types • Frictional – voluntary unemployment that arises because of the time needed to match job seekers with job openings • Structural – unemployment caused by massive mismatch of skills or geographic location • Seasonal – unemployment caused by seasonal changes in labor supply and demand during the year • Cyclical – unemployment that is incurred by business cycles, or more specifically by economic recessions

9. GDPFinal Outputs • GDP consists of only: • Final goods and services • GDP does not include: • 1. Intermediate outputs in order to avoid over-counting • Intermediate outputs are used as inputs to make final outputs e.g. capital goods • 2. Used goods • they were counted the first time they were purchased • 3. Financial assets • e.g. stocks, bonds

10. Which of the following is an example of an intermediate good? • A pair of jeans sold by a clothing retailer • Cloth sold to a suit manufacturer • A share of Wal-Mart stock • A used Ford Mustang sold from one neighbor to another

11. Which of the following is an example of an intermediate good? • A pair of jeans sold by a clothing retailer • Cloth sold to a suit manufacturer • A share of Wal-Mart stock • A used Ford Mustang sold from one neighbor to another

12. Limitations of Real GDP • Real GDP is used to: • Estimate the speed at which the economy is moving • Does not count: • Non-market activities • Things that are not priced • E.g., Household production, underground economy

13. If individuals were paid for their household production, GDP would • increase • decrease • Not change • Not enough information

14. If individuals were paid for their household production, GDP would • increase • decrease • Not change • Not enough information

15. Limitations of Real GDP • GDP is not a perfect measure of the welfare of a nation: • It does not include measures of: • Quality of life • Leisure time • Conditions of environment

16. Limitations of Real GDP • Robert Kennedy 1968 Presidential bid: • “[GDP] does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our courage, nor our wisdom, nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile, and it can tell us everything about America except why we are proud that we are Americans.”

17. Limitations of Real GDP • GDP doesn’t measure many things, but nations with greater GDP can afford…… • better health care for their children • better educational system • to teach more people to read and enjoy poetry • Intelligence, integrity, courage, wisdom, devotion to country are easier to foster when people are less concerned about affording basic necessities. • We conclude that • GDP is a good measure of welfare for most, but not all, purposes

18. GDP and Standard of Living • International data leave no doubt that a nation’s GDP is closely associated with its citizens’ standard of living • Use per capita GDP when comparing across nations • Per capita GDP = GDP/population

20. GDP = AE = AI • Aggregate Expenditures (AE): • The total amount that buyers pay for the final goods and services produced • Everything a firm receives from the sale of its output is paid out as income to the resource owner (AI): • Wages go to labor owners • Rent goes to land owners • Interest goes to capital owners • Profit goes to owners of entrepreneurial ability

21. GDP = AE = AI • The buyers of GDP • pay an amount equal to aggregate expenditures (AE) • The sellers of GDP • receive an amount equal to aggregate income (AI) • Therefore, • GDP = AE = AI • For an economy as a whole • Income must equal expenditure • For every transaction there is a buyer and a seller

22. Calculating Real GDP • 3 ways to calculate GDP: • 1. Expenditure approach • 2. Factor Income approach • 3. Value Added approach • We will use the expenditure approach • GDP = C + I + G + NX • C, personal consumption expenditure • I, gross private investment expenditure • G, government expenditure • NX, net export expenditure

23. Consumption Expenditure, C • Consumption, C • Spending by households on new goods and services, with the exception of new housing • e.g. Purchases of food, clothing, services, autos, other durable goods like furniture

24. Gross Investment Expenditure, I • Investment, I • Spending on capital equipment, inventories, and structures including household purchases of new housing • Nonresidential investment • E.g. machinery, equipment, factories, warehouses, offices purchased by firms • Residential investment • purchases of newly built homes • Inventory change • firms’ accumulation of their output

25. Which of the following is NOT included in the investment category under the expenditure approach to GDP accounting? • Newly constructed residential housing • Factory buildings • Stocks and bonds • Additions to inventory • All of the above are included in investment

26. Which of the following is NOT included in the investment category under the expenditure approach to GDP accounting? • Newly constructed residential housing • Factory buildings • Stocks and bonds • Additions to inventory • All of the above are included in investment

27. Residential construction is generally included in which category of GDP? • consumption • investment • Government expenditures • Net exports

28. Residential construction is generally included in which category of GDP? • consumption • investment • Government expenditures • Net exports

29. Government Expenditure, G • Government, G • Spending on goods and services by local, state, and federal governments • E.g., salaries, computers, military hardware, etc. • Does NOT include transfer payments like social security, welfare, etc.

30. Government purchases include all of the following except: • Welfare payments • Salaries of senators • Fighter jets purchased by the government • The military payroll

31. Government purchases include all of the following except: • Welfare payments • Salaries of senators • Fighter jets purchased by the government • The military payroll

32. Net Export Expenditure, NX • Net Exports, NX • Spending by foreigners on domestically produced goods (exports) minus spending by domestic residents on foreign goods (imports) • Net Exports (NX)= Exports (X)- Imports (M) • If M > X => • NX are negative, • I.e. trade deficit • Americans spent more on foreign goods and services than foreigners spent on American goods and services

33. Net Export Expenditure, NX • Purchases of foreign goods and services are • included in C, I, G • E.g. American spending on a Volvo (Swedish car) is included in C • We minus imports because • we are trying to get a measure of domestic activity

34. Net exports are defined as • Exports plus imports • Exports minus imports • Imports minus exports • Exports plus imports minus tariffs

35. Net exports are defined as • Exports plus imports • Exports minus imports • Imports minus exports • Exports plus imports minus tariffs

36. Consumption is the largest single component of GDP. In recent years it represents approximately _____ % of GDP. • 55 • 60 • 65 • 70 • 75

37. Consumption is the largest single component of GDP. In recent years it represents approximately _____ % of GDP. • 55 • 60 • 65 • 70 • 75

38. GDP Components

39. GDP Estimates • Estimates are constantly • being revised • Advance estimates: • released 15 days after the quarter ends and are based on only the first month of the quarter • Preliminary estimates: • first revision, 45 days after the end of the quarter • Final estimates: • second revision, 75 days after the end of the quarter

40. GDP Estimates • Annual estimates: • numbers are then revised once a year for two years • Benchmark estimates: • revisions made every 5 years

41. GDP Estimates • The media focuses on: • Advance estimates • Range of revisions can result in changes • ranging from –2.5 % points to +3.5% points from advance estimates until benchmark estimates

42. GDP Estimates • If advance estimates show a 3% annualized growth rate in real GDP, find the range of actual real GDP once all revisions are made: • Lower bound: • 3% - 2.5% = .5% actual annualized growth rate • Upper bound: • 3% + 3.5% = 6.5% actual annualized growth rate • Serious implications for • policy makers

43. Saving, Investment, and Financial Intermediaries

44. Learning Objective 21.2 MakingtheConnection Ebenezer Scrooge: Accidental Promoter of Economic Growth? Who was better for economic growth: Scrooge the saver or Scrooge the spender?

45. Who was better for the economy? • Scrooge the saver • Scrooge the spender

46. Who was better for the economy? • Scrooge the saver best for long run economic growth • Scrooge the spender best if we are in a recession

47. “Saving” When a person earns more than he spends • Individuals can deposit the unspent income into a bank, or buy a bond or some stock Individuals often refer to this activity as “investing” • However, macroeconomists call this “saving” U.S. vs Japanese savings rates

48. “Investment” Investment • Purchase of new capital • Equipment or buildings Examples of investment • An individual who borrows to finance building a new house • A firm sells some stock to build a new factory

49. S = I For the macroeconomy as a whole • Saving (S) must equal investment (I) Recall that GDP equals • Y = C + I + G + NX Assume the economy is closed so that NX = 0 • Y = C + I + G • Each unit of output sold in a closed economy is consumed, invested, or bought by the government

50. S = I To emphasize the link between saving and investment, • subtract C and G from both sides You get, • Y – C - G = I Y – C – G is • the total income in the economy that remains after paying for consumption and government purchases • i.e., national saving, S Which leaves, • S = I