Class Macroeconomics Notes -9-24-07
COMPONENTS OF GDP GPD (Y) is sum of: o Consumption (C) o Investment (I) o Government Purchases (G) o Net Exports (NX) o Y (income paid out to households) = C + I + G + NX (GDP in terms of expenditures goods and services) Consumption (C): o Is spending by households on goods and services Ex. Buying clothing, food, movie tickets. o Consumer durable last longer than a year Includes everything except a house. New home would NOT be part of durable would be an investment o Consumer non-durable consumed within a year Food, clothing, services Investment (I): o Is purchases of capital equipment and structures Factory, houses, drills, etc. Recessions usually occurs because selling rate begins to fall for nondurable inventory tends to grow higher and higher cut back on production Investments account for (2/3)'s in drop of GDP (usually because of inventory) Government Purchases (G): o Includes spending on goods and services by government (e.g roads, police, etc.) o Does not include transfer payments; these not made for currently produced goods or services Does not include welfare Unemployment compensation o When Government Purchases > Taxes Domestic Government Budget deficit o When Government Purchases < Taxes Domestic Government Budget Surplus Net Exports (NX): o Exports minus imports o When exports is less than imports trade deficit o When imports is less than exports trade surplus GDP Components of Measurement: Investment 13% Consumption 69% Government spending 19%
Net Exports (-) 5% [Trade Deficit] WHICH COMPONENT OF GDP? Services of Military Government o Purchases GM produces a car and sells it o Is a durable good, consumption category New tool and die equipment o Investment Newly produced GM car NOT SOLD o Investment (inventory) Someone buys a New House o Investment Unemployment benefit o NOT COUNTED Transfer payment Coke sold in China by Coca Cola o GNP, not counted towards GDP Real Versus Nominal GDP Nominal GDP o Measures output in $ with buying power of year output produced. o Sometimes referred to as the "Current Dollar" GDP (not adjusted for inflation) o This will mask recessions (you have to adjust for inflation) Real GDP o Measures output in dollars with buying power of base year. o Sometimes referred to "Constant Dollar" GDP Price Deflator o Price Index that converts nominal to real GDP IMPACT OF INFLATION ON DOLLAR'S BUYING POWER Year 1 Year 2 BASE YEAR Dollar Buys Twice -- Stays the same -As much as $1 in Base Year -- Stays the same -REAL VS. NOMINAL INCOME: You can just pick the base year for comparison Year 2 (GDP = $8) Each $1 buys 100 units $8 * (100 units/$1) = 800 Year 3 Dollar Buys Half As $1 in Base Year
Year 3 (GDP=$8 in nominal or current $) o Each $1 is buying only 50 units of output o $1 is worth half as much o $8 * (50 units/$1) = 400 Year 3 (GDP=$4 in real or base year $) o Each $1 is buying 100 units of output o $1 is still the same o $4 * (100 units/$) = 400
Year 1 Year 2 Year 3
50 (Price Index) 100 200
EQUATION (KEY FORMULA): Real GDP = (Nominal GDP) / (GDP deflator) * 100 No matter what year it is, the base year GDP deflator factor is always 100 * Real GDP = ($8 / 200) * 100 = $4