14.02_lecture_2

14.02_lecture_2 - TOPIC TOPIC 1 Introduction to Macro Data...

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TOPIC 1 Introduction to Macro Data
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Goals and Outline of Topic 1 1. Gross Domestic Product (GDP) What is Gross Domestic Product and how we measure it? Why is this measure important? What are the definitions of the major expenditure components? What are the trends in these components over time? flation 2. Inflation What is the difference between ‘Real’ and ‘Nominal’ variables? How is inflation measured? 3. Interest Rate How is inflation measured? Why do we care about Inflation? 4. Unemployment How is Unemployment measured? Why do we care about Unemployment? 2
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PART I: GDP
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Gross Domestic Product (GDP) GDP is a measure of output! Why Do We Care? Because output is highly correlated (at certain times) with things we care about (standard of living, wages, unemployment, inflation, budget and trade deficits, value of currency, etc…) Formal Definition: GDP is the Market Value of all Final Goods and Services Newly Produced on Domestic Soil During a Given Time Period (different than GNP) 4
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Three ways of measuring GDP Production Method : Measure the Value Added summed across all rms (value added = sale price less cost of raw firms (value added sale price less cost of raw materials) come Method abor Income (wages/salary) + Income Method : Labor Income (wages/salary) + Capital Income (rent, interest, dividends, profits)+ Government Income (taxes) Expenditure Method : Spending by consumers (C) + Spending by businesses (I) + Spending by government (G) + Net Spending by foreign sector (NX) Fundamental identity of national income account : 5 total production = total income = total expenditure
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A simple example of how GDP is measured What is the total value (in dollars) of the economic activity generated by these 2 firms? Production Method (value added: sales – intermediate good): 35K + (40K– 25K) = 50K come Method (Wages + Profits + Taxes) = 15K + 10K + 15K + 3K + 5K + 2K = 50K 6 Income Method (Wages + Profits + Taxes) 15K + 10K + 15K + 3K + 5K + 2K 50K Expenditure approach (expenditure by final users): 10K + 40K = 50K
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“Production” Equals “Expenditure” GDP (for us Y) is a measure of Market Production! Market value = how much you have to spend to buy What is produced in the market has to show up as being purchased or held by some economic agent; Who are the economic agents we will consider on the expenditure side? Consumers (refer to expenditure of consumers as “consumption”) – Businesses (refer to expenditure of firms as “investment”) – Governments (refer to expenditures of governments as “government spending”) – Foreign Sector (refer to expenditures of foreign sector as “net exports”) For us, we will predominantly spend our time working with the Expenditure Approach : 7 ******* Y = C + I + G + NX *******
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Back to a Simple Example •I produce oranges and I can potentially : pg p y – sell them to some domestic customer ( Consumption ) – sell them to some business ( Investment ) – keep them in my stock room as inventory ( Investment ) – sell them to the city of Boston for their shelters ( Government spending ) y( – sell them to some foreign customer ( Net Export ) 8
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14.02_lecture_2 - TOPIC TOPIC 1 Introduction to Macro Data...

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