Ch 06 tracking the u.s. economy macro econ4

Chapter 6 ECON4 William A. McEachern

1

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a

password-protected website for classroom use.

TrackingtheU.S. Economy

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The Product of a Nation• 17th and 18th century

• Mercantilism– Economic prosperity: stock of precious metals

• 1758• Circular flow of output and income

• National income accounting system

2


The Product of a Nation• GDP

– Market Value– All final goods and services– Produced during one year– By resources located in U.S.

• One person’s spending is another person’s income

3


National Income Accounts• 2 approaches:

– Expenditure Approach• Spending on final goods and services

– Income Approach• One person’s spending is another person’s

income

4


National Income Accounts– Expenditure Approach

• Spending on final goods and services– Produced in the nation– Within one year

– Income Approach• Earnings by those who produce all output

– On the nation– During the year

5


National Income Accounts• Final goods and services

– Sold to the final user

• Intermediate goods and services– Purchased by firms– For further processing or for resale

6


GDP Expenditure Approach• Consumption, C, 70% of GDP

– Household purchases of final goods and services• Except for new residences

– that’s investment instead

– Personal consumption expenditures– Households

• Services, nondurable goods, durable goods

7


GDP Expenditure Approach• Investment, I

– Gross private domestic investment– New capital goods

• Physical capital• New residential construction

– Net additional to inventories– 16% of GDP

8


GDP Expenditure Approach• Physical capital

– Manufactured items used to produce goods and services• New plants, and new equipment

• Residential construction– Building new homes or dwelling places

• Inventories– Producers’ stocks of finished and in-

process goods

9


GDP Expenditure Approach• Government purchases, G

– Spending for goods and services• By all levels of government

– Government outlays minus transfer payments

– 19% of GDP

10


GDP Expenditure Approach• Net exports, X-M

– Exports (X) minus imports (M)• Physical items• Invisible (intangibles)

– If negative:• Imports > exports• Trade deficit

• 5% of GDP for lasts decade• C+I+G+(X-M)=Aggregate expenditure=GDP

11


U.S. Spending components as % of GDP since 1959

12


GDP Income Approach

13

• Aggregate income– All earnings of resources suppliers in an

economy– During a given period, usually one year

• Wages• Interest• Rent• profit

• Aggregate expenditures = GDP = Aggregate Income


GDP Income Approach

14

• Value added at each stage of production– Selling price of a product

• Minus the cost of intermediate goods purchased from other firms

– Income earned


Computing Value Added for a New Desk

15


Circular Flow

16

• Circular Flow– Of income and spending in the economy

• Assumptions– Capital – doesn’t wear out– Firms – pay out all profits


Circular Flow

17


Circular Flow

18

• Income flow– Income arising form production– GDP = Aggregate income– Net taxes, NT = Taxes – Transfer

payments– Disposable income, DI = GDP - NT

• GDP = DI + NT


Circular Flow

19

• Disposable Income (DI)– Income households have available to

spend or to save– After paying taxes and receiving transfer

payments

• Net Taxes (NT)– Taxes minus transfer payments


Circular Flow

20

• Expenditure flow– DI = C + S

• Consumption, C• Savings, S, to financial markets

– Investments, I (borrowed)• Firms – spent on capital• Households – spent on residential

construction– Government spending, G– Net Exports = X - M


Circular Flow

21

• Remember:• C + I + G + (X – M) = Aggregate Expenditures = GDP

– Financial markets• Banks and other financial institutions• Facilitate the flow of funds from savers to

borrowers


Leakages = Injections

22

• C + I + G + (X – M) = DI + NT• C + I + G + (X – M) = C + S + NT• I + G + X = S + NT + M• Injections

–I, G. X• Leakages• S, NT, M


Leakages = Injections

23

• Injection– Any spending other than by households– Any income other than from resources

earnings• Investment, government purchases, exports,

and transfer payments• Leakage

– Any diversion of income form the domestic spending stream• Savings, taxes, and imports


Limitations

24

• Some production – not included in GDP– Do-it-yourself production– Underground economy

Underground economy• Illegal• People involved want to evade taxes• 10% of GDP• About $1.6 trillion


Limitations

25

• Leisure, quality, and variety– More leisure– Better quality– Greater variety

• Net domestic product– GDP minus depreciation

• Net investment = I - depreciation


Limitations

26

• Depreciation– Value of capital stock used to produce GDP

or that becomes obsolete during the year

• GDP – doesn’t reflect all costs– Negative externalities

• Air pollution, water pollution– Depletion of natural resources

• Soil depletion, loss of other natural resources


Accounting for Price Changes• Nominal GDP

– GDP based on prices prevailing at the time of production

• Price index– Average price of products– In base year = 100– (Price in current year / Price in base) * 100

27


Accounting for Price Changes• Changes in a price index over time

– Show changes in the economy’s average price level

• Consumer price index, CPI– Measure of inflation– Based on the cost of a fixed market

basket of goods and services

28


Accounting for Price Changes

29



30

• Consumer price index, CPI– Market basket

• (Cost of basket in current year / Cost in base year) * 100

• Overstates inflation, 1% per year– Quality bias– Substitution– Discount stores– Widely used products



31



32

• GDP price index– Comprehensive inflation measure

• Of all goods and services included in GDP

(Nominal GDP / Real GDP) * 100

Before 1995Fixed-weight system: base year 1987

Chain-weighted system: base year 2009



33

Economy & Finance

Ch 06 tracking the u.s. economy macro econ4