Introduction to Macroeconomics Spring 2018 Shanghai Tech Micro

Introduction to Macroeconomics Spring 2018 Shanghai. Tech

Micro v Macro • Micro: study of individual behavior, optimization, how markets work • Macro: study of the economy as a whole, long run patterns of growth and short run cyclical movement

GDP: Gross Domestic Product • The market value of all final goods and services produced within a country in a given period of time • Parsing (chopping up) in reverse order • • Period of time Within a country Produced Goods and Services Final All Market value

‘period of time’ = FLOW • Stock versus flow; GDP is a flow

‘period of time’ = FLOW • GDP is a circular flow • GDP can be measured by spending or income

“within a country” • GDP v GNP?

“produced” • Currently produced; must be produced in the given time period • Sell a brand new house. Include in GDP? • Sell your existing house. Include in GDP?

“goods and services” • GDP includes shoes, apples, and cars. These are goods. • GDP includes football games, education, guitar lessons, and haircuts. These are services.

“final” • GDP includes only final, not intermediate goods, in order to avoid double counting

“all” • GDP should include every single good and service produced. This is impossible to do. What goods and services does GDP miss?

“market value” • GDP values goods and services at their market prices. Guesses are made for when market prices are not available.

GDP = C + I + G + NX • C = consumption; goods and services bought by consumers; • I = investment; tools, plant, and equipment bought by firms and unsold output (inventory); highly variable • G = government spending; goods and services bought by government • NX = net exports; exports - imports

GDP = C + I + G + NX Common confusions: • Investment includes buying stocks and bonds • Government spending includes social security and unemployment compensation • GDP or G is the amount of money circulating in the economy

Real v Nominal GDP • Key: Nominal GDP can be misleading because it uses current prices. • We prefer Real GDP when comparing GDP over time because it holds prices constant.

Real v Nominal GDP What if good A = 10 and good B = 3 in 2003? What is nominal GDP in 2003? What is the lesson here?

GDP Deflator • A measure of the price level GDP Deflator in 2002 = 100 GDP Deflator in 2003 = 90/55 = 164 According to the GDP Deflator, prices rose 64%. Inflation is usually measured by the percentage change in the CPI.

GDP = C + I + G + NX Chinese data: http: //data. stats. gov. cn/easyquery. htm? cn=E 0103 US data: http: //www. bea. gov/i. Table. cfm? Req. ID=9&step=1#reqid=9&step=3&isuri=1&9 03=5

Top 10 countries by GDP (Nominal) 2015 (Source: IMF (Outlook Oct 2015))

Real GDP person • Real GDP measures a nation’s income and Real GDP person is a measure of how much each person gets (on average) • Labor productivity is Real GDP per worker

USA Historical Record Business cycles are clearly evident in the graph: the economy does not grow steadily, it booms and busts.

Growth v Development • Economic Growth = % change in Real GDP person • Economic Development is more ambitious. We want growth + longer life expectancy + higher literacy + better quality of life

Is GDP a Good Measure of Economic Well-Being? • • A large GDP helps us to lead good lives. GDP is not a perfect measure of well-being – • • Leisure, quality of the environment, goods and services produced at home. Measurement problems: underground economy It says nothing about the distribution of income

Summary • GDP measures a nation’s income and economic performance • GDP is income and spending • GDP = C + I + G + NX • Real GDP is way better than nominal GDP