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Macroeconomics

Macroeconomics. GDP, Inflation, and Unemployment. Macroeconomics addresses questions like …. Why is the average income high in some countries while it is low in others? Why do prices rise rapidly in some periods of time while they are stable in others?

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Macroeconomics

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  1. Macroeconomics GDP, Inflation, and Unemployment

  2. Macroeconomics addresses questions like … • Why is the average income high in some countries while it is low in others? • Why do prices rise rapidly in some periods of time while they are stable in others? • Why do production and employment expand in some years and contract in others? • What, if anything, can the government do to promote rapid growth in incomes, low inflation, and stable employment?

  3. GDP

  4. GDP • measures total income of a nation • income = expenditure • most closely watched econ stat • “the market value of all final goods and services produced within a country in a given period of time”

  5. Breaking down the definition … • “the market value” = market prices • “of all” = all items produced in the economy and sold legally • no illegal goods (drugs) • no items that never enter market (home-grown veggies) • “final” = no intermediate goods • Yes: Hallmark card • No: paper sold to Hallmark to make card • “goods and services” = cars + haircuts

  6. Breaking down the definition … • “produced” = current production • Yes: new car • No: used car • “within a country” • Canadian citizen works in US  US GDP • US citizen has factory in South Africa  SA GDP • “in a given period of time” • quarter (3 mos.) or 1 year • seasonal adjustment for quarters

  7. The Equation Y = C + I + G + NX Y = GDP C = consumption I = investment G = government purchases NX = net exports (exports – imports)

  8. U.S. GDP in 1998

  9. Real vs. Nominal GDP • real GDP = the production of goods and services at constant prices • est. base year for price • reflects in Δ in amts. produced • better measure / used most often • nominal GDP = the production of goods and services at current prices • reflects in Δ in amts. produced and Δ in price

  10. Real vs. Nominal GDP Example

  11. Is GDP a good measure of economic well-being? “[GDP] does not allow for the health of our children, the quality of their education, or the joy of their play. It odes 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.” - Senator Robert Kennedy, 1968

  12. Is GDP a good measure of economic well-being?

  13. Is GDP a good measure of economic well-being?

  14. Is GDP a good measure of economic well-being? What GDP leaves out: • leisure • value of goods/services produced at home • volunteer work • quality of environment • income distribution

  15. More Terms • GDP (purchasing power parity) • value of all goods/services produced in the country valued at U.S. prices • GDP (official exchange rate) • value of all goods/services, with price calculated in US$ according to official exchange rate • GDP per capita • average GDP per person

  16. GDP vs. GNP • Gross National Product (GNP) • includes income our citizens earn abroad and excludes income foreigners earn here

  17. Inflation

  18. Inflation • increase in the overall level of prices in the economy

  19. Post-WWI Germany had hyperinflation: YearCost of Bread 1918 ½ mark 1922 160 marks 1923 2 bil. marks!!!

  20. Unemployment

  21. Unemployment • 3 categories: • employed • unemployed • not in the labor force • labor force= # employed + # unemployed • unemployment rate = # unemployed labor force x 100

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