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Lecture 2

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ECON 1012
Irene Foster

Macroeconomics: Foster Week 2 January 22, 2013 GDP Accounting Current News • House GDP agrees to lift the debt limit on last Thursday/Friday o This week, congress will vote to raise the debt limit (Wednesday, January 23, 2013) until May o So the government can raise the debt limit to get over the three month period • Tuesday, January 22, 2013 news: o Japanese Yen falls on Japans effort to tackle deflation o New prime minister asked central bank to ease up on monetary policy o Expectations of new steps from bank have already helped to send the Japanese stock prices up o Exporters are benefiting from the 10% drop in Yen o Stocks rose while the Yen dropped o The Dollar fell because of the Yen’s monetary policy Review from last week: When did national accounting begin? • Nobody had any data on the economy before 1934 • Congress called Simon Kuznet’s report in 1934 • Received the Nobel Prize in 1971 for his work • Now, adopted by almost all countries – System of National Accounts (SNA68,SNA93) A precise Definition of GDP • A measure of the market value of all newly produced final goods and services in a country during some period of time • Market value: All goods are measured in the same units (e.g., USD) o GDP2010=$14.53 trillion o Quarter1=$14.28 trillion—we actually produced 14.28/4=$3.76 trillion dollars o Quarter2=$14.47 trillion—we actually produced 14.47/4 o Quarter3=$14.61 trillion o Quarter4=$14.76 trillion o Numbers are presented this way because this is the annualization/prediction for the end of the year o We multiply it by 4 to see what GDP would be if we continue at that rate • Things that don’t have a market value are excluded, e.g., housework you do for yourself • Newly produced: No used items/sales o Count a good only once • Final: A good that is an input to the production of other goods or services such as a bicycle tire that is sold to a bicycle manufacturing company would not be included in GDP to avoid double-counting o Sold to the FINAL consumer of the good • In a country: a mini-cooper, purchased by you, that was made and assembled in the UK, is not part of the US GDP; it is part of the UK’s GDP Macroeconomics: Foster Week 2 January 22, 2013 • Goods produced by foreigners within the US borders are included in US GDP • Period of Time: For example, if GM produced a 2014 Corvette Stingray in December 2012 but the car is not sold until January 2013, then that Corvette will be included in the GDP of the period in which it was produced—2012 o GDP data is reported quarterly and produced annually New information Three Ways to Measure GDP • The spending or expenditure approach o Measures the total amount spent on goods and services made in the United States • The income or factor payments approach o Measures the total income earned by all factors of production that produce goods and services in the US • The production or output or value-added approach o Measures the total value of all goods and services as they are shipped out of the factory • GDP=total spending=income earned=total output produced=Y • US measures GDP in all of these three ways to get accurate accounts The Production or Output or Value-Added approach FIRM COST OF INTERMEDIATE REVENUE VALUE ADDED GOODS NEEDED FOR FROM ONE ($) ONE REAM ($) REAM ($) Lumber Company 0 1 1 Paper Mill 1 1.50 0.50 Office Supplies Mfr 1.50 2.25 0.75 Wholesaler 2.25 3.50 1.25 Retailer 3.50 5 1.50 Total=$5.00 The Income or Factor Payments Approach • The total value added in the economy from the sale of one ream of paper is $5.00. Where does this go? • For example, the $1.50 added by the retailer goes to the pay the owners of the resources need: o Labor: Wages and salaries $.50 o Capital: Interest on loans $0.25 o Land: rent $0.25 o Entrepreneurship: Profit $0.50 =1.50 The Expenditure Approach—most used in this class • GDP (Y) = C+I+G+NX o Consumption (C)  Purchases of final goods and services by individuals Macroeconomics: Foster Week 2 January 22, 2013 • Services • Imputed items—not actually purchased during the year o The crops that farmers themselves consume o Imputed RENTED values of a home—a service that lasts for a long time, the imputed rental value of the home (what value the house could be rented out for) • Durable—refrigerators, roofs • Nondurable goods—clothing  No financial transactions are included—stocks, bonds (transfers) o Investment (I)  Does not mean the purchase of financial assets such as stocks and bonds  Total spending on lasting goods that will be used in the future to produce more goods  This adds to our national stock—national wealth and cap
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