Transcript Economics 9/24/14 http://mrmilewski.com /a/csdm.k12.mi.us

Economics 9/29/14
http://mrmilewski.com
• OBJECTIVE: Measurement of Economic Performance
AP Macro-II.A
• Language objective: SWBAT define essential vocabulary on
measurement of economic performance in regards to national
income accounts. In addition, swbat write notes on performance
and read and write answers to questions and problems regarding
the objective.
• I. Journal#15
-Do now: What can happen to the economy, in the
short run, if demand drops in a market where they
have “sticky prices”?
• II. Homework
-Questions #1-6 and Problems #1-3 on page 502-503.
National Income Accounting
• It measures the economy’s overall
performance and enables economists
to :
• Assess the health of the economy by
comparing levels of production at
regular intervals.
• Track the long run course of the
economy to see if it has grown, been
steady or declined.
• Formulate policies that will help
improve the economy’s health.
Gross Domestic Product
• The annual total output
of goods and services or
its aggregate output.
• This aggregate output is
measured as the dollar
value of all goods and
services produced
within the borders of a
country.
Question
• If a Toyota factory in Ohio is
producing and selling cars,
should these cars be counted in
the aggregate GDP for Japan, or
should they be counted in the
aggregate GDP for the United
States?
• Since they are made within the
borders of the U.S., they would
count as aggregate GDP for the
U.S.
Aggregate GDP is a Monetary
Measure
• To measure aggregate
GDP, we measure it in a
monetary measure. This
means that we calculate
GDP in dollars.
• A price tag has to be
attached to products to
indicate how society
evaluates their relative
worth.
Example
• Without
• If in year 1, the price of sofas is
evaluating in
$500 and the price of computers is
dollars, we have
$2000 and 3 sofas and 2
no way of
computers are produced, what is
comparing the
the value?
vast number of
• Then in year 2, the prices remain
goods and
the same but production is 2 sofas
services produced
and 3 computers, what is the
in different years.
value?
• Year 1 would be $5,500
• Year 2 would be $7,000
Avoiding Multiple Counting
• To measure aggregate GDP
accurately, all goods and
services must be counted
once, and only once.
• Because most products go
through a series of
production levels before
they reach the market,
GDP includes final goods
and not intermediate
goods.
Intermediate Goods
Goods that are produced that are
purchased for resale or further
processing.
Final Goods
Products that are purchased by their
end users.
Example of Multiple Counting
What does GDP Exclude
• The aggregate GDP excludes nonproduction
transactions that have nothing to do with the
generation of final goods. These include:
– Financial Transactions- Social Security, welfare and
veterans’ payments.
– Private Transfer Payments- Cash gifts from parents to
children.
– Stock Market Transactions- The buying and selling of
stocks and bonds except for commissions to brokers.
– Secondhand Sales- The sale of a used car for example.
Homework Tonight
• Questions #1-6 and
Problems #1-3 on page
502-503.
Two Ways of Looking at GDP:
Spending and Income
• Expenditure Approach- This looks
at the aggregate GDP through the
sum of all money spent in buying
goods and services.
• Income Approach- This looks at
the aggregate GDP in terms of
income derived or created from
producing goods and services.
The Expenditure Approach
• Business cycle - the rise and fall of GDP over
time.
• GDP – Gross Domestic Product
• GDP= C+Ig+G+Xn(X-M)
• C – consumer spending
• I – business investment
• G – government purchases
• X – exports
• M - imports
Personal Consumption Expenditures (c)
• This includes all spending by
households.
• About 10% of this spending is
on durable goods or goods that
have an expected life of three
or more years.
• About 30% are on non-durable
goods that have a life
expectancy of less than three
years.
• About 60% are on services
provided by doctors, lawyers,
etc.
Gross Private Domestic Investment (Ig)
or Business Investment
• This includes:
• All final purchases of
machinery, equipment
and tools by businesses.
• All construction.
• All changes in inventory.
Government Purchases (G)
• The government spends in
two major ways:
• Expenditures for goods and
services that the
government consumes
providing public services.
• Spending on publicly
owned capital such as
schools and highways,
which have long lifetimes.
Net Exports (Xn)
• Net Exports consist of all
goods produced within our
borders that are sold to other
countries, less the goods made
by other countries that we
purchase.
• Net Exports=Exports-Imports.
Putting it all Together
Homework Tonight
• Questions #1-6 and
Problems #1-3 on page
502-503.
AP Economics 9/30/14
http://mrmilewski.com
• OBJECTIVE: Measurement of Economic Performance
AP Macro-II.A
•
Language objective: SWBAT define essential vocabulary on measurement of
economic performance in regards to national income accounts. In addition,
swbat write notes on performance and read and write answers to questions
and problems regarding the objective.
• I. Journal#17
-Do now: What is the GDP for Wonderland if business
investment is 22 billion, purchases of stocks is 31 billion,
personal consumption is 123 billion, second hand sales are
18 billion, government spending is 109 billion, transfer
payments are 25 billion and net exports are 72 billion?
• II. Homework
-Questions #7-9 and problems #4-5 on page 503-504.
The Income Approach
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•
•
•
GDP – Gross Domestic Product
GDP= W + R + I + P + SA
W – wages
R – rents
I - interest
P – profits
SA - statistical adjustments
Compensation to Employees (W)
• By far the largest share of
national income.
• Wages and salaries paid by
business and government to
their employees.
• It also includes payments for
pensions, health insurance
and other benefits.
Rents (R)
• Rents consist of the income
received by the households and
businesses that supply property
resources.
• It includes the monthly payments
tenants make to landlords and the
lease payments businesses make
to lease office space.
• This is a net rent payment: gross
rental income less depreciation of
the property.
Interest (I)
• The money paid by
businesses to the
suppliers of loans used
to purchase capital.
• It also includes interest
earned by households
on savings deposits,
CD’s and corporate
bonds.
Profits (P)
• Proprietor’s income is the net
income of sole proprietors’,
partnerships and
unincorporated businesses.
• Corporate profits are broken
down into three categories:
• Corporate Income Tax
• Dividends
• Undistributed Corporate
Profits.
Taxes on Production and Imports
• Income earned by the
government in the form
of sales taxes, excise
taxes, business property
taxes, license fees and
customs duties.
From National Income to GDP
• National Income is the total of all sources of
private income (compensation, rents, interest,
proprietors’ income and corporate profits)
plus government revenues.
• To arrive at GDP using the income approach:
GDP=National Income - Net Foreign Income + Statistical Discrepancy
+ Consumption of Fixed Capital(Depreciation)
Other National Accounts
• Net Domestic Product = GDP – Depreciation
• Disposable Income = Consumption + Savings
Homework Tonight
• Questions #7-9 and
problems #4-5 on page
503-504.
Economics 10/1/14
http://mrmilewski.com
• OBJECTIVE: Measurements of Economic Performance
AP Macro-II.A
• Language objective: SWBAT define essential vocabulary on measurement
of economic performance in regards to Nominal GDP versus Real GDP. In
addition, swbat write notes on performance and read and write answers
to questions and problems regarding the objective.
• I. Journal#18
-Do now: Using the following data, compute the GDP using the
income approach: Wages 145 billion, Net Exports 34 billion,
Government Spending 143 billion, Rents 63 billion, Interest 35 billion,
Investment 47 billion, Proprietors’ Income 76 billion, Corporate Income
101 billion and Taxes on Production and Imports 39 billion.
• II. Homework
-Questions #10-12 and problems #6-8 on page 503-504.
Nominal GDP versus Real GDP
• As discussed earlier, we have to associate GDP to
dollar values to be able to calculate it.
Unfortunately, the value of money changes from
year to year.
• Money’s value is can be affected by both inflation
or deflation.
• The way around this problem is to take Nominal
GDP (unadjusted GDP) and inflate it when prices
fall or deflate it when prices rise. This adjusted
GDP is referred to as Real GDP.
Price Index
• The Price Index is a
measure of the price of
a collection of goods
and services called a
“market basket”.
• It compares the prices
of a given year and a
specific year.
How to Compute the Price Index
• In this example of a one
good economy, pizza, we
can compute a price index
to apply to the nominal
GDP.
• This is done by dividing
the specific year price by
the base year price. If it is
2/1, or 2, we change it to
200. If it is 1/2, or .50 we
change it to 50.
Calculating Real GDP
• To calculate Real GDP,
we have to first
compute the nominal
GDP (C+I+G+Xn) and
divide it by the price
index.
• Let’s go back to the
previous example.
Alternative Method
• If we know nominal
GDP and we know real
GDP, we can use a little
algebra and calculate
the Price Index.
Shortcomings of GDP
• Although GDP is reasonably accurate and a very good
measure of how the economy is doing, it does have its
shortcomings.
• Some major productive activities that it does not
account for, or are not included in GDP:
– Nonmarket Activities like stay at home parents or
carpenters that do repair work on their own home
– The underground economy which includes gamblers,
smugglers, prostitutes, drug growers and drug dealers.
– Others in the underground economy include people who
get paid under the table, servers who don’t claim all of
their tips they earned in cash.
(Look at the chart on page 500)
ACDC Films
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AC DC Econ: Back to the Future Inflation
ACDC Econ: GDP & Growth
ACDC Econ: Cars
ACDC Econ: Nominal & Real
Homework Tonight
Questions #10-12 and
problems #6-8 on page
503-504.
Economics 10/3/14
http://mrmilewski.com
• OBJECTIVE: Measurements of Economic Performance
AP Macro-I.E
• Language objective: SWBAT define essential vocabulary on the business
cycle, unemployment and inflation . In addition, swbat write notes on
performance and read and write answers to questions and problems
regarding the objective.
• I. Journal#18
-Do now: Go to next slide.
• II. Homework
-Questions #1 and 2, problems # 1 on page 544-545.
Do now
• Compute real GDP for the following table:
Year
Nominal GDP
Price Index
2005= 100
1978
2425
39.75
1988
5350
64.25
1998
8675
86.50
2008
13750
109.05
Real GDP
The Business Cycle
• The economy in the
long-run is cyclical. It
goes through up and
down phases.
• This is known as the
Business Cycle. We have
periods of expansion as
well as periods of
recession.
Phases of the Business Cycle
• Peak- Here the economy is near or at
full employment and output is close to
capacity. Prices tend to rise during this
phase.
• Recession- Here the economy is in
decline which lasts 6 months or more.
Output, income and employment are all
down.
• Trough- The recession bottoms out and
everything is at their lowest levels. This
can be short lived or last quite long.
• Expansion- The economy begins to
recover. GDP, income and employment
begin to rise.
Causes of Fluctuations in the Cycle
• As we discussed in a
previous chapter,
changes in the short run
of the economy are the
results of shocks.
• When there are “sticky
prices”, they cannot
change quick enough to
adjust to the shock.
What Causes Shocks?
• Irregular Innovation- Technology
advances such as the railroads in
the 19th century or the computer in
modern times can cause a shock.
• Productivity Changes- A shock can
be caused if productivity were to
increase or decrease unexpectedly.
This can happen if the availability
of a resource suddenly changes,
like oil or agricultural goods.
Causes of shocks continued
• Monetary Factors- Changes in the
money supply can affect the economy.
Printing more money can cause
inflation and printing less can lower
output and prices fall.
• Political Events- Unexpected events,
like 9/11, can create a shock.
• Financial instability- Unexpected
financial bubbles (rapid asset price
increases or decreases) can cause a
shock. This can cause a change in
consumer confidence.
Shock Impact on Goods and Services
• During a recession, firms that produce
capital goods and durable goods
suffer greater output and employment
declines.
• Firms that provide services or that
produce nondurable goods tend to be
less effected by a recession.
Homework Tonight
Questions #1 and
2, problems # 1 on
page 544-545.