Understand GDP and its components?

C- household consumption of non durable goods, I investment spending spending for durable goods, real estate of new homes G- government spending NX net exports. Whats not in GDP: Black Market activities, , unreported income, resale, intermediate goods. Limitations of GDP: Nominal GDP doesnt account for inflation/deflations, doesnt factor in externalities, doesnt account for black markets. GDP: C + I + G + NX GNP: GNP = GDP + NR (Net income inflow from assets abroad or Net Income Receipts) - NP (Net payment outflow to foreign assets) Annualized % change in GDP = (GDP new- GDP old)/ GDP old X (100) (365/91) Nominal GDP Just the numbers Real GDP: Real GDP is calculated by using the production figures (Quantity) of the current year and multiplying those numbers by the base year prices. Deflator: Nominal GDP/Real GDP X 100 BEA gets a quarter to adjust its number

The Business Cycle

Economic growth is not a steady phenomenon; rather, it tends to exhibit a pattern as follows: 1. 2. 3. 4. an expansion of above-average growth a peak a contraction of below-average growth a trough or low-point

The troughs then are followed by periods of expansion and the cycle generally repeats, though not in a regular manner. These fluctuations in economic growth are known as the business cycle and are depicted conceptually in the following diagram.

Indicators of the Business Cycle Because the business cycle is related to aggregate economic activity, a popular indicator of the business cycle in the U.S. is the Gross Domestic Product (GDP). The financial media generally considers one quarter = downturn, two consecutive quarters of negative GDP growth to indicate a recession. Used as such, the GDP is a quick and simple indicator of economic contractions.

Unemployment: Unemployment rate = # of Unemployed/ (# in Labor Force) = # of Unemployed/ (# Employed + #Unemployed) Labor Force = (# Employed + #Unemployed) Labor Force Participation Rate = Labor Force / Adult population Unemployed = dont have a job, but want one and are actively looking for one. Employed have a job Adult Population anyone over the age of 16 -65 can work Types of Unemployment: Frictional natural turnover, job creation. Structural- as industries leave market, restructuring, Cyclical anything above the nat. rate of increase! Unemployment doesnt account for couching. Unemployment rate went up but we added 100000 jobs .

Consumer Price Index a Variety goods times their current price to reflect the spending of the av. American consumer . Fixed bundle of goods, fixed weight index , go out every month . In the base Year CPI = 100 b/c CPI = Pby/Pby x 100 = 1 X100= 100 Beyond Base Year. Pnew year/ Pby X 100 = CPI new. CPI new > 100 inflation CPI new < 100 deflation Use the CPI to Calculate the Inflation Rate Inflation Rate = (CPI new year CPI by) / CPI by CPI includes prices of imported goods, while GDP does not. CPI does not account for the substitution of goods due to price changes. CPI is only consumer goods and services while GDP is all goods and services. CPI overstates potential inflation. Social Security is indexed to the CPI. PPI Producer Price Index. Long Run looks at historical trends sees a great increase in GDP per capita over the last 100 years. Standards of living heightened over time. Short Run looks at Real GDP and the fluctuations of the business cycles. Determined by spending GDP = C+ I +G +NX Dont care for inflation Look at Unemployment though. How government policy affects growth? THE IMF AND THE WORLD BANK? READ CH 32/33/36 Impediments to growth: poverty, government instability, warfare, corruption. Pg 727 RE: successful transition to a market economy Chapter 23: Aggregate Output Consumption Function- relationship b.w income (y) and household consumption (c) As income goes up, consumption goes up. Consumption is always nonzero. Can be done with aggregate income and aggregate consumption Marginal Propensity to Consume (MPC): Slope of Consumption fn = Change in C / Change in Y
1- MPC = MPS

Planned Investment is I: stocks Inventory = 25 so its a horizontal line!

Actual investment is the amount of investment that actually takes place includes unplanned changes in inventory. Planned Aggregate Expendture = Consumption (upward sloping line) + Investment (horizontal line) Equilibrium is where planned Aggregate Expenditure = aggregate output. Planned investment = Actual investment Investment/Government Multiplier is 1 /MPS = 1 / 1- MPC Tax Multiplier = -MPC/MPS = -MPC/ 1 MPC = (-slope of consumption function)/ (1- slope of consumption function) Money Multiplier = 1 /Req. Res. Ratio Monetary is re: money supply ALL DONE BY THE FED. Fiscal is done by the govt taxes and spending. Taxes increase, disposable income decreases, consumption decreases. Taxes decrease, disposable income increases, consumption increases. Y = Consumption + Savings C = a +b Y C = a + b (Y-T) where Y is disposable income and T is taxes. Contractionary Fiscal : Increase Taxes, Decrease Govt Purchases, Decrease transfer payment (social security) Expansionary Fiscal Policy: Decrease Taxes, Increase Gov. Purchases, Increase transfer payments (soc. Sec.) Federal Reserve controls the money supply by
1. Changing the RRR (RRR- percentage of its deposits that a bank must keep as reserves) 2. Changing the discount rate ( the rate of interest from borrowing from the Fed) 3. Engaging in Open Market Operations (Buying and Selling Bonds)

When the fed buys a bond, that means that it pays out in Cash increasing money supply When the fed sells a bond, they give out security and take away cash decreasing money supply. Contractionary Monetary to decrease money supply, the Fed increase interest r, they sell bonds which leads less Md. Expansionary Monetary: to increase money supply, the Fed wants to decrease interest rate r, so the fed buys back bonds > giving out cash which leads to more money Md. Deficit Spending > Savings Surplus Spending < Savings Balanced Spending = Saving

Government can still operate even if its in a deficit, but to make up for the deficit, you need borrow, which means the government goes into debt. Increase in Govt Spending drives down investment Spending I G increase, income up, consumption up, Md up, interest rate r up, Investment spending down G decrease, income down, Md down, interest rate r down, investment up. Debt : is what govt owes to other countries Deficit is the shortfall in the budget for a particular year. Expenditures: Defense Spendings, Health and Human Services, Interest on the Debt, Civil Works Projects. Revenue : Selling Treasury Bonds, Taxes.