C + Ig + G + Xn [X-M]C + Ig + G + Xn [X-M] =

GDPGDP–Depreciation= [what is for sale]

NDPNDP –NFFIEUS–Indirect Business Taxes =

NINI–UUndis Corp Profits–CCorp Inc Taxes -SSoc Secur+TTP=

[PIPI is what you can spend, save,spend, save, or or pay in taxespay in taxes]

PI – Personal Income Taxes =

[DIDI is what you can spendspend oror save save ]

[“Replacement capital”][“Replacement capital”]

[GDP and its four cousins][GDP and its four cousins]National Income AccountingNational Income Accounting

Answers to “Is It Counted in GDP?”Answers to “Is It Counted in GDP?”

C = C = $$ Ig = $Ig = $ G = $G = $ Xn = $Xn = $Gross Domestic ProductGross Domestic Product (GDPGDP)

-Consumption of fixed capitalNet Domestic ProductNet Domestic Product (NDPNDP)

-NNet For. Factor Inc. Earn. U.S. -IIndirect business taxes

National IncomeNational Income (NINI) --UUndistributed Corporate Profits --CCorporate income taxes --SSocial Security Contributions

++TTransfer payments Personal IncomePersonal Income (PIPI)

-Personal Taxes Disposable IncomeDisposable Income (DIDI)

________________________

$_$_________________

$_______$___________________

$_$____________________________________

$_$_____________________

$$______________

NIA Practice – “How To Do It”NIA Practice – “How To Do It” Personal taxesPersonal taxes 403 403 -U-Undistributedndistributed corp. profitscorp. profits 4646 ImportsImports 362 362 -Social Security contrib.-Social Security contrib. 169169 +Transfer payments 283+Transfer payments 283 Personal consumption 2,316Personal consumption 2,316 -C-Corporate orporate IIncomencome TTaxes axes 88 88 Gross Gross privateprivate domes invest. domes invest. 503 503 Indirect business taxes Indirect business taxes 231231 Government purchases 673Government purchases 673 ExportsExports 465 465 Depreciation Depreciation [Capital consumption][Capital consumption] 307307

N.F.F.I.E. in the U.S.N.F.F.I.E. in the U.S. 12 12

$112$112

NFFI = $12NFFI = $12

2,3162,316503503673673

++1031033,5953,595--307307

3,2883,288--1212

--2312313,0453,045

--4646--8888

--169169++283283

--303303

3,0253,025--403403

2,6222,622

ROWROW$$100100

I’m going through an academic recession.

Report CardReport CardEnglishEnglish C CAccounting CAccounting CAmerican History DAmerican History DEconomics Economics FF

Positive Net InvestmentPositive Net Investment [[Ig>Ig>DD]]

Net InvestmentNet Investment

Gross InvestmentDepreciationDepreciation--

==

Stock ofCapital

Consumptionand

GovernmentSpending

Stock ofCapital

Depreciation

NetInvestment

January 1 Year’s GDP December 31

Increased

GrossInvestment

[increasing product. capac.]

NominalNominal [money][money] GDPGDP v.v. Real GDPReal GDPAn increase in pricesincrease in prices and/or outputoutput will increasenominal GDP.

Only an increase in output will increase real GDPincrease in output will increase real GDP.Nominal GDP could increase even if output falls.

Real GDP = Nominal Y/GDP deflator x 100

So, nominal GDP measures output & pricesnominal GDP measures output & prices.

Real measures only output [actual production]Real measures only output [actual production]

Constant (real) GDPConstant (real) GDP v. current (money) GDPcurrent (money) GDP

Real GDPReal GDP = = Nominal GDP/Index Nominal GDP/Index XX 100 100

Practice Macroeconomic FormulasPractice Macroeconomic Formulas

NS 12 and 13NS 12 and 1312.12. Using the above formula, what is the real GDPreal GDP for 1994 if nominal GDP was $6,947 trillion and the GDP deflator was126.1? ($6,611/$5,610/$5,509) billion.

13.13. For 1996, what would real GDPreal GDP be if nominal GDP were $7,636 trillion and the GDP deflator were 110.2?($6,929/$9,628/$6,928).

[$6,947/126.1 x 100 = $5,509 trillion[$6,947/126.1 x 100 = $5,509 trillion

[$7,636 trillion/110.2 x 100 = $6,929 trillion][$7,636 trillion/110.2 x 100 = $6,929 trillion]

Characteristics ofCharacteristics of ExpansionsExpansions andand RecessionsRecessions ExpansionsExpansions 1. Less unemployment2. Increase in real GDP3. Rapid job growth4. Increasing interest rate5. Increasing prices6. Fewer social problems (alcoholism, domestic violence, divorce, and suicides)

Four Phases of Business CycleFour Phases of Business Cycle

RecessionsRecessions1. More unemployment2. Decrease in Real GDP3. Reduced job growth4. Lower interest rates5. Decreasing prices6. More social problems (alcoholism, domestic violence, divorce and suicide)

Three Types of UnemploymentThree Types of Unemployment11.Frictional.Frictional – “temporary”, “transitional”, “short-term.”(“between jobs” or “search” unemployment)

Examples:a. People who get “fired”“fired” or “quit”“quit” to look for a better one.b. “Graduates”“Graduates” from high school or college who are looking for a job.c. “Seasonal”“Seasonal” or weather-dependent jobs such as ““agricultural”agricultural”, “construction”“construction”, “retail”“retail”, or “tourism”“tourism”. [lifeguards, resort workers, Santas, & migrant workers.]Frictional unemployment signals that “new jobs”“new jobs” are availableand reflects “freedom of choice”“freedom of choice”..

These are qualified workers “transferable” skills.These are qualified workers “transferable” skills.

2.2. Structural UnemploymentStructural Unemployment

StructuralStructural – “technological”“technological” or “long term”“long term”.. There are basic changes in the “structure”“structure” of the labor force which make certain “skills obsolete”“skills obsolete”..

AutomationAutomation may result in job losses.Consumer tasteConsumer taste may make a good “obsolete”.The autoauto reduced the need for carriage makers.

Farm machineryFarm machinery reduced the need for farm laborers.““Creative destruction”Creative destruction” means as jobs are created, other jobs are lost. Jobs of the future destroy jobs oftoday. Frictional and Structural make up the “natural“naturalrate of unemployment”rate of unemployment”.

““These jobs do not come back.”These jobs do not come back.”““Non-transferable skills”Non-transferable skills” – choice is prolonged unemployment or retraining.

3. CCyclical yclical UUnemploymentnemployment

CyclicalCyclical – ““economiceconomic downturns” downturns” in the business cyclebusiness cycle.

““Cyclical fluctuations”Cyclical fluctuations” caused by “deficient AD”“deficient AD”““Durable goods jobs”Durable goods jobs” are impacted the most.These cancan be be postponedpostponed because they can be repairedcan be repaired.““Cyclical unemployment”Cyclical unemployment” is “real unemployment”“real unemployment”..

““These jobs do come back.”These jobs do come back.”

UnemploymentUnemployment 5,655,0005,655,000Unemployment Rate = Unemployment Rate = Labor ForceLabor Force x 100; 4.0% = x 100; 4.0% = 140,863,000140,863,000 x 100 x 100 [Employed + unemployed] [135,208,000+5,655,000][Employed + unemployed] [135,208,000+5,655,000]

IIn n Forney, 42 Forney, 42 are are unemployed & 658unemployed & 658 are are employed. Temployed. The he unemployment rateunemployment rate is is __ __%.%.

One milOne mil. are . are unemployedunemployed & & 19 mil19 mil. are . are employedemployed. The unemploy. rate is __%.. The unemploy. rate is __%.6655

NS 41NS 4141. If the total population is 280 million, 280 million, and the civilian labor forcecivilian labor force includes 129,558,000129,558,000 with jobswith jobs & 6,739,000 unemployed & 6,739,000 unemployed but looking for jobs, then the employment rateemployment rate would be ____%. 4.94.9

[6,739,000/136,297,000 x 100 = 4.9%][6,739,000/136,297,000 x 100 = 4.9%]

NegativeNegative//PositivePositive GDP GapsGDP Gaps

““Natural Rate of Unemployment” [4-6%]Natural Rate of Unemployment” [4-6%]

ADAD33ADAD11

ADAD22

ASAS

1111%% 6 6%% 11%%

YYRR Y* Y*FF YYii

YYAA Y YP P YYAA

$9$9 T T $10 $10 T T $11 $11 TT

RRecessionaryecessionary GDP Gap GDP Gap

InflationaryInflationary GDP Gap GDP Gap

Demand-Pull InflationDemand-Pull Inflation – increase in AD.[“Too many dollars chasing too few goods”][“Too many dollars chasing too few goods”] Originates from “buyers side of the market”“buyers side of the market”

Cost-Push InflationCost-Push Inflation – 3 things maycause “cost-push” inflation.1. Wage-pushWage-push – strong labor unions2. Profit-pushProfit-push – companies increase prices when their costs increase.3. Supply-sideSupply-side cost shocks cost shocks – unanticipated

increase in raw materials such as oil.

Demand-PullDemand-Pull && Cost-PushCost-Push InflationInflationDD1 1 DD22

““Demand-pull”Demand-pull”

PP22

““Wage-price”Wage-price”SpiralSpiral

SS11SS22DD

PLPL22

PLPL11

““Cost-push”Cost-push”

SS

PP11

[-11/160 x 100 = -6.9%][-11/160 x 100 = -6.9%]

(2000-later year) (1999-earlier year)(2000-later year) (1999-earlier year) Current year’s index – last year’s indexCurrent year’s index – last year’s index 172.2-166.6(5.6)172.2-166.6(5.6)C.P.I. = Last year’s index(1999-earlier year) x 100; 166.6 x100 = 3.4%C.P.I. = Last year’s index(1999-earlier year) x 100; 166.6 x100 = 3.4%

130.7-124.0(6.7)130.7-124.0(6.7) 116-120(-4)116-120(-4) 333-300(33)333-300(33) 124.0 x 100 = ____124.0 x 100 = ____ 120 x 100 = ____120 x 100 = ____ 300 x 100 = ____300 x 100 = ____

Figuring InflationFiguring Inflation[Change/Original X 100 = inflation]

5.4%5.4% -3.3%-3.3% 11%11%

NS 50, 51, & 52NS 50, 51, & 5250.The CPI was 166.6 in 1999 and 172.2 in 2000. Therefore, the rate of inflation for 2000 was (2.7/3.4/4.2)% 51. If the CPI falls from 160 to 149 in a particular year, the economy has experinced (inflation/deflation) of (5/-4.9/-6.9)%.52. If CPI rises from 160.5 to 163.0 in a particular year, the rate of inflation for that year is (1.6/2.0/4.0)%.

[5.6/166.6 x 100 = 3.4%][5.6/166.6 x 100 = 3.4%]

NominalNominalIncomeIncome

RealRealIncomeIncome

InflationInflationPremiumPremium

-16%16%

1010%%

6%6%

[[NominalNominal income – income – inflationinflation rate rate == RealReal Income Income]]

=

Misery IndexMisery Index