measuring the us economy fin 30220: macroeconomics

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  • Slide 1
  • Measuring the US Economy FIN 30220: Macroeconomics
  • Slide 2
  • U.S. GDP of $17 Trillion represents approximately one fifth of total worldwide production ($108 Trillion) and makes the United States the largest single country economy on the planet!! * Source: CIA Factbook Note: 2014 GDP estimates measured on a Purchasing Power Parity Basis Trillions of Dollars
  • Slide 3
  • GDP is the standard benchmark for economic well being. Is it a good indicator of well being? VS 1950: $275B 2014: $17,555B 1950: $2,200B 2014: $16,200B 1950: $15,000 2014: $50,000 1950: $27,000 2014: $52,000 Ratio 2009 Dollars 2012 Dollars2009 Dollars
  • Slide 4
  • GDP is the standard benchmark for economic well being. Is it a good indicator of well being? VS Annual defense spending has grown from $35B in 1950 to $795B in 2009. Should this be subtracted out? The service industry has grown from 30M employees in 1950 to 113M in 2009. Is this really new activity? Should we count things like pollution as economic bads? How do we account for the added quality and convenience of new products and technologies?
  • Slide 5
  • *Source: Rethinking Progress The Genuine progress indicator, or GPI, is a metric that has been suggested to replace, or supplement, gross domestic product (GDP) as a measure of economic growth. GPI is designed to take fuller account of the health of a nation's economy by incorporating environmental and social factors which are not measured by GDP.
  • Slide 6
  • The Satisfaction with Life Index was created by Adrian G. White, an analytic social psychologist at the University of Leicester, using data from a metastudy. It is an attempt to show life satisfaction in different nations. CountrySWL #1 Denmark273.33 #1 Switzerland273.33 #3 Austria260 #3 Iceland260 #5 Bahamas256.67 The US is ranked #23 with a score of 246.67 (tied with the United Arab Emirates and Venezuela) China is ranked #82
  • Slide 7
  • Firms Households Product Markets Factor Markets The Basic circular flow real goods and services Firms supply households with final goods Households supply labor and capital to firms To understand the US economy, we need to visualize how goods, services, and payments flow between sectors of the economy.
  • Slide 8
  • Firms Households Product Markets Factor Markets Every flow of real goods and services is matched by an equal flow of payments in the opposite direction Households Pay for goods and services Firms pay wages, interest, profits Households supply labor and capital to firms Firms supply households with final goods
  • Slide 9
  • Firms Households Factor Markets Product Markets Lets leave out the flow of real goods for simplicitythe basic circular flow is payments from households to firms (payment for final goods and services) and from firms to households (payment for factor services). However, keep in mind that there has to be an equal flow in the opposite direction of real goods and services.
  • Slide 10
  • Firms Households Factor Markets Product Markets Financial Markets Now, we can add the financial sector (acting as a middleman between businesses and firms) Net Household savings Borrowing and stock issues by firms Investment spending
  • Slide 11
  • Firms Households Factor Markets Product Markets Financial Markets Government Now, add the public sector Government Borrowing Government Spending Taxes Transfers
  • Slide 12
  • Firms Households Factor Markets Product Markets Financial Markets Rest of World Government Foreign Borrowing Foreign Lending Exports Imports Now, add rest of the world
  • Slide 13
  • Firms Households Product Markets Rest of World Government Exports Imports Gross domestic product (GDP) measures the current market value of all goods and services produced within the borders of a country over a given time period. For the US, GDP (on an annual basis) for the first quarter of 2015 was $17,655B Therefore, in measuring GDP, we are concentrating on the product markets
  • Slide 14
  • Farmer A produces 1,000 bushels of Apples (Apples cost $10/bushel) Farmer B produces 2,000 bushels of Oranges (Oranges costs $15/bushel) Calculating GDP a simple example. GDP Calculation Farmer A: 1,000 Bushels@ $10/Bushel $10,000 Farmer B: 2,000 Bushels@ $15/Bushel $30,000 GDP$40,000
  • Slide 15
  • Suppose that Intel produces 1,000 computer chips (P = $100) 1000 Chips sold to Dell Dell produces 1000 computers (P = $2,000) Calculating GDP the problem with intermediate goods. GDP Calculation 1,000 computer chips @ $100 1,000 computers @ $2,000 $100,000 $2,000,000 GDP $2,100,000 Houston, we have a problem!
  • Slide 16
  • Suppose that Intel produces 1,000 computer chips (P = $100) 1000 Chips sold to Dell Dell produces 1000 computers (P = $2,000) The problem with intermediate goods is that they create a double counting problem. Intel reports the value of the computer chips they produced Dell also reports the value of the computer chips (as a part of the computers they produced) We have counted the computer chips twice!
  • Slide 17
  • Suppose that Intel produces 1,000 computer chips (P = $100) 1000 Chips sold to Dell Dell produces 1000 computers (P = $2,000) Value added measures the value of the final product minus the value of all the materials that went into that final product GDP Calculation (Value Added) 1,000 computer chips @ $100 1,000 computers @ $2,000 $100,000 $2,000,000 GDP $2,000,000 - $100,000 Materials Expense
  • Slide 18
  • Suppose that Intel produces 1,000 computer chips (P = $100) 1000 Chips sold to Dell Dell produces 500 computers (P = $2,000) Lets change the example up a bit GDP Calculation (Value Added) 1,000 computer chips @ $100 500 computers @ $2,000 $100,000 $1,000,000 GDP $1,000,000 - $100,000 Materials Expense Dell has 500 chips remaining in inventories Is this correct?
  • Slide 19
  • Suppose that Intel produces 1,000 computer chips (P = $100) 1000 Chips sold to Dell Dell produces 500 computers (P = $2,000) Any materials purchased that havent been used need to be added back in as an investment expense GDP Calculation (Value Added) 1,000 computer chips @ $100 500 computers @ $2,000 $100,000 $1,000,000 GDP $1,050,000 - $100,000 Materials Expense Dell has 500 chips remaining in inventories Inventory Investment $50,000
  • Slide 20
  • Suppose that Xerox produces 50 copiers (P = $5000) 50 Copiers sold to Dell Dell produces 1000 computers (P = $2,000) Lets change things up again. GDP Calculation (Value Added) 50 copiers @ $5000 1,000 computers @ $2,000 $250,000 $2,000,000 GDP $2,000,000 - $250,000 Equipment expense Is this right?
  • Slide 21
  • Suppose that Xerox produces 50 copiers (P = $5000) 50 Copiers sold to Dell Dell produces 1000 computers (P = $2,000) Dell now owns an asset (the copier) which needs to be added back in GDP Calculation (Value Added) 50 copiers @ $5000 1,000 computers @ $2,000 $250,000 $2,000,000 GDP $2,250,000 - $250,000 Equipment expense Equipment Investment $250,000
  • Slide 22
  • Gross Domestic Product vs. Net Domestic Product Gross of depreciation expense Net of depreciation expense 50 copiers @ $5000 1,000 computers @ $2,000 $250,000 $2,000,000 GDP$2,250,000 - $250,000 Equipment expense Equipment Investment (full value) $250,000 50 copiers @ $5000 1,000 computers @ $2,000 $250,000 $2,000,000 NDP$2,225,000 - $250,000 Equipment expense Equipment Investment (depreciated value) $225,000
  • Slide 23
  • Gross Domestic Product vs. Net Domestic Product Gross of depreciation expense Net of depreciation expense 50 copiers @ $5000 1,000 computers @ $2,000 $250,000 $2,000,000 GDP$2,250,000 - $250,000 Equipment expense Equipment Investment (full value) $250,000 GDP $2,250,000 Depreciation -$25,000 NDP $2,225,000 For the US GDP = $17.6T NNP = $15.1T Capital Stock = $41T Depreciation = $2.5T (6%)
  • Slide 24
  • Lets put is all together Suppose that Intel produces 1,500 computer chips (P = $100) Suppose that Xerox produces 50 copiers (P = $5000) 200 Chips bought by households 1,300 Chips Bought by Dell 45 Copiers Bought by Dell Dell Produces 1,000 Computers (P = $2,000) sold to consumers Leaves 300 Chips in inventories 5 Copiers bought by households GDP Calculation 1,500 computer chips @ $100 $150,000 50 copiers @ $5000 $250,000 1,000 computers @ $2,000 $2,000,000 - $355,000 Expenses Equipment Investment $225,000 Inventory Investment $30,000 GDP $2,300,000
  • Slide 25
  • Firms Households Product Markets Rest of World Government Exports Imports We could go about this a different wayeach good or service produced must be matched by an equal expenditure GDP
  • Slide 26
  • Lets recalculate using expenditures Suppose that Intel produces 1,500 computer chips (P = $100) Suppose that Xerox produces 50 copiers (P = $5000) 200 Chips bought by households 1,300 Chips Bought by Dell 45 Copiers Bought by Dell Dell Produces 1,000 Computers (P = $2,000) sold to consumers Leaves 300 Chips in inventories 5 Copiers bought by households GDP Calculation Equipment Investment $225,000 Inventory Investment $30,000 GDP $2,300,000 1,000 Computers @ $2,000 $2,000,000 $20,000 $25,000 5 Copiers @$5,000 200 Chips @$100
  • Slide 27
  • CategoryAmount (B)% of Total Consumption$11,97368% Gross Investment$2,89016% Government$3,20718% Net Exports-$515-2% GDP$17,5551