Class 9 - Macroeconomic Measurements

Final exam is Wednesday, December 16, 2009 at 8pm-9:50pm.
There will be class on Monday night, 12/14. Therefore, there are 3 class periods left.

Tonight: Chapters 15 and 16.
Next week: Chapter 21 - The Monetary System
The following week: Chapter 22 - Money Growth and Inflation

This begins the study of Macroeconomics. More interesting, more exciting, more arguable. More questions and fewer answers and therefore more intellectually exciting. 100 questions and 300 answers.

Tonight, we will cover 2 of the 3 major macroeconomic statistics: GDP and CPI.

US economists are most concerned with GDP these days, but we could be focusing on CPI in the near future.

GDP appears to be increasing at present. It went up in 3rd quarter of 2009 and may continue to increase in the next quarter.

Where do these statistics come from?

GDP come from the US department of commerce. The Bureau of Economic Analysis (http://www.bea.gov/) calculates the GDP. The census bureau also plays a part. BEA also provides foreign trade information. They hire thousands of people to put the GDP statistics together. GDP data comes out quarterly. They collect quarterly data from companies.

CPI and Unemployment Rate come from the Bureau of Labor Statistics (part of the Department of Labor). The data is provided monthly.

Gross Domestic Product (GDP)

Definition: Total money value of the final goods and services produced by the residents of a nation during a specific time period.

It used to be measured in GNP, but now the US conforms to the rest of the world and measures GDP. GNP replaces "residents" with "citizens". Therefore, GDP of countries like Dubai is high, but GNP is relatively low.

Ex: If a Greek woman works for a French company at a US location, that production is calculated into the US GDP, because it's produced on US soil, and Greece's GNP because the person doing the producing is a Greek citizen.

GDP is always expressed in monetary terms because its the thing that all goods and services have in common. Ex: Baseball, hot dogs, apple pie and Chevrolet.

GDP measures the value of final goods.
Ex: Paint may or may not be a final product. If it's used to paint a picture that is never sold, then the paint is the final product. If it's used by an artist to paint a picture which is sold, then the paint is an intermediate good and the picture is the final good.

In a country like the US, most of the GDP is in services - non-tangible.

GDP measures production. Even if they're not sold.

GDP is national. However, the EU now also has a consolidated GDP measurement for all 27 member states.

GDP is almost always measured annually or quarterly on an annual basis.

See table 3 pg 339 - 12 most populous countries.

Real GDP is adjusted for inflation. In international terms, its adjusted for "purchasing power" for different exchange rates.

Table 3 implies that GDP tends to influence quality of life.
FYI box on pg 340 implies that GDP tends to influence whether a country will be successful in the Olympics.

Pres Sakozy of France created a commission on the measurement of economic performance and social progress, chaired by Joseph Stiglitz. See http://www.stiglitz-sen-fitoussi.fr/

There is sometimes a trade-off between leisure and economic production. For example, US workers work more hours per year than the workers do in Germany, so it makes sense that US GDP is larger. However, since German workers get more paid vacation per year, you could make an argument that Germans have a high quality of life.

The Stiglitz commission made several recommendations on how to improve the GDP measurement.

The National Income Equation

Y = C + I + G + NX

Y (national income, GDP) is the sum of 4 components.

C = Consumption, spending of the household sector, ~ 70% of GDP. Does not include new residential structures; that is considered investment. C is always tangible.
1. Non-durable goods
2. Durable goods (has most volatility)
3. Services
Only applies to new goods, not on second sales of houses or other similar goods.

I = Investment. There are the expenditures that businesses make in order to produce more stuff.
1. Capital goods - equipment, machinery
2. Structures - buildings, shopping centers
3. Inventories - this is where GDP counts the stuff that is produced but doesn't get sold. This number is good for short-term forecasting, especially the inventories/GDP ratio. If inventories are rising, then there is likely to be a cutback in production in the future. Inventory and supply chain management are the keys to just-in-time production for Toyota. Inventory management is also a key to the success of Walmart.
Keynes ("animal spirits") said that capital goods and structures are the most volatile parts of GDP because they're not immediately necessary. They're based on expectations, and expectation are unmeasureable and unknowable. Government purchases are the "counterweight".

G = Government purchases
1. Federal - federal government can borrow funds and the central bank can create or free up money and can thus counteract the procyclic nature of the state and local government purchases
2. State - tends to be procyclical, they cut spending when incomes are lower, making the recession worse
3. Local

NX = Net Exports
I.e. Total exports-total imports
Not every country can have positive net exports. At least one country has to have a deficit.