Where You Are Economics 201 Principles of

Where You Are! Economics 201 – Principles of Macroeconomics Tuesday and Thursday 2: 00 to 3: 15 pm 1. Principles of Macroeconomics by Parkin, 12 th edition, Pearson. 1. My. Econ. Lab for Parkin for graded homework assignments and practice. Course website: http: //www. terpconnect. umd. edu/~jneri/Econ 201

Who Am I Dr. John Neri Office Location: 1106 D Morrill Hall Office Hours: T and Th 3: 30 pm-4: 30 pm

Illness or Family Emergency and Exams Steps you MUST follow: • Pre-Notification: If you are sick or have a family emergency and cannot take an exam, you must contact Professor Neri before the exam. You must fill out the Request for Excuse form found on the course web page. • Written Verification: Illness or family emergency must be subsequently verified in writing by a physician. If you go to the health center and a doctor will not write you a note, that means they consider you well enough to continue with academic activities. • If both steps are not followed, you will not be excused from the exam

Students using the DSS facility must meet with me within the first 2 weeks of classes.

Advice!!! • Course is cumulative. • Important to keep up with the lectures, homework and readings each week.

Macroeconomics vs Microeconomics Examines the functioning of individual industries and the behavior of individual decision-making units - firms and households. Macroeconomics Deals with the economy as a whole. Focuses on determinants of total national income, deals with aggregates such as aggregate consumption and investment, and looks at the overall level of prices instead of individual prices. aggregate behavior The behavior of all households and firms together. sticky prices Prices that do not always adjust rapidly to maintain equality between quantity supplied and quantity demanded.

Three Major Macroeconomic Concerns Growth in production • • how much we produce and can we keep it growing Unemployment • • High employment - Low unemployment Inflation and deflation • • Low stable inflation

Examples of Macroeconomic Questions • What causes inflation? • Why is the unemployment rate sometimes high and sometimes low? • What might cause interest rates to be low one year and high the next? • How do changes in the money supply affect the economy? • How do changes in government spending and tax policy affect the economy?

A couple of questions for you: What is the current unemployment rate in the US? What is fiscal policy? What is the federal government budget deficit? What is the Federal Reserve System? What is monetary policy?

A Little Macroeconomic History: • 19 th and early 20 th century, Classical Theory/Classical Economist • They focused on microeconomics • They argued that market forces drive the economy toward full employment, possibly quickly – markets clear. • In Macro Speak “The economy self-corrects” • If unemployment exist, wages would fall to move the economy back to full employment.

A Little Macroeconomic History: • 1929 to 1933: The Great Depression • Worldwide economic crisis. • Total amount of goods and services produced in the U. S. fell by more than 25%. • Unemployment increased to 25%. • A lot of unemployment for a long period of time.

A Little Macroeconomic History: • 1936: John Maynard Keynes, “The General Theory of Employment, Interest, and Money” • Replaces classical theory with theory based on: – Aggregate (Total) Demand – Wage and price rigidities – sticky! – Markets don’t clear and it may take a long time for the economy to “self-correct” • Birth of Macroeconomics as a field separate from microeconomics

A Little Macroeconomic History: • Keynes believed government should intervene in the economy to stimulate the level of output and employment – During periods of low private demand, the government should take action to stimulate aggregate (total) demand to lift the economy to full employment. – Keynes was not a socialist. He was a capitalist. He simply felt capitalism could be unstable.

A Little Macroeconomic History: • Private demand Public demand? • What can the government do to stimulate aggregate total demand (private and public) to lift the economy out of recession? • Big, Big Question – does this stuff work? • Almost 80 years later still debating this!

Chapter 4 Part 1 MEASURING GDP AND ECONOMIC GROWTH

Goals of Chapter 4: ¨ Define GDP (Gross Domestic Product) ¨ Explain why GDP equals aggregate expenditure and aggregate income ¨ Explain how the Bureau of Economic Analysis measures U. S. nominal GDP and real GDP ¨ Explain the uses and limitations of real GDP as a measure of economic well-being

Production and GDP • Gross Domestic Product (GDP) – – – Total value of all final goods and services produced for the marketplace during a given year within the nation’s borders 18

Production and GDP • Total value… – GDP is measured in dollar values (P x Q) • …of all final… – Final goods and services: sold to their final user • …goods and services… • Goods: tangibles • Services: intangibles 19

Production and GDP • …produced… – Not included: land, stocks and bonds used goods … • …for the marketplace… – With the intention of being sold • …during a given period… – Specific period of time • …within a nation’s borders – Regardless of who owns the resources 20

Gross Domestic Product Final Goods and Services GDP is the value of the final goods and services produced. A final good (or service) is an item bought by its final user during a specified time period. A final good contrasts with an intermediate good, which is an item that is produced by one firm, bought by another firm, and used as a component of a final good or service. Excluding the value of intermediate goods and services avoids counting the same value more than once – double counting.

Intermediate and Final Good Tires taken from that pile and mounted on the wheels of the new car before it is sold are considered intermediate goods. Tires taken from that pile to replace tires on your old car are considered final goods. If we included the value of the tires (an intermediate good) on new cars and the value of new cars (including the tires), we would be double counting.

The Expenditure Approach to GDP • Expenditure approach: GDP=C+I+G+NX – Adding the value of goods and services purchased by each type of final user 1. Consumption goods and services (C) purchased by households 2. Private investment goods and services (I) purchased by businesses 3. Government goods and services (G) purchased by government agencies 4. Net exports (NX) purchased by foreigners

The Expenditure Approach to GDP • Consumption spending (C) – Part of GDP purchased by households as final users – 70% of total production – Not included: • Imported consumption goods and components • New home construction 24

The Expenditure Approach to GDP • Consumption spending (C) – Included - even though households don’t actually buy them • Total value of food products produced on farms that are consumed by the farmers and their families themselves • Total value of housing services provided by owner-occupied homes 25

The Expenditure Approach to GDP • Private investment (I) – Business purchases of plant, equipment, and software – New home construction – Changes in inventories 26

The Expenditure Approach to GDP • Private investment (I) – Adds to the nation’s capital stock – Ignores depreciation • Net investment – Investment minus depreciation 27

The Expenditure Approach to GDP • Government purchases (G ) – Spending by federal, state, and local governments on goods and services • Government outlays – Government purchases + Transfer payments 28

The Expenditure Approach to GDP • Transfer payments – Payment that is not compensation for supplying goods, services, or resources – Money redistributed from one group of citizens (taxpayers) to another (the poor, the unemployed, the elderly) – Included in government budgets as outlays – Not included in the government purchases component of GDP 29

The Expenditure Approach to GDP • Net exports (NX) – Total exports minus total imports • Total exports – U. S. production that is purchased by foreigners • Total imports – Americans’ purchases of goods produced outside of the United States 30

2017 13, 100 3, 140 3, 330 -570 ______ 19, 000 X = 2339 and M = 2877

Gross National Product (GNP) • GNP is the value of goods and services produced anywhere in the world by the residents of a nation. • Nike’s income from shoe factories in Vietnam is part of US GNP and Vietnam’s GDP. • Toyota’s income from car plants in the US is part of Japan’s GNP and US GDP. • GNP = GDP plus payments received from the rest of the world minus income paid to the rest of the world

Gross Domestic Product Depreciation is the decrease in the value of a firm’s capital that results from wear and tear and obsolescence. Gross investment is the total amount spent on purchases of new capital and on replacing depreciated capital. Net investment is the increase in the value of the firm’s capital. Net investment = Gross investment Depreciation.

Measuring U. S. GDP The Bureau of Economic Analysis complies the GDP data Uses two approaches - § The expenditure approach § The income approach

Measuring U. S. GDP The Expenditure Approach The expenditure approach measures GDP as the sum of consumption expenditure, business investment expenditure, government expenditure on goods and services, and net exports. GDP = C + I + G + (X M)

The Income Approach to GDP • Factor payments – Payments to the owners of resources that are used in production • Income Approach GDP = sum the factor payments earned by all households in the economy (wages and salaries, rent, interest, and profit) • Total output of the economy (GDP) = total income earned in the economy 36

Why does expenditure = income In every transaction, the buyer’s expenditure becomes the seller’s income. Thus, the sum of all expenditure equals the sum of all income.

Simple Circular Flow The circular flow diagram shows the income received and payments made by each sector of the economy.

Measuring U. S. GDP The Income Approach The sum of all factor incomes is called net domestic income at factor cost. Two adjustments must be made to the net domestic income get GDP: 1. Add Indirect taxes 2. Add depreciation