U.S. Macroeconomic GoalsStable Prices

Low Unemployment

High and Sustained Growth

Measuring the Economy Measure size = Measure temperature

Measure your weight=Measure the U.S.EconomyGross Domestic Product (GDP)

Gross Domestic Product GDPGross Domestic Product (GDP)-The total dollar value of all final goods and services produced within a countrys borders during one calendar year.

Total Dollar Value Measure units produced by the countrys currency value . $$$$$$

Gross Domestic Product Final Goods and Services Product is in its final form sold to customers. It does not include Intermediate Goods products used in the production of final goods.

Gross Domestic ProductEx. Woodcutter cuts down a tree ($100)Sawmill processes into lumber ($200)Furniture maker turns into table ($450)Furniture dealer sells table for $750Consumer purchases the table and the value of the finished product is counted.What is the final value counted for GDP??

Gross Domestic Product Within a countrys bordersEx. Coca Cola produced in Russia is not included. A Toyota produced in a plant in Tennessee is included. Why?Current Year GDP counts goods produced within the year not necessarily sold. Unsold inventories count. GDP does not count products such as used cars, second hand clothing. It was already counted the year it was first produced/sold.

Output Expenditure Model GDP = C + I + G + Xn

C Personal consumption expenditureI Gross Business InvestmentG Government purchases of goods and servicesXn (X-M ) Exports minus imports

GDP Factors C = Consumption expenditures- Consumer purchasesDurable goods (life of > 1 years) ex. CarsNondurable goods (< 1 year) ex. FoodServicesI = Gross Business Investmenttotal of all capital goods produced in 1 year in a country.Fixed investmenthousing, buildings, equipmentInventory investmentIncrease/decrease in total $ in raw materials, final goods, etc.

GDP Factors G = Government PurchasesTotal $ that local, state, federal governments spend on goods and services.Ex. Highways, education, national defenseGovernment aid does not count (it only transfers wealth).

GDP Factors Xn = Net ExportsThe $ value of goods and services produced within the U.S. borders.Exports: Goods produced in this country but sold in other countries.Imports: Goods produced in other countries but sold in this countryXN = (X-M) = Exports minus Imports

Adjusting GDP for Price Increases As prices increase, so does GDP. Therefore, economists must calculate GDP in terms of real pricesNominal GDPExpressed in current prices of the period being measured.Real GDPAdjusted for price changes.Price Indexset of statistics that allows economists to compare prices over time.

Limitations of GDP Non-Market Activities GDP measures only market transactions. Ex. If you make a product or provide a service and no one pays for it, it doesnt count.Underground EconomyIllegal and unreported legal activities.Negative Externalities Unintended side effectsQuality of Life Additional goods and services does not necessarily mean better well being.

Eight Things Not Counted in GDP[no production]

Second Hand Sales[no production]Public/Private Transfer PaymentsPurely Financial TransactionsIntermediate GoodsU.S. Corporations producing overseasNon-market transactions [household or volunteer work]Unreported Legal Business ActivityIllegal Business Activity

Self Employment $255Other Legal $25Rents & Royalties $30Corporate Profits $50Interest $55Wages andSalaries $185Drugs $120Bribery $35Gambling andLoan Sharking $10Pornography $20Fraud $30Other Illegal $20Prostitution $30Stolen Goods $35Illegal$300 BLegal$600 BWhat gets reported isthe Above GroundWhat doesnt get reportedis the Underground

Influences on GDPWhat makes GDP rise or fall? in Aggregate Demand the amounts of goods and services that consumers, firms, govt. and foreign buyers collectively desire to purchase at each possible price level. in Aggregate Supply All goods and services produced by all firms in a nation at all possible prices.

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