Chapter 7
The First Step Into
Macroeconomics
McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Objectives
•
•
•
•
•
•
•
Macroeconomics
Measuring the economy
Gross Domestic Product (GDP)
Components of GDP
Understanding GDP
What GDP does not include
International comparisons
7-2
Macroeconomics
• Macroeconomics studies the economy as a
whole.
• Core concepts include the issues of output,
growth, inflation, and unemployment.
• Questions raised include:
– Is the economy heating up or slowing down?
– Are prices rising too quickly?
– Are there jobs available for students graduating from
college?
– What will happen to interest rates for car loans and
mortgages?
7-3
Measuring the Economy
• Measure the size of the economy in order
to identify economic problems, diagnose
the causes, and figure out what the right
policy might be to fix them.
• But measuring the size and growth of the
economy is not an easy task.
• In the 1930’s, Simon Kuznets developed a
framework for measuring the economy.
7-4
Measuring the Economy
• Today, the Bureau of Economic Analysis (BEA),
the Bureau of Labor Statistics (BLS), the Census
Bureau, and the Federal Reserve are the main
statistical agencies in Washington.
• They conduct surveys, collect data, and
regularly publish reports on the key economic
statistics. These include production,
unemployment, inflation, productivity, and
foreign trade.
7-5
The Basics of Gross Domestic
Product
• Gross Domestic Product (GDP) is the
dollar value of the output of the national
economy.
• All the statistics that feed into the process
of measuring GDP are known as the
system of national accounts.
• The process requires measuring the
output and price of over a million goods
and services.
7-6
The Basics of Gross Domestic
Product
• The problem in measuring GDP is that
different types of goods and services are
each measured in different units.
– For example, how do we compare automobiles with
haircuts or aquariums?
• There is no easy way to add them all up.
• The key is to express the output of each good
and service as a dollar amount and then add
these dollar amounts up.
7-7
Components of GDP
• GDP is made up of the following
components:
– personal consumption, which includes goods and
services bought by households.
– nonresidential investment, which are the buildings,
equipment, and software businesses purchase to use
in production.
– residential investment, which include the
construction of new homes and the renovation of
existing homes.
7-8
Components of GDP
– government consumption and investment, which
are goods and services purchased by the
government.
– inventory investment, or goods produced by
businesses that are not immediately purchased.
– net exports, which includes the difference between
exports and imports.
• GDP is the sum of these components.
7-9
Components of GDP, 2007
The following table shows the value of the different components of GDP
for 2007.
Category
Billions of dollars
Personal consumption
9,734
Nonresidential investment
1,482
Residential investment
641
Change in inventories
3
Government purchases
2,690
Net exports
-708
Gross Domestic Product
13,841
7-10
No Double-Counting
• Only final goods and services count in GDP; that
is, goods and services purchased by the final
user.
• Purchases of intermediate inputs are left out of
GDP to avoid double-counting.
– Intermediate inputs are any goods and services used
or bought by a business as an input in the production
process.
• For example, a printing company uses paper and
ink to produce a book.
7-11
Consumption Expenditures
• The largest category of GDP is personal
consumption expenditures, or consumer
spending.
• This category includes all sorts of goods and
services that households spend money on,
including food, telephone services, personal
computers, automobiles, and gasoline.
• Medical spending is part of consumer spending.
7-12
Nonresidential Investment
• Nonresidential investment is the total
spending by businesses on the structures,
equipment, and software they need to run their
operations.
• The biggest category of business investment
spending today is software.
• A new factory in the United States, even if built
by a foreign-owned company, is counted as part
of US GDP.
– It is location, not ownership, that counts for GDP.
7-13
Growth in Technology Spending
7-14
Residential Investment
• Residential investment is the spending on the
building of new homes and the renovation of
existing ones.
• In contrast, if you buy an existing home, the
spending does not count as part of residential
investment, since no actual production or
construction occurred.
– Remember, GDP is about production of new goods
and services.
• Residential investment is highly volatile over
time.
7-15
Ups and Downs of Residential
Investment
7-16
Government Spending
• The federal, state, and local governments in the
United States are an important part of the
economy, spending a total of $4.6 trillion in
2007.
• There are two types of government spending:
– The first type is called government consumption
and investment, which includes all of the
government’s purchases of goods and services, such
as salaries paid to government employees.
7-17
Government Spending
– The other type of government spending is money
which is sent out by the government, but the actual
spending is done by the private sector.
• For example, government programs such as Medicare and
Medicaid spend enormous sums of money, but most of the
actual healthcare is done by private hospitals and doctors.
• Social Security checks are sent out by the federal
government, but spent by individuals.
• These expenditures are not counted as part of government
spending.
7-18
Change in Inventories
• The change in inventories is a rather small but
important category.
• When companies add to their inventories, it
contributes positively to GDP.
• This is because it counts as production, even if
no one has bought the goods.
• In contrast, when companies reduce their
inventories by selling goods, the change gets
subtracted from GDP.
7-19
Net Exports
• Net exports equals exports minus imports.
• Exports are goods and services produced in the
United States and sold outside the country, so
they add positively to GDP.
• Imports are goods and services produced
outside the United States and consumed within
this country. They enter the GDP calculation with
a negative sign.
7-20
The Flow of Exports and Imports in
2007
Gross Domestic
Product
$12.20
trillion
$13.84 trillion
US production of
goods and services
Foreign
purchases of
goods and
services
produced in
the US
$1.64
trillion
Exports
Gross Domestic
Purchases
$14.55 trillion
US purchases of
goods and
services
produced in the
US
US purchases of
goods and services
$2.35
trillion
US purchases
of goods and
services
produced
overseas
Imports
7-21
Exports and Imports, 1950-2007
7-22
What GDP Does Not Include
• GDP focuses on the market economy.
• Thus, non-market transactions are not included.
– All the work put in by volunteers at hospitals, schools,
and religious organizations is not counted as part of
GDP.
– All the time and effort that goes into raising children,
cleaning house, and cooking food by a stay-at-home
parent is not counted as part of GDP.
7-23
What GDP Does Not Include
• GDP also does not include the underground
economy.
• The underground economy includes illegal
activities such as drug dealing and ‘off-the-book’
activities such as the babysitter or landscaper
who gets paid in cash and does not report it to
the Internal Revenue Service.
– The underground economy could be as large as 10%
of GDP.
7-24
International Comparisons of GDP
• Other countries calculate their own GDP using
roughly the same methods as the US.
• This allows us to make an international
comparison of GDP.
• GDP per capita is the economic output of a
country, divided by the size of its population.
– If we want to determine which countries have the
highest living standards, we use GDP per capita.
7-25
GDP per Capita Across Countries
53,037
Norway
United States
45,845
Switzerland
41,128
38,435
Canada
36,494
Sweden
United Kingdom
35,134
Germany
34,181
Japan
33,577
France
33,188
Korea
24,783
Russia
14,692
12,775
Mexico
Brazil
9,695
China
5,292
Indonesia
3,725
2,659
India
1,300
Bangladesh
806
Ethiopia
0
10,000
20,000
30,000
40,000
50,000
60,000
Average GDP per person, 2007 (dollars)
7-26