Principle of Macroeconomics
Dr. Ou Hu
Webpage: www.as.ysu.edu/~ohu
Office Hours:11:00-12:00, Monday through
Friday and by appointment
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Principles of Macroeconomics
• Macroeconomics – study the behaviors of the
overall economy
• Macroeconomic Goals
– Sustainable economic growth
– Full employment
– Stable price
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Gross Domestic Product, GDP: A Definition
– A nation’s gross domestic product (GDP)
• Total value of all final goods and services produced
for the market during a given period within the
nation’s borders.
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Gross Domestic Product, GDP: A Definition
• …of all final…
– When measuring production, we only count goods and
services that are sold to their final users.
• Avoids over-counting intermediate products when measuring
GDP.
– Value of all intermediate products is automatically included in
value of final products they are used to create.
– Examples: tires, glass, flour, etc.
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Gross Domestic Product, GDP: A Definition
• …goods and services…
– Goods: cars, furniture, computers, beer, etc.
– Services: medical, financial, educational, etc.
• …produced…
– In order to contribute to GDP, something must be
produced.
Q: should stocks or bonds be included in the calculation
of GDP?
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Gross Domestic Product, GDP: A Definition
• …for the market…
– GDP does not include all final goods and services produced in the
economy
• Includes only the ones produced for the market—that is, with the
intention of being sold.
• Example: ‘Do it yourself’ activities
• …during a given period…
– GDP measures production during some specific period of time
• Only goods produced during that period are counted.
how about old houses? And how about the services provided by the
realtors?
• GDP is actually measured for each quarter, and reported as an annual
rate.
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Gross Domestic Product, GDP: A Definition
• …within the nation’s borders
– U.S. GDP measures output produced within U.S.
borders.
• Regardless of whether it was produced by Americans
– Incomes Americans earned abroad are not counted.
– However, foreigners producing goods or services within the
country are included:
Chinese Acrobats, Toyota, Andrea Bocelli
– GDP vs.GNP
• GNP=GDP+net income receipts
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The Expenditure Approach to GDP
• Expenditure approach divides output into four categories
according to which group in the economy purchases it as
final users
– Consumption goods and services (C)—purchased by households
– Private investment goods and services (I)—purchased by
businesses
– Government goods and services (G)—purchased by government
agencies
– Net exports (NX)—purchased by foreigners
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The Expenditure Approach to GDP
• When we add up the purchases of all four groups we get
GDP
GDP = C + I + G + NX
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Consumption Spending
• Consumption is the part of GDP purchased by households
as final users
– Almost everything households buy during the year is included as
part of consumption spending when we calculate GDP
– One exception is construction of new homes
• Counted as private investment
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Private Investment
• Private investment has three components
– Business Fixed Investment
• Factories, office buildings, machinery, and software
• Are regarded as final goods, and firms that buy them as final users of
those goods
– Residential Investment
• Residential housing is an important part of a nation’s capital stock
• House will continue to provide services into the future
– Changes in Business Inventories
• Why do we count the change in firms’ inventories as part of investment
in measuring GDP?
– When goods are produced but not sold during the year, they end up in a
firm’s inventory stock
– Part of the nation’s capital stock
– Will provide services in the future, when they are finally sold and used
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Government Purchases
• Purchases by state, local, and federal government are
included.
• Government purchases include
– Goods
• Fighter jets, police cars, school buildings, spy satellites, etc.
– Services
• Such as those performed by police, legislators, and military
personnel
• Government is considered to be a purchaser even if it
actually produces the goods or services itself
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Government Purchases
• Transfer payments represent money redistributed from
one group of citizens (taxpayers) to another (poor,
unemployed, elderly).
– While transfers are included in government budgets as outlays
they are not purchases of currently produced goods and services.
• Not result in production of new goods and services
• Not included in government purchases or in GDP
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Net Exports
• Not only do we spend on domestic goods and services,
but we also spend on those from the rest of the world. So
does the rest of the world.
– Add all the U.S. exports (sold to foreigners) in the measure of GDP
– Deduct all the U.S. imports (bought from foreigners) during the
year, leaving us with just output produced in United States
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Other Approaches to GDP: The Value-Added
Approach
• Value added
– Firm’s contribution to a product or
– Revenue it receives for its output
• Minus cost of all the intermediate goods that it buys
• GDP is sum of values added by all firms in economy.
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Other Approaches to GDP: The Factor
Payments Approach
• In any year, value added by a firm is equal to total factor
payments made by that firm.
• Thus, GDP = total factor payments made by all firms in the
economy
• factor payments like wages, salaries, rent, interest and profit
– GDP is measured by adding up all of the income
• Gives us an important insight into the macroeconomy
– Total output of economy (GDP) = total income earned in the
economy
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Measuring GDP: A Summary
• Different ways to calculate GDP
– Expenditure Approach
• GDP = C + I + G + NX
– Value-Added Approach
• GDP = Sum of value added by all firms
– Factor Payments Approach
• GDP = Wages and Salaries + interest + rent + profit
Therefore, Total output = Total income
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Problems With GDP
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Changes in Quality
Underground Economy
Non-market Production
Not a perfect measure of economic well-being
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Change in Quality
– While BEA includes impact of quality changes for many
goods and services (such as automobiles and
computers)
• Does not have the resources to estimate quality changes for
millions of different goods and services
By ignoring these quality improvements, GDP probably
understates true growth from year to year.
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The Underground Economy
• Some production is hidden from government
authorities
– Either because it is illegal
• Drugs, prostitution, most gambling
– Or because those engaged in it are avoiding taxes
• Production in these hidden markets cannot be measured
accurately
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Non-Market Production
• GDP does not include non-market production
– Goods and services that are produced, but not sold in the market
• Whenever a non-market transaction becomes a market
transaction GDP will rise even though total production has
remained the same
• So, we must we must exercise caution in interpreting
changes in GDP.
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Not a perfect measure of economic well-being
• No value measured on leisure
• “Bad” things can raise GDP.
Disasters, wars, etc.
• Externality – ecological cost
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