Finance 30220:
Macroeconomics
Introduction to The US Economy
How do we measure a country’s size? Total production would be a good start, but
the global economy complicates things….
BMW X5
IPhone
Where do
BMWs come
from?
Spartanburg, South Carolina
• 8,000 Employees
• Produces 300,000 vehicles annually
• Produces ALL X3, X4, X5, and X6
models (even for export to Europe)
Germany
China
USA
Canada
Egypt
South Africa
India
Munich, Germany
Japan
Mexico
Where does your IPhone come from?
Imports of the iPhone in 2009 contributed $1.9
billion to the U.S. trade deficit with China.
Two measures of a country’s production
Gross Domestic Product
represents the total current
market value of all goods
and services produced
within a country over the
course of some time period
By the Standard of GDP, a
BMW X5 is an American car,
but the IPhone is an Chinese
phone (actually, a global phone)
Gross National Product
represents the total current
market value of all goods
and services produced by a
country’s citizens over the
course of some time period
By the Standard of GNP, a
BMW X5 is a German car,
(The IPhone is still a global
phone)
Why East Timor’s GNP is almost six times
as high as its GDP
Gross Domestic Product: $1.3B
Gross National Product: $7.54B (+580%)
Why is Ireland’s GNP so much lower than its
GDP?
Gross Domestic Product: $210.3B
Gross National Product: $164.2B (-25%)
(Do a google search on this)
The Bureau of Economic Analysis (BEA) reports Gross Domestic Product (GDP) for the
United States on a quarterly basis:
For the third quarter of 2015, GDP in the
United States was (on an annualized basis)
was...
$18,060,200,000,000.00
Gross National product
$18,263,800,000,000.00
* Source: www.bea.gov
Let’s stick with GDP for now. How does the US Economy compare in size to other countries around the world?
(World Economy = $109T ; the countries listed below are 75% of the total)
European Union
$18.12T
Russia
$2.5T
United States
$17.35T
China
$18.09T
England
Japan
$2.60T
$4.767T
California
$2.3T
India
$7.411T
Mexico
$2.15T
Australia
Brazil
$1.1T
$323T
PPP Method 2014 est.
* Source: CIA Factbook
Problem: How do we compare economies with different currencies?
The average price of a Big
Mac in the United States
is*
$4.93
The Market Exchange rate method
involves converting foreign prices to
US dollars using the current market
exchange rate.
The average price of a
Big Mac in China is*
1 Chinese Yuan = .15 U.S. dollars
17.60 Yuan
Y17.60 x .15 = $2.64
Which if these is more accurate?
The Purchasing Power Parity method
uses prevailing US prices
$4.93
In principle, it shouldn’t matter…arbitrage would eliminate any price differentials.
The average price of a Big
Mac in the United States
is*
$4.93
The average price of a
Big Mac in China is*
1 Chinese Yuan = .15 U.S. dollars
17.60 Yuan = $2.64
In this case, you could make money by buying Big Macs in China and then resell them in The US. There is a unique exchange rate
that eliminates this profit opportunity.
17.60 x exchange rate = 4.93
exchange rate =
4.93
17.60
= .28 ($ per Yuan) (3.57 Yuan per $)
(This is known as the PPP exchange rate)
Do markets really eliminate profit opportunities?
Yuan Per US Dollar
0.60
0.50
0.40
0.30
PPP
.28
55%
0.20
.15
0.10
1981
1985
1989
1993
1997
2001
2005
2009
2013
Based off of Big
Macs, the Yuan is
“undervalued” by
55%
“Overvalued”
“Undervalued”
China
* Source: The Economist
Valuing currencies using the Big
Mac Standard
The method by which countries are evaluated sometimes greatly change the results!
PPP Approach
*2014 Estimate
** Source: CIA Factbook
Market Exchange Rate
Country
GDP
Rank GDP
Rank
European Union
$18.12T
#1
$18.27T
#1
China
$18.09T
#2
$10.36T
#3
USA
$17.35T
#3
$17.35T
#2
India
$7.41T
#4
$2.051T
#6
Japan
$4.767
#5
$4.602T
#4
Germany
$3.748
#6
$3.874T
#5
Russia
$3.577
#7
$1.861T
#7
Note how concentrated GDP is among a few countries….
Nominal GDP around the world (PPP Method)
*Source: CIA Factbook
Lets use the PPP method as a reasonable method for comparing countries. Per Capita GDP is
calculated by dividing total GDP by the current population. This gives a better sense of average well
being.
Per Capita GDP =
$18T
322M
= $55,900
* Source: www.bea.gov
In Per Capita Terms, the United States ranks #19 while China sits at #117 ($13,200)!! The European Union
comes in at #41 ($39,400)
165,000
145,000
125,000
105,000
85,000
65,000
45,000
25,000
Note: 2014 GDP estimates measured on a Purchasing Power
Parity Basis
* Source: CIA Factbook
Per capita GDP is even more highly concentrated in a few countries
GDP Per Capita around the World
*Source: CIA World Factbook
Did you know that if you earn
$20,000 or more per year,
you are in the top 4% of the
global income distribution
$20,000 is in the bottom 20% of
the US income distribution
* Source: World Bank
Side note: Calculating rates of growth
540
340
220
100
t=0
150
t=1
t=2
t=3
t=4
Suppose that we have the following data. How would you calculate the rate of growth between time 0 and time 4.
Side note: Calculating rates of growth
540
340
440% (Of 100)
220
100
t=0
150
t=1
 540  100 
Growth  
 *100  440%
 100 
t=2
t=3
t=4
Calculating a percentage change like
this assumes that the growth takes
place all at once
Side note: Calculating rates of growth
540
340
220
100
t=0
150
t=1
t=2
Growth  ln  540   ln 100   *100  168%
t=3
t=4
Using natural logs allows the growth
process to be a smooth, continual
process
Side note: Calculating average annual rates of growth
540
52%
340
52%
220
100
52%
150
52%
t=0
t=1
t=2
1


4
540


Average Annual Growth  
 1 *100  52.5%

 100 



t=3
t=4
Again, this assumes a discrete
process (happening at regular
intervals)
Side note: Calculating average annual rates of growth
540
340
220
100
t=0
150
t=1
t=2
ln  540   ln 100 
Growth 
*100  42%
4
t=3
t=4
Using natural logs allows the growth
process to be a smooth, continual
process
Another measure of economic performance would be the rate of growth in output rather than the level of output
Year on
Year
Growth
Period
GDP (Billions)
2014Q3
2014Q4
2014Q1
2015Q2
2015Q3
17,522
17,615
17,649
17,913
18,060
Annualized
Growth
Year on Year growth (2015Q3-2014Q3)
Annualized Growth (2015Q3)
ln 18, 060   ln 17,522   *100  3.0%
ln 18, 060   ln 17,913  * 4*100  3.23%
We can approximate real growth by subtracting the inflation rate
Period
GDP (Billions)
Price Level
2014Q3
2014Q4
2014Q1
2015Q2
2015Q3
17,522
17,615
17,649
17,913
18,060
109.0
109.1
109.1
109.7
110.0
Year on Year growth (2014Q3-2015Q3)
Annualized Growth (2015Q3)
ln 18, 060   ln 17,522   *100  3.0%
ln 18, 060   ln 17,913  * 4*100  3.23%
Year on Year Inflation (2014Q3- 2015Q3)
Annualized Inflation (2015Q3)
- ln 110.0   ln 109.0   *100  0.9%
Real Growth = 2.1%
- ln 110.0   ln 109.7   * 4*100  1.1%
Real Growth = 2.23%
* Source: www.bea.gov
In terms of real GDP Growth the US drops to #131 (The EU is #168 at 1.4%, China is #18 at 7.3%)
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
Note: 2014 GDP estimates measured on a Purchasing Power Parity Basis
* Source: CIA Factbook
Note that this picture of economic growth is almost a mirror image of the picture for GDP per capita (the fastest
growing regions are the lower income regions…we will come back to this)
Growth Rates of Real GDP around the world
*Source: IMF's October 2012 World Economic Outlook
Let’s look at longer term averages for the US…
Year
1947Q3
GDP
$250B
Price
12.95
2015Q3
$18,060
110.0
Price Growth (Inflation)
Total Growth
 ln 18, 060   ln  250  

 *100  6.3%
68


 ln 110.0   ln 12.95  

 *100  3.2%
68


Real Growth = 6.3% - 3.2% = 3.1%
Note that the US seems to be slowing…this began in the 1970s
Average Real
Growth = 3.1%
???
Something definitely happened in the 1970s and
1980s…
Since the late 1970’s we have seen the emergence of a “wage gap”. That is, we see a difference between
productivity and wages
450
Index: 1947 = 100
400
350
300
250
200
150
From the late 1970’s on,
we have developed a
“wage gap”
100
50
0
1947
1957
1967
Real GDP Per Hour
1977
1987
1997
Real Compensation Per Hour
2007
Historically, labor’s share of income has been constant at around 65%, but has decreased since the
1980s.
Percent
70
68
66
65%
64
62
This “wage gap” translates
into a lower labor share of
income
60
58
56
1947
1952
1957
1962
So, where is the extra income going?
1967
1972
1977
1982
1987
1992
1997
2002
2007
2012
As labor’s share of total income
declines, a larger share of income
is going to capital owners (i.e. to
rich people)
*Source: Thomas Piketty and
Emmanuel Saez
Note the divergence of median with mean in the late 1990’s
Real GDP Per Capita
(1993 = 100)
Real Median
Household Income
(1993 = 100)
US Income Distribution in 2012 (Real Mean Household income = $60,000)
* Source: US Census Bureau
# of Households = 121M
Average Income by Quintiles (2013)
$105,910+
$65,501 - $105,910
$40,187 - $65,501
$20,900 - $40,187
$0 - $20,900
Source: US Census Bureau (www.census.gov)
The Lorenz Curve
The Lorenz curve plots the cumulative distribution of US income
The Gini Coefficient
A
Gini 
A B
The US currently has a Gini
coefficient of .45
0 = Perfect
Equality
1 = Perfect
inequality
Gini Coefficient in the US by County
* Source: Census Bureau
Gini Coefficients around the world
* Source: CIA Fact book
Note that income inequality in the US was worse back in the 1920’s, but has grown dramatically since the 1970s
Income inequality really
accelerated in the 1990’s!
The Good Old Days: Economic Growth from 1947-1973
The Times, They are a Changin’: Economic growth from 1977-1989
Here we can see both the declining growth as well as the rising inequality.