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19 | The Macroeconomic
Perspective
Figure 19
...
This photograph shows people lined up during the Great Depression,
waiting for relief checks
...
(Credit: modification of work by the U
...
Library of Congress/Wikimedia
Commons)
How is the Economy Doing? How Does One Tell?
The 1990s were boom years for the U
...
economy
...
What
causes the economy to expand or contract? Why do businesses fail when they are making all the
right decisions? Why do workers lose their jobs when they are hardworking and productive? Are bad
economic times a failure of the market system? Are they a failure of the government? These are all
questions of macroeconomics, which we will begin to address in this chapter
...
How can we get a handle on that? The answer begins more
than 80 years ago, during the Great Depression
...
Roosevelt and his economic
advisers knew things were bad—but how could they express and measure just how bad it was? An
economist named Simon Kuznets, who later won the Nobel Prize for his work, came up with a way to
track what the entire economy is producing
...
In this chapter, you will learn how GDP is constructed, how it
is used, and why it is so important
...
What causes recessions?
What makes unemployment stay high when recessions are supposed to be over? Why do some countries grow faster than
others? Why do some countries have higher standards of living than others? These are all questions that macroeconomics
addresses
...
However, when we do that, something curious happens
...
Indeed, what seems sensible from a
microeconomic point of view can have unexpected or counterproductive results at the macroeconomic level
...
A few people decide that they want a
better view, and so they stand up
...
Eventually, nearly everyone is standing up, and as a result, no one can see
much better than before
...
This is not macroeconomics, but it is an apt analogy
...
How are we going to tackle it? Figure 19
...
We will study macroeconomics from three different perspectives:
1
...
)
2
...
Finally, what are the policy tools governments can use to manage the macroeconomy?
Figure 19
...
The box on the left indicates a consensus of what are the most important goals for the macro economy, the middle
box lists the frameworks economists use to analyze macroeconomic changes (such as inflation or recession), and the
box on the right indicates the two tools the federal government uses to influence the macro economy
...
• Economic growth ultimately determines the prevailing standard of living in a country
...
A growth rate of more than 3% is
considered good
...
When people lack jobs, the economy is wasting a precious resource-labor, and the result is lower goods
and services produced
...
While
measured unemployment is unlikely to ever be zero, a measured unemployment rate of 5% or less is considered low
(good)
...
If many
people face a situation where the prices that they pay for food, shelter, and healthcare are rising much faster than the
wages they receive for their labor, there will be widespread unhappiness as their standard of living declines
...
CHAPTER 19 | THE MACROECONOMIC PERSPECTIVE 381
Frameworks
As you learn in the micro part of this book, principal tools used by economists are theories and models (see Welcome
to Economics! for more on this)
...
This book presents two perspectives on
macroeconomics: the Neoclassical perspective and the Keynesian perspective, each of which has its own version of AD and
AS
...
Policy Tools
National governments have two tools for influencing the macroeconomy
...
The second is fiscal policy, which involves changes in government spending/
purchases and taxes
...
2 will be explained in detail in one or more other chapters
...
19
...
How large is the U
...
economy? The size of a nation’s overall economy is typically measured by its gross domestic product
(GDP), which is the value of all final goods and services produced within a country in a given year
...
This task is straightforward: take the quantity of everything produced,
multiply it by the price at which each product sold, and add up the total
...
S
...
2 trillion, the
largest GDP in the world
...
The GDP of an economy can
be measured either by the total dollar value of what is purchased in the economy, or by the total dollar value of what is
produced
...
GDP Measured by Components of Demand
Who buys all of this production? This demand can be divided into four main parts: consumer spending (consumption),
business spending (investment), government spending on goods and services, and spending on net exports
...
) Table 19
...
Figure 19
...
4 (b) shows the levels of exports and imports as a percentage
of GDP over time
...
Table 19
...
Figure 19
...
Components of GDP on the Demand Side (in trillions of
dollars)
Percentage of
Total
Consumption $11
...
6%
Investment
$2
...
2%
Government
$3
...
5%
Exports
$2
...
5%
Imports
–$2
...
9%
Table 19
...
S
...
gov/iTable/
iTable
...
2
Percentage of
Total
100%
Table 19
...
S
...
gov/iTable/
iTable
...
3 Percentage of Components of U
...
GDP on the Demand Side Consumption makes up over half of
the demand side components of the GDP
...
gov/iTable/iTable
...
It refers to the purchase
of new capital goods, that is, new commercial real estate (such as buildings, factories, and stores) and
equipment, residential housing construction, and inventories
...
From the accountant’s perspective, it is as
if the firm invested in its own inventories
...
CHAPTER 19 | THE MACROECONOMIC PERSPECTIVE 383
Figure 19
...
Business investment hovers around 15% of GDP, but it increases and declines more than
consumption
...
(b) Exports are added to total
demand for goods and services, while imports are subtracted from total demand
...
S
...
If imports exceed exports, as in recent
years, then a trade deficit exists
...
gov/iTable/iTable
...
This tells us that consumers’ spending decisions are a major driver of the economy
...
Investment expenditure refers to purchases of physical plant and equipment, primarily by businesses
...
Investment demand is
far smaller than consumption demand, typically accounting for only about 15–18% of GDP, but it is very important for
the economy because this is where jobs are created
...
Business
investment is volatile; new technology or a new product can spur business investment, but then confidence can drop and
business investment can pull back sharply
...
Government expenditure in the United
States is about 20% of GDP, and includes spending by all three levels of government: federal, state, and local
...
Examples include the government buying a new fighter jet for the Air Force (federal government spending), building a new
highway (state government spending), or a new school (local government spending)
...
These payments are excluded from GDP because the government does not receive a new good or service in return or
exchange
...
If you are curious about the awesome undertaking
of adding up GDP, read the following Clear It Up feature
...
S
...
Once every five years, in the second and seventh year of each decade, the Bureau of the Census carries
out a detailed census of businesses throughout the United States
...
These figures are adjusted with foreign trade data to account
for exports that are produced in the United States and sold abroad and for imports that are produced
abroad and sold here
...
Together, these sources provide the main basis for figuring out what is
produced for consumers
...
For what is purchased by the federal government, the statisticians rely on the U
...
Department of
the Treasury
...
Because a lot of government spending at all levels involves hiring people to provide services, a large
portion of government spending is also tracked through payroll records collected by state governments
and by the Social Security Administration
...
Additional surveys cover transportation and travel, and adjustment is made for financial
services that are produced in the United States for foreign customers
...
Information on energy comes from the U
...
Department of Transportation and Department of Energy
...
Surveys of landlords find out about rental income
...
All of these bits and pieces of information arrive in different forms, at different time intervals
...
These
numbers are then “annualized” by multiplying by four
...
The “advance” estimate of GDP for a certain quarter is released one month after
a quarter
...
The “final” estimate is published
one month later, but it is not actually final
...
Then, once every five years, after the results of the latest detailed five-year business
census have been processed, the BEA revises all of the past estimates of GDP according to the newest
methods and data, going all the way back to 1929
...
org/l/beafaq) to read FAQs on the BEA site
...
By the same token, we must also subtract spending on
imports—goods produced in other countries that are purchased by residents of this country
...
The gap between exports
and imports is called the trade balance
...
In the United States, exports typically exceeded imports in the 1960s and 1970s, as shown in Figure 19
...
Since the early 1980s, imports have typically exceeded exports, and so the United States has experienced a trade deficit in
most years
...
Figure 19
...
As noted before, if exports and imports are equal, foreign trade has no effect on total
GDP
...
Based on these four components of demand, GDP can be measured as:
GDP = Consumption + Investment + Government + Trade balance
GDP = C + I + G + (X – M)
CHAPTER 19 | THE MACROECONOMIC PERSPECTIVE 385
Understanding how to measure GDP is important for analyzing connections in the macro economy and for thinking about
macroeconomic policy tools
...
Table 19
...
Before going into detail about
these categories, notice that total GDP measured according to what is produced is exactly the same as the GDP measured
by looking at the five components of demand
...
5 provides a visual representation of this information
...
7
16
...
7
29
...
6
46
...
2
7
...
1
0
...
3
100%
Table 19
...
S
...
gov/iTable/
iTable
...
5 Percentage of Components of GDP on the Production Side Services make up almost half of the
production side components of GDP in the United States
...
Figure 19
...
CHAPTER 19 | THE MACROECONOMIC PERSPECTIVE 386
Figure 19
...
Nondurable goods used to be larger than durable goods, but in recent years, nondurable goods have been
dropping closer to durable goods, which is about 20% of GDP
...
The change in
inventories, the final component of aggregate supply, is not shown here; it is typically less than 1% of GDP
...
By far the largest part of GDP, however, is services
...
A detailed breakdown of the leading service industries would include healthcare, education, and legal
and financial services
...
S
...
Instead, the most
common jobs in a modern economy involve a worker looking at pieces of paper or a computer screen; meeting with coworkers, customers, or suppliers; or making phone calls
...
The category of structures includes everything from
homes, to office buildings, shopping malls, and factories
...
The amount of inventories sitting on shelves tends to decline if business is better than expected, or to rise if business is
worse than expected
...
What are final goods? They
are goods at the furthest stage of production at the end of a year
...
For example,
imagine what would happen if government statisticians first counted the value of tires produced by a tire manufacturer, and
then counted the value of a new truck sold by an automaker that contains those tires
...
To avoid this problem, which would overstate the size of the economy considerably, government statisticians count just
the value of final goods and services in the chain of production that are sold for consumption, investment, government,
and trade purposes
...
From the example above, only the value of the Ford truck will be counted
...
The concept of GDP is fairly straightforward: it is just the dollar value of all final goods and services produced in the
economy in a year
...
S
...
CHAPTER 19 | THE MACROECONOMIC PERSPECTIVE 387
What is Counted in GDP
What is not included in GDP
Consumption
Intermediate goods
Business investment
Transfer payments and non-market activities
Government spending on goods and services
Used goods
Net exports
Illegal goods
Table 19
...
3
...
The entire underground economy of services paid
“under the table” and illegal sales should be counted, but is not, because it is impossible to track these sales
...
6% of
GDP, or close to $2 trillion dollars in 2013 alone
...
Also, production of some goods—such as home production as
when you make your breakfast—is not counted because these goods are not sold in the marketplace
...
org/l/undergroundecon) to read about the “New Underground
Economy
...
We mentioned
above that GDP can be thought of as total production and as total purchases
...
One of the closest cousins of GDP is the gross national product (GNP)
...
GNP adds what is produced by domestic businesses and labor abroad, and subtracts out any payments
sent home to other countries by foreign labor and businesses located in the United States
...
For the United States, the gap between GDP and GNP is relatively
small; in recent years, only about 0
...
For small nations, which may have a substantial share of their population working
abroad and sending money back home, the difference can be substantial
...
The process by which capital ages and loses value
is called depreciation
...
For practical purposes, it is not vital to memorize these definitions
...
To get an idea of how these calculations work,
follow the steps in the following Work It Out feature
...
4:
What is the value of GDP?
What is the value of net exports?
What is the value of NNP?
Government purchases
$120 billion
Depreciation
$40 billion
Consumption
$400 billion
Business Investment
$60 billion
Exports
$100 billion
Imports
$120 billion
Table 19
...
To calculate GDP use the following formula:
GDP = Consumption + Investment + Government spending + (Exports – Imports)
= C + I + G + (X – M)
= $400 + $60 + $120 + ($100 – $120)
= $560 billion
Step 2
...
Net exports = X – M
= $100 – $120
= –$20 billion
Step 3
...
2 | Adjusting Nominal Values to Real Values
By the end of this section, you will be able to:
• Contrast nominal GDP and real GDP
• Explain GDP deflator
• Calculate real GDP based on nominal GDP values
When examining economic statistics, there is a crucial distinction worth emphasizing
...
Looking at economic statistics
without considering inflation is like looking through a pair of binoculars and trying to guess how close something is: unless
you know how strong the lenses are, you cannot guess the distance very accurately
...
The nominal value of any economic statistic means the statistic is measured in terms of actual
prices that exist at the time
...
Generally, it is
the real value that is more important
...
5 shows U
...
GDP at five-year intervals since 1960 in nominal dollars; that is, GDP measured using the actual
market prices prevailing in each stated year
...
7
Year
Nominal GDP (billions of dollars)
GDP Deflator (2005 = 100)
1960
543
...
0
1965
743
...
3
1970
1,075
...
8
1975
1,688
...
1
1980
2,862
...
3
1985
4,346
...
3
1990
5,979
...
7
1995
7,664
...
7
2000
10,289
...
0
2005
13,095
...
0
2010
14,958
...
0
Table 19
...
S
...
bea
...
7 U
...
Nominal GDP, 1960–2010 Nominal GDP values have risen exponentially from 1960 through 2010,
according to the BEA
...
This conclusion would be highly misleading
...
In order to see how
much production has actually increased, we need to extract the effects of higher prices on nominal GDP
...
GDP deflator is a price index measuring the average prices of all goods and services included in the economy
...
The
data for the GDP deflator are given in Table 19
...
8
...
8 U
...
GDP Deflator, 1960–2010 Much like nominal GDP, the GDP deflator has risen exponentially from
1960 through 2010
...
8 shows that the price level has risen dramatically since 1960
...
Clearly, much of the apparent growth in
nominal GDP was due to inflation, not an actual change in the quantity of goods and services produced, in other words, not
in real GDP
...
What is
needed is to extract the increase in prices from nominal GDP so as to measure only changes in output
...
This adjustment is easy to do if you understand that nominal measurements are in value terms, where
Value = Price × Quantity
or
Nominal GDP = GDP Defla or × Real GDP
Let’s look at an example at the micro level
...
Coolshirt's nominal revenue from sales = Price × Quantity
= $9 × 10
= $90
Then,
Coolshirt's real income = Nominal revenue
= $90
$9
Price
= 10
In other words, when we compute “real” measurements we are trying to get at actual quantities, in this case, 10 t-shirts
...
We start with the same formula as above:
Real GDP = Nominal GDP
Price Index
For reasons that will be explained in more detail below, mathematically, a price index is a two-digit decimal number like
1
...
85 or 1
...
Because some people have trouble working with decimals, when the price index is published, it has
traditionally been multiplied by 100 to get integer numbers like 100, 85, or 125
...
We also need to remember to divide the
published price index by 100 to make the math work
...
CHAPTER 19 | THE MACROECONOMIC PERSPECTIVE 391
Computing GDP
It is possible to use the data in Table 19
...
Step 1
...
5, to see that, in 1960, nominal GDP was $543
...
0
...
To calculate the real GDP in 1960, use the formula:
Real GDP =
Nominal GDP
Price Index / 100
$543
...
5 billion
We’ll do this in two parts to make it clear
...
19
...
3 billion / 0
...
5 billion
...
Use the same formula to calculate the real GDP in 1965
...
7 billion
20
...
5 billion
Step 4
...
The
calculations and the results are shown in Table 19
...
Year
Nominal GDP
(billions of dollars)
GDP Deflator
(2005 = 100)
Calculations
Real GDP (billions of
2005 dollars)
1960
543
...
0
543
...
0/
100)
2859
...
7
20
...
7 / (20
...
5
1970
1075
...
8
1,075
...
8/100)
4338
...
9
34
...
9 /
(34
...
8
1980
2862
...
3
2,862
...
3/100)
5926
...
7
62
...
7 /
(62
...
0
1990
5979
...
7
5,979
...
7/100)
8225
...
0
82
...
0/
100)
9346
...
7
89
...
7 /
(89
...
5
2005
13095
...
0
13,095
...
0/100)
13095
...
6 Converting Nominal to Real GDP (Source: Bureau of Economic Analysis, www
...
gov)
CHAPTER 19 | THE MACROECONOMIC PERSPECTIVE 392
Year
2010
Nominal GDP
(billions of dollars)
14958
...
3 /
(110
...
0
Real GDP (billions of
2005 dollars)
13598
...
6 Converting Nominal to Real GDP (Source: Bureau of Economic Analysis, www
...
gov)
There are a couple things to notice here
...
It is called the base year (or base period)
...
When we calculate real GDP, for example, we take the quantities
of goods and services produced in each year (for example, 1960 or 1973) and multiply them by their
prices in the base year (in this case, 2005), so we get a measure of GDP that uses prices that do not
change from year to year
...
The formula used is:
GDP defla or = Nominal GDP × 100
Real GDP
Rearranging the formula and using the data from 2005:
Nominal GDP
Price Index / 100
= $13,095
...
4 billion
Comparing real GDP and nominal GDP for 2005, you see they are the same
...
It is
because 2005 has been chosen as the “base year” in this example
...
Look at the data for 2010
...
3 billion
110 / 100
Real GDP =
= $13,598
...
The reason for this should be clear: The value of nominal GDP is “inflated” by inflation
...
Figure 19
...
S
...
Because 2005 is the base year, the nominal and real values
are exactly the same in that year
...
CHAPTER 19 | THE MACROECONOMIC PERSPECTIVE 393
Figure 19
...
S
...
S
...
The
black line measures U
...
GDP in real dollars, where all dollar values have been converted to 2005 dollars
...
However, real GDP will appear higher than nominal
GDP in the years before 2005, because dollars were worth less in 2005 than in previous years
...
Let’s return to the question posed originally: How much did GDP increase in real terms? What was the rate of growth of
real GDP from 1960 to 2010? To find the real growth rate, we apply the formula for percentage change:
2010 real GDPreal GDPreal GDP × 100 = % change
1960 – 1960 – 2,859
...
5
× 100 = 376%
2,859
...
S
...
Of course, that understates the material improvement since it fails to capture improvements in the quality of products and
the invention of new products
...
Because:
Real GDP
% change in real GDP
% change in quantity
=
Price × Quantity
= % change in price + % change in quantity
OR
=
% change in real GDP – % change in price
Therefore, the growth rate of real GDP (% change in quantity) equals the growth rate in nominal GDP (% change in value)
minus the inflation rate (% change in price)
...
For more accurate measures, one
should use the first formula shown
...
3 | Tracking Real GDP over Time
By the end of this section, you will be able to:
• Explain recessions, depressions, peaks, and troughs
• Evaluate the importance of tracking real GDP over time
• Analyze the impact of economic fluctuations on a country’s output and price level
When news reports indicate that “the economy grew 1
...
By convention, GDP growth is reported at an annualized rate: Whatever the calculated growth in real
GDP was for the quarter, it is multiplied by four when it is reported as if the economy were growing at that rate for a full
year
...
10 U
...
GDP, 1900–2012 Real GDP in the United States in 2012 was about $13 trillion
...
(Source: bea
...
10 shows the pattern of U
...
real GDP since 1900
...
A significant decline in real GDP is called a recession
...
The severe drop in GDP that occurred during the Great Depression of the 1930s
is clearly visible in the figure, as is the Great Recession of 2008–2009
...
When real GDP rises, so does employment
...
Losing a job imposes painful
financial and personal costs on workers, and often on their extended families as well
...
Table 19
...
S
...
The highest point of the
economy, before the recession begins, is called the peak; conversely, the lowest point of a recession, before a recovery
begins, is called the trough
...
The movement of the economy from peak to trough and trough to peak is called the business cycle
...
The most recent
recession started in December 2007 and ended formally in June 2009
...
Trough
Peak
Months of Contraction
Months of Expansion
December 1900
September 1902
18
21
August 1904
May 1907
23
33
June 1908
January 1910
13
19
January 1912
January 1913
24
12
December 1914
August 1918
23
44
March 1919
January 1920
7
10
July 1921
May 1923
18
22
July 1924
October 1926
14
27
November 1927
August 1929
23
21
March 1933
May 1937
43
50
June 1938
February 1945
13
80
Table 19
...
S
...
nber
...
html)
CHAPTER 19 | THE MACROECONOMIC PERSPECTIVE 395
Trough
Peak
Months of Contraction
Months of Expansion
October 1945
November 1948
8
37
October 1949
July 1953
11
45
May 1954
August 1957
10
39
April 1958
April 1960
8
24
February 1961
December 1969
10
106
November 1970
November 1973
11
36
March 1975
January 1980
16
58
July 1980
July 1981
6
12
November 1982
July 1990
16
92
March 2001
November 2001
8
120
December 2007
June 2009
18
73
Table 19
...
S
...
nber
...
html)
A private think tank, the National Bureau of Economic Research, is the official tracker of business cycles for the U
...
economy
...
19
...
When comparing the GDP of
different nations for this purpose, two issues immediately arise
...
S
...
Thus, comparing GDP between two countries requires converting to a common currency
...
For instance, the United States has a much larger
economy than Mexico or Canada, but it also has roughly three times as many people as Mexico and nine times as many
people as Canada
...
Converting Currencies with Exchange Rates
To compare the GDP of countries with different currencies, it is necessary to convert to a “common denominator” using an
exchange rate, which is the value of one currency in terms of another currency
...
Two types of exchange rates can be used
for this purpose, market exchange rates and purchasing power parity (PPP) equivalent exchange rates
...
PPP-equivalent exchange
rates provide a longer run measure of the exchange rate
...
Exchange rates will be discussed in more detail in Exchange Rates and
International Capital Flows
...
CHAPTER 19 | THE MACROECONOMIC PERSPECTIVE 396
Converting GDP to a Common Currency
Using the exchange rate to convert GDP from one currency to another is straightforward
...
S
...
Step 1
...
In 2012, the exchange rate was 1
...
(These numbers are realistic, but rounded off to simplify the calculations
...
Convert Brazil’s GDP into U
...
dollars:
Brazil's GDP in reals
Brazil's GDP in $ U
...
= 1
...
S
...
Compare this value to the GDP in the United States in the same year
...
S
...
Step 4
...
8 which shows the size of and variety of GDPs of different countries in 2012, all
expressed in U
...
dollars
...
Country
GDP in Billions of
Domestic Currency
Domestic Currency/U
...
Dollars(PPP Equivalent)
GDP (in billions of
U
...
dollars)
Brazil
4,403
reals
1
...
221
1,488
China
51,932
yuan
4
...
856
540
Germany
2,644
euros
0
...
817
4,684
Japan
475,868
yen
102
...
813
1,759
South
Korea
1,302,128
won
806
...
659
2,336
United
States
16,245
dollars
1
...
8 Comparing GDPs Across Countries, 2012 (Source: http://www
...
org/external/pubs/ft/
weo/2013/01/weodata/index
...
S
...
The United States is also a populous
country; in fact, it is the third largest country by population in the world, although well behind China and India
...
S
...
S
...
CHAPTER 19 | THE MACROECONOMIC PERSPECTIVE 397
GDP per capita = GDP/population
The second column of Table 19
...
8, showing their GDP as converted into U
...
dollars (which is the same as the last
column of the previous table)
...
The fourth column lists the GDP per
capita, which is calculated by dividing the second column by the third
...
S
...
S
...
36
11,875
Canada
$1,488
34
...
04
9,162
Egypt
$540
82
...
90
$39,028
India
$4,684
1223
...
61
$36,266
Mexico
$1,614
50
...
87
$15,312
United
Kingdom
$2,336
63
...
18
$51,706
Table 19
...
imf
...
aspx)
Notice that the ranking by GDP is different from the ranking by GDP per capita
...
Will China soon have a
better standard of living than the U
...
? Read the following Clear It Up feature to find out
...
9, China has the second largest GDP of the countries: $12,406 compared to the
United States’ $16,245
...
China
has a much larger population so that in per capita terms, its GDP is less than one fifth that of the United
States ($9,162 compared to $51,706)
...
One caveat: For reasons to be discussed shortly, GDP per capita
can give us only a rough idea of the differences in living standards across countries
...
Middle-income countries, which include much
of Latin America, Eastern Europe, and some countries in East Asia, have GDP per capita in the range of $6,000 to $12,000
...
CHAPTER 19 | THE MACROECONOMIC PERSPECTIVE 398
19
...
” Most of the
migration in the world, for example, involves people who are moving from countries with relatively low GDP per capita to
countries with relatively high GDP per capita
...
While GDP focuses on production that is bought and sold in markets,
standard of living includes all elements that affect people’s well-being, whether they are bought and sold in the market or
not
...
Limitations of GDP as a Measure of the Standard of Living
While GDP includes spending on recreation and travel, it does not cover leisure time
...
The GDP per capita of the U
...
economy is larger than the GDP per capita of Germany, as was shown in Table 19
...
S
...
The calculation of GDP does not take the German
worker’s extra weeks of vacation into account
...
GDP includes the cost of buying pollution-control equipment, but it does
not address whether the air and water are actually cleaner or dirtier
...
Similarly, it counts spending on education, but does
not address directly how much of the population can read, write, or do basic mathematics
...
For example, hiring someone to mow your lawn or clean your house is part of GDP, but doing these tasks yourself
is not part of GDP
...
S
...
By the second decade of the 2000s, nearly 60% of women participated in the
paid labor force according to the Bureau of Labor Statistics
...
GDP has nothing to say about the level of inequality in society
...
When GDP per capita
rises by 5%, it could mean that GDP for everyone in the society has risen by 5%, or that of some groups has risen by more
while that of others has risen by less—or even declined
...
If a family buys 100 loaves of bread in a year, GDP does not care whether they are all white bread, or
whether the family can choose from wheat, rye, pumpernickel, and many others—it just looks at whether the total amount
spent on bread is the same
...
The standard of living in, for
example, 1950 or 1900 was not affected only by how much money people had—it was also affected by what they could
buy
...
In certain cases, it is not clear that a rise in GDP is even a good thing
...
If people are led by a rising fear of crime, to pay for installation of bars and burglar alarms on
all their windows, it is hard to believe that this increase in GDP has made them better off
...
Does a Rise in GDP Overstate or Understate the Rise in the Standard of
Living?
The fact that GDP per capita does not fully capture the broader idea of standard of living has led to a concern that the
increases in GDP over time are illusory
...
Fortunately, this fear appears to be overstated
...
For example, the typical workweek for a
U
...
worker has fallen over the last century from about 60 hours per week to less than 40 hours per week
...
Since 1970, the air and water in the United
States have generally been getting cleaner
...
A much wider variety of basic products like food and clothing is available today than several decades ago
...
On the other side, rates of crime, levels of traffic congestion, and inequality of incomes are higher in the United States now
than they were in the 1960s
...
By ignoring these factors, GDP
would tend to overstate the true rise in the standard of living
...
org/l/amdreamvalue) to read about the American Dream and
standards of living
...
Even
though GDP does not measure the broader standard of living with any precision, it does measure production well and
it does indicate when a country is materially better or worse off in terms of jobs and incomes
...
No single number can capture all the elements of a term as broad as “standard of living
...
How is the Economy Doing? How Does One Tell?
To determine the state of the economy, one needs to examine economic indicators, such as GDP
...
It is the broadest measure of a nation’s economic activity and we
owe a debt to Simon Kuznets, the creator of the measurement, for that
...
S
...
6
trillion worth of goods and services were produced annually
...
GDP per
capita gives a rough estimate of a nation’s standard of living
...
CHAPTER 19 | THE MACROECONOMIC PERSPECTIVE 400
KEY TERMS
business cycle the relatively short-term movement of the economy in and out of recession
depreciation the process by which capital ages over time and therefore loses its value
depression an especially lengthy and deep decline in output
double counting a potential mistake to be avoided in measuring GDP, in which output is counted more than once as it
travels through the stages of production
durable good long-lasting good like a car or a refrigerator
exchange rate the price of one currency in terms of another currency
final good and service output used directly for consumption, investment, government, and trade purposes; contrast with
“intermediate good”
GDP per capita GDP divided by the population
gross domestic product (GDP) the value of the output of all goods and services produced within a country in a year
gross national product (GNP) includes what is produced domestically and what is produced by domestic labor and
business abroad in a year
intermediate good output provided to other businesses at an intermediate stage of production, not for final users;
contrast with “final good and service”
inventory good that has been produced, but not yet been sold
national income includes all income earned: wages, profits, rent, and profit income
net national product (NNP) GDP minus depreciation
nominal value the economic statistic actually announced at that time, not adjusted for inflation; contrast with real value
nondurable good short-lived good like food and clothing
peak during the business cycle, the highest point of output before a recession begins
real value an economic statistic after it has been adjusted for inflation; contrast with nominal value
recession a significant decline in national output
service product which is intangible (in contrast to goods) such as entertainment, healthcare, or education
standard of living all elements that affect people’s happiness, whether these elements are bought and sold in the market
or not
structure building used as residence, factory, office building, retail store, or for other purposes
trade balance gap between exports and imports
trade deficit exists when a nation's imports exceed its exports and is calculated as imports –exports
trade surplus exists when a nation's exports exceed its imports and is calculated as exports – imports
trough during the business cycle, the lowest point of output in a recession, before a recovery begins
KEY CONCEPTS AND SUMMARY
19
...
GDP is measured by taking the
quantities of all goods and services produced, multiplying them by their prices, and summing the total
...
Demand can be divided into consumption, investment, government, exports, and imports
...
To avoid double
counting, GDP counts only final output of goods and services, not the production of intermediate goods or the value
of labor in the chain of production
...
2 Adjusting Nominal Values to Real Values
The nominal value of an economic statistic is the commonly announced value
...
To convert nominal economic data from several different years into real, inflationadjusted data, the starting point is to choose a base year arbitrarily and then use a price index to convert the
measurements so that they are measured in the money prevailing in the base year
...
3 Tracking Real GDP over Time
Over the long term, U
...
real GDP have increased dramatically
...
The speeding up and slowing down of GDP growth represents the business cycle
...
A longer and deeper decline is a depression
...
19
...
One way to do that is with the exchange rate, which is the price of one country’s currency
in terms of another
...
Countries with large populations often have large GDPs, but GDP alone can be a
misleading indicator of the wealth of a nation
...
19
...
GDP does not directly take
account of leisure, environmental quality, levels of health and education, activities conducted outside the market,
changes in inequality of income, increases in variety, increases in technology, or the (positive or negative) value that
society may place on certain types of output
...
Country A has export sales of $20 billion, government purchases of $1,000 billion, business investment is $50
billion, imports are $40 billion, and consumption spending is $2,000 billion
...
Which of the following are included in GDP, and which are not?
a
...
The rise in life expectancy over time
c
...
Child care provided by a grandmother
e
...
The sale of a new car
g
...
The iron that goes into the steel that goes into a refrigerator bought by a consumer
...
Using data from Table 19
...
Without looking at Table 19
...
10
...
)
5
...
7, how often have recessions occurred since the end of World War II (1945)?
6
...
7, how long has the average recession lasted since the end of World War II?
7
...
7, how long has the average expansion lasted since the end of World War II?
CHAPTER 19 | THE MACROECONOMIC PERSPECTIVE 402
8
...
The Central African Republic has a GDP of 1,107,689 million CFA francs and a population of 4
...
The
exchange rate is 284
...
Calculate the GDP per capita of Central African Republic
...
Explain briefly whether each of the following would cause GDP to overstate or understate the degree of change
in the broad standard of living
...
The environment becomes dirtier
b
...
A greater variety of goods become available to consumers
d
...
What are the main components of measuring GDP 16
...
What are the main components of measuring GDP 17
...
Would you usually expect GDP as measured by what
is demanded to be greater than GDP measured by what is 18
...
Why must double counting be avoided when 19
...
15
...
U
...
macroeconomic data are thought to be among
the best in the world
...
Why do you think that GDP does not grow at a
steady rate, but rather speeds up and slows down?
25
...
What does GDP not tell us about the economy?
equilibrium value of an exchange rate
...
Why could
22
...
Why might per capita GDP be only an imperfect
measure of a country’s standard of living?
23
...
S
...
How might a “green” GDP be measured?
on the nominal interest rates and inflation rates given in
Table 19
...
Last year, a small nation with abundant forests cut been best to be a borrower?
down $200 worth of trees
...
$100 worth of that
Prime Interest Rate
Inflation Rate
lumber was used to produce $250 worth of bookshelves
...
9%
5
...
8%
11
...
1%
7
...
The “prime” interest rate is the rate that banks charge
Table 19
...
Based on the nominal interest rates
and inflation rates given in Table 19
...
9%
10
...
0%
Inflation
Rate
2
...
10
Table 19
...
A mortgage loan is a loan that a person makes to
purchase a house
...
11 provides a list of the
mortgage interest rate being charged for several different
years and the rate of inflation for each of those years
...
4%
4
...
4%
Table 19
...
Ethiopia has a GDP of $8 billion (measured in U
...
dollars) and a population of 55 million
...
S
...
Calculate the per capita GDP for
each country and identify which one is higher
...
In 1980, Denmark had a GDP of $70 billion
(measured in U
...
dollars) and a population of 5
...
In 2000, Denmark had a GDP of $160 billion
(measured in U
...
dollars) and a population of 5
...
By what percentage did Denmark’s GDP per
capita rise between 1980 and 2000?
33
...
The exchange rate is 20 koruny/U
...
dollar
...
What is the GDP per
capita of the Czech Republic expressed in U
...
dollars?