19-Macroeconomics and GDP

  1. Economics is split between micro and macro
    1. Macroeconomics represents a top down aggregate view of the economy
    2. Macro is not just a larger picture
      1. Deals with different issues such as inflation, unemployment and deficits
      2. Individual behavior can lead to unexpected results(e.g. one person at a ball game stands up to get a better view and then everyone else is standing up; no one has a better view but everyone acted rationally)
  2. GDP is the standard measure of the size of an economy
    1. GDP is total value of goods and services
    2. Can be measured as what’s produced or what’s demanded
      1. If its measured by what’s produced it includes: durable goods, non-durable goods, services and structures
      2. Consumption(nearly 70%)+Government(about 19%, social security however is labeled under consumption so always be wary of that)+Investments(which are a much smaller percentage but leads to the highest fluctuations due to investor sentiment)+Exports-Imports, or C+G+I+X-M=GDP
      3. The bureau of economic analysis measures the GDP and every few years they reviews their work and sometimes make very drastic changes
  3. Per capita GDP
    1. GDP ÷ Population= Per capita GDP
    2. This is useful to measure many different economies
  4. Real GDP means adjusted for inflation
    1. Involves establishing a base year at a base number: let’s say 1990 at $200million
    2. In 1995 nominal GDP raises to $300million but since there was an increase in prices due to inflation the real GDP is $250million
  5. GDP has imperfections
    1. Home production is not included(e.g. women went into the work place in the 70’s and things that weren’t bought and sold now were like meals and daycare)
    2. Leisure is not valued by the market. If everyone took an extra week of vacation but output remained the same there would be no shift in GDP
    3. Natural disasters are included in GDP by way of cleanup that ensues
    4. Transfers of ownership are not included
    5. GDP only counts the final product so, for example, rubber steel and iron would not be included individually, they would be blanketed under let’s say tires, and tires may not be included individually but filed under cars sold
  6. GDP shows upward trend overtime with occasional dips and spikes
    1. Recessions, on the whole, have gotten shorter excepting this current one
    2. Recessions are defined by the bureau of economic research and they define it as “a significant decline in [the] economic activity spread across the country, lasting more than a few months, normally visible in real GDP growth, real personal income, employment(non-farm payrolls), industrial production, and wholesale-retail sales.
  7. Macro policy is summarized with four goals and two sets of tools for accomplishment
    1. Goals: economic growth, low unemployment, low inflation and a sustainable balance of trade
    2. Tools: fiscal and monetary policy
    3. Model for describing relationship between goals and tools is the aggregate supply-demand model
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