ECON 2010 Business Economics PDF

ECON 2010 BUSINESS ECONOMICS Topic- 7 Macroeconomic Indicators After studying this chapter, you will be able to: Define GDP. Measure it with income & expenditure Describe the Circular Flow of Expenditure and Income Summarize the uses & limitation...

ECON 2010 BUSINESS ECONOMICS Topic- 7 Macroeconomic Indicators After studying this chapter, you will be able to: Define GDP. Measure it with income & expenditure Describe the Circular Flow of Expenditure and Income Summarize the uses & limitations of GDP  Gross Domestic Product GDP Defined GDP or gross domestic product is the market value of all final goods and services produced in a country in a given time period. This definition has four parts:  Market value  Final goods and services  Produced within a country  In a given time period  Gross Domestic Product Market Value GDP is a market value—goods and services are valued at their market prices. To add oil and gas, fertilizer and education, we add the market values so we have a total value of output in dollars. Key macro economic indicators of Qatar (source QNB)  Gross Domestic Product Final Goods and Services GDP is the value of the final goods and services produced. A final good (or service) is an item bought by its final user during a specified time period. Eg: Toyota SUV purchased by you. A final good is different from an intermediate good, which is an item that is produced by one firm, bought by another firm, and used as a component (part) of a final good or service. Eg:A Firestone tire purchased by Toyota for use in an SUV. Excluding the value of intermediate goods and services avoids counting the same value more than once. This is a very key component and can make a big difference. US Bureau of Economic Analysis (BEA) reclassified software from intermediate to final good status in 1999. When the 1996 GDP was recalculated to include software, it increased by $115 billion, or 1.5 percent of GDP Class Activity Do Problem 1 in Work Sheet  Gross Domestic Product Produced Within a Country GDP measures production within a country—domestic production. Example: Japanese Toyota cars produced in the US are part of US GDP not Japan’s GDP. In a Given Time Period GDP measures production during a specific time period, normally a year or a quarter of a year.  Gross Domestic Product GDP and the Circular Flow of Expenditure and Income GDP measures the value of production, which also equals total expenditure on final goods and total income. The equality of income and value of production shows the link between productivity and living standards. The circular flow diagram in Figure 21.1 illustrates the equality of income and expenditure.  GDP & the Circular Flow of Expenditure and Income The circular flow diagram shows the transactions among households, firms, governments, and the rest of the world.  Gross Domestic Product Households and Firms Households sell and firms buy the services of labor, capital, and land in factor markets. Firms pay wages for labor services, interest for the use of capital, and rent for the use of land. A fourth factor of production, entrepreneurship, receives profit. In the figure, the blue flow, Y, shows total income paid by firms to households. Gross Domestic Product  Gross Domestic Product Firms sell and households buy consumer goods and services in the goods market. Consumption expenditure is the total payment for consumer goods and services, shown by the red flow labeled C. Firms buy and sell new capital equipment in the goods market and put unsold output into inventory. These purchases of new capital equipment and the additions to inventories are investment, shown by the red flow labeled I. GDP & the Circular Flow of Expenditure and Income  Gross Domestic Product Governments Governments buy goods and services from firms and their expenditure on goods and services is called government expenditure. Government expenditure is shown as the red flow G. Governments finance their expenditure with taxes and pay financial transfers to households, such as unemployment benefits, and pay subsidies to firms. These financial transfers are not part of the circular flow of expenditure and income. GDP & the Circular Flow of Expenditure and Income  Gross Domestic Product Rest of the World Firms in the United States sell goods and services to the rest of the world—exports—and buy goods and services from the rest of the world—imports. The value of exports (X ) minus the value of imports (M) is called net exports, the red flow (X – M). If net exports are positive, the net flow of goods and services is from U.S. firms to the rest of the world. If net exports are negative, the net flow of goods and services is from the rest of the world to U.S. firms.  Gross Domestic Product Rest of the World  Gross Domestic Product The blue and red flows are the circular flow of expenditure and income.  Gross Domestic Product The sum of the red flows equals the blue flow.  Gross Domestic Product That is: Y = C + I + G + X – M  Gross Domestic Product The circular flow shows two ways of measuring GDP. GDP Equals Expenditure Equals Income Total expenditure on final goods and services equals GDP. GDP = C + I + G + X – M. Aggregate income equals the total amount paid for the use of factors of production: wages, interest, rent, and profit. Firms pay out all their receipts from the sale of final goods, so income equals expenditure, Y = C + I + G + (X – M).  Gross Domestic Product Why “Domestic” and Why “Gross”? Domestic Domestic product is production within a country. It contrasts with national product, which is the value of goods and services produced anywhere in the world by the residents of a nation. Gross Gross means before deducting the depreciation of capital. The opposite of gross is net, which means after deducting the depreciation of capital.  Measuring GDP Government agencies, such as the Qatar Statistics Authority (qsa.gov.qa) usually use both an expenditure approach and an income approach and combine the two methods to estimate GDP. We will focus on the expenditure approach in this course because it’s easier, but remember expenditure should equal income and both methods should equal GDP.  Measuring GDP The Expenditure Approach The expenditure approach measures GDP as the sum of consumption expenditure, investment, government expenditure on goods and services, and net exports. GDP = C + I + G + (X − M)  Explainer - GDP = Expenditure = Income The Expenditure Approach = GDP = C + I + G + (X − M) A. Consumption Expenditure  Consumer Durables – cars, furniture  Consumer Non- Durables – food, clothing  Services – haircuts, taxi rides B. Investments  Business Fixed investments – capital goods, machines, factories, office buildings  Residential Investments – homes sold to households  Inventory investments – unsold finished goods during the accounting period C. Government Expenditure  Final goods and services purchased by government– fighter jets, public education  DOES NOT INCLUDE transfer payments like unemployment benefits, pensions, interest paid on government loans. Reason? It gets no goods or services in return for the payment. D. Net Exports  Exports MINUS Imports Table 4.1 on the next slide shows the expenditure approach with data (in billions) for 2014. GDP = $11,729 + $2,714 + $3,139 − $538 = $17,044 billion  Nominal GDP & Real GDP Nominal GDP Real GDP YEAR 2022 YEAR 2022 Production (units) Price (QAR) Value (QAR) Production (units) Base Year Value (QAR) Price (QAR) 25 Shawarmas 10 250 25 Shawarmas 10 250 200 Karak Chai 5 1000 200 Karak Chai 5 1000 GDP 1,250 GDP 1,250 YEAR 2023 YEAR 2023 Production (units) Price (QAR) Value (QAR) Production (units) Base Year Value (QAR) Price (QAR) 35 Shawarmas 11 385 35 Shawarmas 10 350 250 Karak Chai 4 1000 250 Karak Chai 5 1,250 GDP 1,385 GDP 1,600 Class Activity Do Rest of the Problems Work Sheet  The Uses and Limitations of Real GDP Economists use estimates of real GDP for two main purposes: 1. To compare the standard of living over time 2. To compare the standard of living across countries  The Uses and Limitations of Real GDP 1. The Standard of Living Over Time Real GDP per person is real GDP divided by the population. Real GDP per person tells us the value of goods and services that the average person can enjoy. By using real GDP, we remove any influence that rising prices and a rising cost of living might have had on our comparison.  The Uses and Limitations of Real GDP Long-Term Trend A handy way of comparing real GDP per person over time is to express it as a ratio of some reference year. For example, in 1960, real GDP per person was $17,210 and in 2013, it was $49,658. So real GDP per person in 2013 was 2.9 times its 1960 level—that is, $49,658 ÷ $17,210 = 2.9.  The Uses and Limitations of Real GDP 2. The Standard of Living Across Countries Two problems arise in using real GDP to compare living standards across countries: 1. The real GDP of one country must be converted into the same currency units as the real GDP of the other country. 2. The goods and services in both countries must be valued at the same prices.  The Uses and Limitations of Real GDP Limitations of Real GDP Real GDP measures the value of goods and services that are bought in markets. Some of the factors that influence the standard of living and that are not part of GDP are (not bought and sold in the goods or factor markets)  Household production  Underground economic activity  Leisure time  Environmental quality  The Uses and Limitations of Real GDP The Bottom Line Do we get the wrong message about the level and growth of economic well-being and the standard of living by looking at the growth of real GDP? The influences that are omitted from real GDP are probably large. It is possible to construct broader measures that combine the many influences that contribute to human happiness. Despite all the alternatives, real GDP per person remains the most widely used indicator of economic well-being. Class Activity Do Problems