Macroeconomics Measuring the Economic Well Being Of A Nation Analysis https://www.ted.com/talks/michael_green_what_the_s… https://www.ted.com/talks/nic

Macroeconomics Measuring the Economic Well Being Of A Nation Analysis https://www.ted.com/talks/michael_green_what_the_s…

https://www.ted.com/talks/nic_marks_the_happy_plan…

For this assignment, please watch these two videos about how to better measure the economic well beings of a nation, in 21st century. Referring to points from these two videos, and also chapter 10 of our textbook, please write your analysis on the shortcomings of each of these methods for measuring the economic well beings of the nations today. If you are asked to advise the federal government on how to best measure our economic success in the US, which one of these methods you’d suggest? Why? Microeconomics and Macroeconomics
Microeconomics is the study of how households and firms make
choices, how they interact in markets, and how the government
attempts to influence their choices.
In contrast, macroeconomics is the study of the economy as a
whole, including topics such as inflation, unemployment, and
economic growth.
• When we want to study the overall economy-level actions of
people and governments, the models and tools of
macroeconomics become very useful.
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Some Important Macroeconomic Terms
Business cycle: Alternating periods of economic expansion and
economic recession.
Expansion: The period of a business cycle during which the total
production and total employment are increasing.
Recession: The period of a business cycle during which total
production and total employment are decreasing.
Economic growth: The ability of an economy to produce
increasing quantities of goods and services.
Inflation rate: The percentage increase in the price level from one
year to the next.
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Gross Domestic Product Measures Total
Production
Explain how total production is measured.
The most common measure used by economists of overall
economic activity in an economy is gross domestic product, or
GDP.
Gross domestic product (GDP): the market value of all final
goods and services produced in a country during a period of time,
typically one year.
We will examine each of the parts of this definition in turn.
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“Market Value”
Gross domestic product: the market value of all final goods and
services produced in a country during a period of time, typically
one year.
We cannot add together the number of cars, melons, haircuts, and
all other goods and services without agreeing on a common way
to measure them.
The best practical way is to value each good and service in
monetary terms, and the best measure of this that we have is the
price that each good or service is sold for.
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“Final Goods and Services”
Gross domestic product: the market value of all final goods and
services produced in a country during a period of time, typically
one year.
A final good or service is a good or service purchased by a final
user. These are what are used to calculate GDP.
• Why? If we counted intermediate goods and services as
well, ones that were inputs into another good or service, such
as a tire on a truck, then we would end up double counting.
Example: If we counted the value of the ice cream bought by a
store and also counted the value of that ice cream when it was
sold to a consumer, we would be double counting the wholesale
value of the ice cream.
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“During a Period of Time”
Gross domestic product: the market value of all final goods and
services produced in a country during a period of time, typically
one year.
To measure total output in a given year, we measure the goods
and services produced only in that given year.
• Again, this avoids double counting: if you buy a DVD in 2011,
that DVD counts in 2011’s GDP. If you resell it in 2012, it will not
count again in 2012.
• So GDP counts only new goods and services. Used items were
previously produced and counted, so don’t need to be counted
again.
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Production and Income
There are two main conceptual ways to measure the total
economic activity in an economy: total production or total income.
When we measure one, we are also measuring the other. Why?
• Everything that is produced and sold constitutes income for
someone; so we have the choice of measuring the value of
products produced and sold, or the value of incomes.
• Each is a valid way of measuring economic activity.
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The Circular Flow and the Measurement of GDP (1 of 4)
In a very simple model of the
economy, we could start with
households and firms.
To measure overall economic
activity, we could measure
the amount of money that
households spend on goods
and services.
Or we could measure income
to households.
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The Circular Flow and the Measurement of GDP (2 of 4)
Let’s add in some more layers.
We’ll start with government.
How does the government
affect economic activity?
• It takes in taxes from
households and firms.
• It uses those taxes to buy
goods and services, and to
make transfer payments—
payments to households for
which the government does
not receive a good or service
in return.
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The Circular Flow and the Measurement of GDP (3 of 4)
Some economic activity
takes place between
households, firms, and
the rest of the world.
• Households buy
goods and services
from firms in other
countries; these are
known as imports.
• Firms sell goods and
services to
households in other
countries; these are
known as exports.
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The Circular Flow and the Measurement of GDP (4 of 4)
Finally, there are firms
that deal specifically in
flows of money; we label
these firms the financial
system.
• Households elect not
to spend some of
their income and
instead save it with
financial system firms
like banks.
• These financial
system firms lend
money to other firms
and the government.
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Follow the Spending to Measure GDP
To measure GDP, the Bureau of Economic Analysis (BEA) in the
Department of Commerce measures four major categories of
expenditures:
• Personal consumption expenditures, or consumption (C)
• Gross private domestic investment, or investment (I)
• Government consumption and gross investment, or government
purchases (G)
• Net exports of goods and services, or net exports (NX)
GDP can be expressed as the sum of these:
Y = C + I + G + NX
We will examine each component of GDP in turn.
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Consumption
Y = C + I + G + NX
Consumption is spending by households on goods and services,
not including spending on new houses (which are counted instead
in investment).
In BEA statistics, consumption is further divided into expenditure
on
• Services, such as medical care, education, and haircuts
• Nondurable goods, such as food and clothing, and
• Durable goods, such as automobiles and furniture.
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Investment
Y = C + I + G + NX
Investment is spending by firms on new factories, office buildings,
machinery, and additions to inventories, plus spending by
households and firms on new houses.
The BEA measures the following categories of investment:
• Business fixed investment, such as new factories, office
buildings, machinery, and research and development.
• Residential investment, i.e. new single-family and multi-unit
houses.
• Changes in business inventories, i.e. goods that have been
produced but not yet sold.
Note: in economics, “Investment” does not been buying stocks
and bonds etc., like it does in finance.
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Government Purchases
Y = C + I + G + NX
Government purchases are spending by federal, state, and local
governments on goods and services.
This includes both government consumption (like teachers’
salaries and office supplies) and government investment (like
highways and military bases).
This does not include transfer payments, since those do not result
in immediate production of new goods and services.
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Net Exports
Y = C + I + G + NX
Net exports are the value of exports minus the value of imports.
This difference might be positive or negative; in recent years, this
has been negative in the United States.
Since we want to count domestic production (production in the
United States), we add up the value of the goods and services
sold to foreigners and subtract the value of the goods and
services sold to Americans by foreigners.
• An export is not counted otherwise (in C, I, or G) so we need to
count it somehow as production.
• An import is counted (in C, usually) but we are trying to measure
domestic production, so we don’t want to count it. Subtracting it
off achieves this goal.
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Components of GDP in 2016
Consumption is the largest component of GDP; within that,
services are the largest component—almost half of GDP.
American net exports are negative, since the value of our imports
exceeds the value of our exports.
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Microsoft’s Steve Ballmer Reorganizes
Government Data
Category, taken from the
preamble to the U.S.
Constitution
Examples of Government Spending in This Category
Percentage of Total
Government
Spending at All
Levels (Federal,
State, and Local)
8%
Percentage of
Spending in This
Category Carried Out
by State and
Local Governments
1. Establish justice and
ensure domestic
tranquility
Police, firefighting, and prisons; the court
system; and disaster relief
89%
2. Provide for the
common defense
National defense, payments to veterans,
maintaining embassies in foreign countries,
and securing the nation’s borders
16
0
3. Promote the general
welfare
Infrastructure, such as highways and
bridges; public housing; public health; and
government-owned businesses such as
transit systems and public hospitals
23
66
4. Secure the blessings
of liberty to ourselves
and our posterity
Education, environmental protection, and
the Social Security, Medicare, and Medicaid
systems
54
41
Ballmer organized government spending data on the basis of four “missions”
for government that he identified in the preamble to the U.S. Constitution.
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Calculating Value Added
Firm
Value of Product
Value Added
Blank
Cotton farmer
Value of raw cotton = $1
Value added by cotton farmer
= $1
Textile mill
Value of raw cotton woven into
cotton fabric = $3
Value added by textile
mill = ($3 − $1)
= $2
Shirt company
Value of cotton fabric made into a
shirt = $15
Value added by shirt
company = ($15 − $3)
= $12
L.L.Bean
Value of shirt for sale on L.L.Bean’s
Web site = $35
Value added by L.L.Bean
= ($35 − $15)
= $20
Blank
Total Value Added
Blank
= $35
An alternative method to measure GDP is to measure the value
added: the market value a firm adds to a product.
The final selling price of a product must equal the sum of the values
added to the product at each stage of production.
The table illustrates this method for a shirt sold on L.L.Bean’s web site.
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Does GDP Measure What We Want It to
Measure?
Discuss whether GDP is a good measure of well-being.
GDP can be a useful tool to measure total output in an economy.
Many people go further than this, interpreting GDP as a measure
of the well-being of citizens.
However, GDP has shortcomings as both a
• Measure of total production and a
• Measure of well-being.
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Shortcomings of GDP as a Measure of Total
Production
Two important types of production are omitted from the BEA’s
measurement of GDP:
Household production such as childcare, cleaning, and cooking is
not typically paid for with money.
• But such contributions are real—if they were performed by a
non-household member, they would be paid for and counted in
GDP.
Underground economy: Buying and selling of goods and
services that is concealed from the government to avoid taxes or
regulations, or because the goods and services are illegal.
• This may be 10 percent or more of the economy in America and
substantially more in low-income countries.
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How Important Are These Shortcomings?
If we are comparing GDP from year to year, the size of household
production and the underground economy is probably about the
same from year to year, so GDP growth is a reasonable measure
of the growth in total production.
However over long periods of time, these shortcomings might be
more serious.
Example: As women have entered the workforce in larger
numbers, some household production has been replaced by paid
childcare and restaurant meals. So increases in GDP may
exaggerate the increase in actual total production.
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Apply the Concept: Underground
Economies in Developing Countries
In developing countries, the
underground economy is often
referred to as the informal sector, as
opposed to the formal sector, in
which output of goods and services
is measured.
• In many developing countries, the
informal sector is very large; often
above 50 percent of total output.
Economists studying economic
development say this often reflects
poor government policies: high
taxes and regulations and low
confidence in the security of private
property from government seizure.
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Shortcomings of GDP as a Measure of WellBeing
GDP per capita (i.e. GDP divided by population) is often used to
represent differences in standards of living from country to country.
However, even if it accurately measured total production, it would not
reflect:
• The value of leisure
• Pollution and other negative effects of production
• Crime and other social problems
• The distribution of income
In fact, improvements in many of these will result in lower GDP per
capita.
Example: Lower crime would allow lower spending on police, prisons,
and private security. This would decrease GDP, but surely result in
improvements in economic well-being.
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Real GDP versus Nominal GDP
Discuss the difference between real GDP and nominal GDP.
Suppose GDP increases; is the increase in GDP due to production
increasing, or due to prices increasing?
• To separate these effects, the BEA calculates both Nominal GDP—
the value of final goods and services evaluated at current-year
prices—and Real GDP—the value of final goods and services
evaluated at base-year prices.
The choice of a base-year is arbitrary; we might use any year’s prices to
compare real GDP. The current standard is 2009.
• Unfortunately, the relative prices also change from year to year,
distorting real GDP calculations. Since 1996, the BEA has overcome
this problem by using chain-weighted prices, using previous-year
prices to adjust current-year production.
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Calculating Real GDP: An Example
Blank
Product
2009 Blank
2019 Blank
Quantity
Price
Quantity
Price
Eye examinations
80
$40
100
$50
Pizzas
90
11
80
10
Shoes
15
90
20
100
The table shows output and prices in 2009 and 2019.
• Calculating the total value of output in 2009 gives:
$3,200 + $990 + $1,350 = $5,540.
To calculate real GDP in 2019, we use the prices from 2009.
• This gives real 2019 GDP in 2009 dollars of $6,680.
• Compare this to nominal GDP in 2019 of $7,800.
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Nominal GDP and Real GDP, 1995-2016
The current base year
for calculating prices is
2009, so real and
nominal GDP are equal
in 2009.
Growth figures reported
in the media are the
growth in real GDP.
Since prices have
generally increased
since 2009, real GDP is
less than nominal GDP,
and the opposite is true
before 2009.
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The GDP Deflator
Economists and policy-makers are interested in the price level: a
measure of the average prices of goods and services in the economy.
• Why? Stable prices are desirable because they allow households and
firms to plan for the future appropriately.
In order to know whether we are achieving price stability, we need to
measure the price level.
• One way to do this is using the GDP deflator: a measure of the price
level, calculated by dividing nominal GDP by real GDP and multiplying
by 100:
Nominal GDP
GDP deflator =
100
Real GDP
Since nominal and real GDP will be the same in the base year, the GDP
deflator will be 100 in the base year.
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Calculating GDP Deflator: An Example
Blank
2015
2016
Nominal GDP
$18,037 billion
$18,569 billion
Real GDP
$16,397 billion
$16,662 billion
Formula
Applied to 2015
Applied to 2016
 $18,037 billion 
 $18,569 billion 
 Nominal GDP 
GDP deflator = 
×100

100
=
110.0




  100 = 111.4
$16,397
billion
$16,662
b
illi
o
n
 Real GDP 




The first table gives nominal and real GDP for 2015 and 2016.
We can use this to calculate the GDP deflator in each year.
• The GDP deflator increased from 110.0 to 111.4:
 111.4 − 110.0 

  100 = 1.3%
110.0


So we can say the price level rose by 1.3% over this period.
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8.4 Other Measures of Total Production and
Total Income
Describe other measures of total production and total income.
Each quarter, the BEA publishes the National Income and Product
Accounts tables. These include GDP computations but also:
• Gross national product (GNP): Production performed by citizens of a
nation, including overseas production
• National income: GDP minus the consumption of fixed capital; i.e.
GDP minus depreciation
• Personal income: Income received by households; includes transfer
payments but excludes firms’ retained earnings
• Disposable personal income: Personal income minus personal tax
payments; this measures the amount that households are able to
spend or save
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Measures of Total Production and Total Income, 2016
The table and graph show the various measures of the national income
accounts for the United States in 2016.
• National income must be smaller than GDP, since it is just GDP minus
depreciation.
• Similarly, disposable personal income must be less than personal income,
since it is just personal income minus taxes.
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The Division of Income, 2016
All production must be rewarded with income; so in theory, we
could count either in order to calculate GDP.
• In practice, data limitations make us unlikely to come up with
the same number; there will always be some statistical
discrepancy.
The figure illustrates the division of income as measured by the
BEA in 2016.
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Copyright
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