portfolio of teaching materials - university of …bcw005/pdfs/portfolio of...portfolio of teaching...

Portfolio of Teaching Materials Boris Wong

All materials are from Principles of Macroeconomics, taught during Summer 2016

Contents:

1. Syllabus 2. Final exam 3. Midterm exam 4. Problem set (for GDP chapter) 5. Lecture slides (for GDP chapter)

Economics 3 – Principles of Macroeconomics, Summer Session I 2016

MTuWTh, 12:30-1:50 pm, Warren Lecture Hall 2111 Discussion: Tue, 2:00-3:50 pm, Warren Lecture Hall 2111

Instructor: Boris Wong ([email protected]) Office Hours: Mondays, 3-5 pm, Sequoyah Hall 232 Class Website: https://tritoned.ucsd.edu TA: Grant Johnson ([email protected]) Office Hours: Wednesdays, 2:30-4:30 pm, Sequoyah Hall 236

COURSE DESCRIPTION: Introduction to macroeconomics: output, unemployment, inflation, business cycles, monetary and fiscal policy, and international trade. COURSE GOALS: By the end of this course, you should be able to:

Explain how economists define and measure an economy’s output Describe the true costs of inflation and compute real value of goods by adjusting for

inflation Define and calculate the unemployment rate and the participation rate Discuss the determinants of economic growth and evaluate government policies that

promote economic growth Analyze the creation of money through the lending behavior of commercial banks Recommend appropriate fiscal and monetary policies in different situations of the economy

PREREQUISITES: ECON 1 – Principles of Microeconomics TEXTBOOK: Principles of Economics ECON 1/2/3, 6th edition, by Robert H. Frank, Ben S. Bernanke, Kate Antonovics and Ori Heffetz A custom edition is available at the UCSD Bookstore for $106.67 GRADING AND EXAMS: Clicker questions (5%) Homework (10%) – the lowest percent score is automatically dropped Midterm Exam (35%) Thursday, July 14 Final Exam, cumulative (50%) Friday, July 29, 11:30-2:29pm, location TBA CLASS PARTICIPATION: We’ll be using peer instruction with clickers in this class. That’s where I’ll pose conceptually-challenging, multiple-choice questions and each of you will have an opportunity to practice new skills and ways of thinking, and compare your way of thinking with others in the class. Beginning in week 2 (Tuesday, July 5), you’ll receive 1 point for every question you answer – the goal of peer instruction is for you to practice, not for you to get a question right or wrong. The two lowest percent scores are automatically dropped. The i-clicker 2 model is available at the UCSD Bookstore.1 You will need to register your remote on Ted before using in class. From the class Ted page, go to Tools > i-clicker Student Registration.

mailto:[email protected]


HOMEWORK: It is tremendously important that you keep up with the course and that you practice solving economic problems. Homework will be posted and submitted through TritonEd. Homework will be due each Friday night (exception: the last homework will be due on Wednesday night), with the next homework being released the same night. ADMINISTRATIVE ISSUES:

1. Students requesting accommodations for this course due to a disability must provide a current Authorization for Accommodation (AFA) letter issued by the Office for Students with Disabilities (OSD) which is located in University Center 202 behind Center Hall. Students are required to present their AFA letters to Faculty (please make arrangements to contact me privately) and to the OSD Liaison in the department in advance so that accommodations may be arranged. Contact the OSD for further information: 858.534.4382 (phone), [email protected] (email), http://disabilities.ucsd.edu (website).

2. Academic dishonesty will not be tolerated. All suspected cases of academic dishonesty will

be reported to the Academic Integrity Coordinator. Students found guilty of academic dishonesty will earn a failing grade for the course in addition to the penalties imposed by the Academic Integrity Review Board.

3. Exams a. You must bring your student ID to all exams. b. You may only use a pen/pencil, a straight edge, and a nonprogrammable scientific

calculator (Example, TI-30XA available online for $10) during exams. i. Exams are closed book and you may not use any notes.

ii. Exams are electronic-free: you may not use programmable calculators, headphones, cell phones, etc.

c. If you arrive late to an exam, I will allow you to take the exam in the time that remains as long as no one has turned in his/her exam and left the room. Once a classmate has turned in his/her exam, you will earn a zero on the test if you arrive late.

d. If you believe your midterm has not been graded properly, you may request a re-grade within one week of the exam being returned by submitting a re-grade form (posted on TritonEd) along with your exam. I will re-grade your entire exam. The re-graded score will be your grade for the exam. You may not ask for another re-grade or go back to your first grade.

READING:

Topic Chapter Spending, Income, and GDP 15 Inflation and the Price Level 16 Wages and Unemployment 17 Economic Growth 18 Saving, Capital Formation, and Financial Markets 19 Money, Prices, and the Financial System 20 Short-Term Economic Fluctuations 21 Spending, Output, and Fiscal Policy 22 & Appendix Monetary Policy and the Federal Reserve 23 Exchange Rates, International Trade, and Capital Flows 26

1 If you already have the i-clicker or i-clicker(+) model, these will be fine.


1

Econ 3 Name Summer I 2016 Wong Student ID

Final Exam – Version A

Your exam should have 7 short answer questions and 20 multiple choice questions.

No notes or books during this exam. You may use a calculator if it is not a graphing calculator and not your phone. Problems with computations must show work to receive credit (unless multiple choice).

If you need to use the restroom, please raise your hand to request permission before leaving

the room. You must leave your phone while using the restroom.

------------------------------------------------------------------------------------------------------------ Do not mark, for graders only

Part I Question 1 / 26

Question 2 / 12

Question 3 / 22

Question 4 / 8

Question 5 / 6

Question 6 / 16

Question 7 / 12

Part II Multiple Choice / 80

TOTAL / 182

3

Part 1: Free Response Remember to show your work.

1. Suppose the components of planned aggregate expenditure are given by:

C = 100 + 0.7∙(Y – T)

IP = 200

NX = 0

G = 150

T = 210

A. (8 points) What is the value of short-run equilibrium output Y?

(Show algebra here)

Y =

4

B. (6 points) Suppose that potential GDP (Y*) = 1052 and the natural rate of unemployment

(U*) equals 5.5 %. What is the actual rate of unemployment (to the nearest tenth of a

percent)?

C. (6 points) If the government raises G by $10, by how much will short-run equilibrium

output rise?

Short-run equilibrium

output will rise by (round

to the nearest dollar):

D. (6 points) How can the government change T to achieve the same effect on short-run

equilibrium output as an increase of G by $10? Indicate both the direction and the

magnitude of the change in T.

Change in T (round to the

nearest dollar):

U =

5

2. Suppose the U.S. government announces that it will stop sending out Social Security checks to

retirees in 20 years because the trust fund will run out.

A. (2 points) As a result of the announcement we would expect current saving of households to

(↑ or ↓ or “stay constant”)

B. (10 points) Show in a graph how this announcement affects real interest rates and business

investment in the United States during the next 20 years. Be sure to label the axes and curves,

and show how they shift. Also indicate the effect on the equilibrium real interest rate and

national saving (use ↑ or ↓ or “no change”) in the box below.

Variable Indicate ↑, ↓, or “no change”

Real interest rate

National saving

6

3. Suppose we are in a deep recession.

A. (2 points) What is the appropriate open market operation by the Federal Reserve?

B. (8 points) Illustrate in a money supply and money demand diagram to show what happens

given the open market operation you chose in part A. Clearly label the axes and curves, and

indicate any shifts with arrows.

C. (12 points) Given the open market operation you chose in part A, what happens to the

following variables?

Indicate ↑, ↓, or “no change”

Nominal interest rate

Real interest rate

Consumption

Planned Investment

Planned aggregate expenditures

Output

7

4. (8 Points) In the U.S. from 2008 to 2013, Chairman Ben Bernanke raised the money stock

M1 on average by 12.6% per year. Real GDP grew at an average annual rate of only 0.9% per

year during this period. Some people predicted that the high growth of M1 would cause

inflation to increase, but in fact, inflation stayed low, averaging 1.4% per year. What

happened? Indicate what other variable must be changing, the direction of change, and the

magnitude of the change (rounded to the nearest %).

5. (6 Points) Suppose the nominal interest rate is 7%. What is the appropriate price

(today) for a bond whose principal is $500, has a coupon rate of 3%, and

matures in one year?

8

6. (16 points) Refer to the following table to answer the questions below.

Year Nominal GDP (in trillions) CPI (=100 in 1983)

2007 14.5 207 2008 14.7 215

2009 14.4 215

2010 15.0 218

a. What was real GDP (measured in 1983 dollars) in 2007?

b. By what percent did real GDP decrease from 2007 to 2009?

c. By what percent did nominal GDP decrease from 2007 to 2009?

d. Why did real GDP fall by more than nominal GDP from 2007 to 2009? Explain

briefly.

9

7. (12 Points) You save $100 dollars today for retirement.

A. Suppose you invest the $100 at an annual interest rate of 8%, how much money would you

have after 40 years?

B. Suppose the inflation rate is 2% per year for the next 40 years, and the nominal interest rate

is still 8%. How many years would it take for the real purchasing power of your $100 to

double?

10

Part 2: Multiple Choice (4 pts each)

Please write your answers with CAPITAL LETTERS in the box.

1. If commercial banks are maintaining a 4 percent reserve/deposit ratio and the Fed raises the

required reserve ratio to 6 percent, then banks will the loans they make and

the money supply will .

A. increase; increase

B. increase; decrease

C. decrease; increase

D. decrease; decrease

2. The introduction of a new technology that increases the productivity of labor will:

A. increase the supply of labor

B. decrease the supply of labor

C. increase the demand for labor

D. decrease the demand for labor

3. Growth of real GDP per person is totally determined by the growth of:

A. Average labor productivity and the proportion of the population employed

B. Average labor productivity and the proportion of the population in the labor force

C. Labor force participation and the share of income going to capital

D. Labor force participation and the share of the population employed.

4. Increasing levels of disposable income in China are likely to:

A. shift the demand for U.S. dollars to the left

B. shift the supply of U.S. dollars to the left

C. shift the demand for U.S. dollars to the right

D. shift the supply of U.S. dollars to the right

5. Thomas Malthus’ famous prediction that population growth would inevitably lead to

episodes of famine and disease did not come true because Malthus overlooked the

importance of which factor?

A. The minimum wage

B. Stabilizing monetary policy

C. Inflation

D. Technological change

E. Declining marginal product of labor

11

6. The key assumption of the basic Keynesian model is that in the short-run firms

A. Meet demand at preset prices

B. Adjust prices to bring sales in line with capacity

C. Change prices frequently

D. Operate just as they do in the long run

E. Produce potential output

7. In the diagram that identifies the short-run equilibrium output, what does the 45° line

represents?

A. Y = PAE B. I > I

P

C. I < IP

D. PAE = C + IP + G + NX

E. Y* = Y

8. Higher nominal interest rates the quantity demanded of money and higher real

income the demand for money.

A. increase; increases

B. increase; decreases

C. increase; does not change

D. decrease; decreases

E. decrease; increases

9. Which of the following was a new monetary policy tool since 2008?

A. Lending through the discount window

B. Changing reserve requirements

C. Buying government treasury bills

D. Paying interest on bank reserves

E. Giving out tax rebates

10. Because Congress fixes the minimum wage in nominal terms, when there is inflation,

the nominal minimum wage and the real minimum wage .

A. remains constant; falls

B. remains constant; remains constant

C. remains constant; increases

D. increases; falls

11. Which of the following is a flow?

A. Saving.

B. Wealth.

C. Money.

D. Assets.

12

12. Increasing the capital available to the workforce, holding other factors constant, tends to

total output and to average labor productivity.

A. increase; decrease

B. increase; increase

C. increase; keep unchanged

D. decrease; increase

13. The change in wealth for a household during a period equals:

A. saving + capital gains - capital losses.

B. saving - capital gains + capital losses.

C. saving - investment + capital gains - capital losses.

D. public saving + private saving - transfers.

14. When an individual deposits currency into a checking account:

A. bank reserves increase which allows banks to lend more and, ultimately,

increases the money supply.

B. bank reserves decrease which reduces the amount banks can lend thereby

reducing the growth of the money supply.

C. bank reserves are unchanged.

D. bank liabilities increase which reduces the amount banks can lend, thereby

reducing the growth of the money supply.

15. You are given the following information about the economy:

Private saving is ; public saving is ; and national saving is .

A. 800; 200; 600

B. 800; 200; 1,000

C. 1,000; 800; 1,000

D. 1,500; 700; 2,700

13

16. A Big Mac in the US costs 4.8 US dollars. A Big Mac in China costs 15 Chinese

Yuan. If the exchange rate is 0.16 dollars/Yuan, in which country is a Big Mac more

expensive and by how much?

A. 3x more expensive in China

B. 2x more expensive in China

C. 3x more expensive in the US

D. 2x more expensive in the US

17. Based on the table below, if the production process described below is subject to

diminishing returns to capital, then total packages wrapped when a fourth machine is

installed must be less than packages.

A. 2,000

B. 15,000

C. 16,000

D. 17,000

18. Workers at a car-manufacturing plant in Flint, Michigan are laid off because the

economy is weak and GM cars aren't selling well. GM isn't sure when the plant will

reopen. What type of unemployment describes the workers' situation?

A. Structural unemployment

B. Frictional unemployment

C. Cyclical unemployment

D. Full unemployment

14

Use the following graph to answer the next two questions

19. Based on the diagram above, short-run equilibrium output equals:

A. 4000

B. 4100 C. 4500

D. 5000

E. 6000

20. Based on the diagram above, at short-run equilibrium output autonomous expenditure

equals and expenditure induced by income equals .

A. 500, 4500

B. 500, 5000 C. 500, 5900

D. 5450, 5500

E. 5900, 6000

15

STUDENT CONSENT FOR RELEASE OF STUDENT INFORMATION

(Buckley Waiver)

I hereby authorize the UCSD Economics Department to return my graded final

examination/research paper by placing it in a location accessible to all students in the course. I

understand that the return of my examination/research paper as described above may result in

disclosure of personally identifiable information, that is not public information as defined in UCSD

PPM 160-2, and I hereby consent to the disclosure of such information.

Quarter Course Date

Instructor

Student ID#

Print Name

Signature

1

Econ 3 Name Summer I 2016 Wong Student ID

Seat number

Midterm – Version A

Your exam should have 6 short answer questions and 10 multiple choice questions. Make

sure you have all 9 pages.

No notes or books during this exam.

You may use a calculator if it is not a graphing calculator and not your phone.

Problems with computations must show work to receive credit (unless multiple choice).

Regrade requests must be submitted within one week of when exams are returned in class.

Standard university policy is to not accept regrade requests for exams done in pencil.

------------------------------------------------------------------------------------------------------------ Do not mark, for graders only

Part I Question 1 / 12

Question 2 / 10

Question 3 / 12

Question 4 / 6

Question 5 / 10

Question 6 / 10

Part II Multiple Choice / 40

TOTAL / 100

2

Part 1: Free Response Remember to show your work!

Place answers in blanks and boxes, where available.

1. (12 points) Suppose that only two types of goods are produced and consumed in the

U.S.: donuts and hotdogs. Here is a list of prices and quantities:

Year Price of donuts

(in $)

Price of

hotdogs (in $)

Quantity of

donuts

produced and

consumed

Quantity of

hotdogs

produced and

consumed

1 5 2 10 6

2 6 3 14 7

A. What is nominal GDP in the Year 1?

B. Using Year 1 as the base year, what is the percent increase

in real GDP from Year 1 to Year 2 (rounded to

the nearest 1/10th of a percent).

C. Again using Year 1 as the base year, calculate the

Consumer Price Index (CPI) in the Year 2

(rounded to the nearest 1/10th).

3

2. (10 points) Suppose a new U.S. president decides to deport low-skill illegal immigrants

and build a wall along the U.S. and Mexican border to restrict new entrant of low-skill

workers. At the same time, improvement in the technology of self-driving cars starts to

replace the value of low-skill workers such as truck drivers, thus reducing their marginal

product of labor.

A. All else equal, illustrate in a supply and demand diagram to show what happens to low-skill

workers such as truck drivers. Clearly label the axes and curves, and indicate any shifts with

arrows.

B. Fill in the blanks with “increase,” “decrease,” or “ambiguous.”

Low-skill wages

Low-skill employment

4

3. (12 points) Consumer Price Index.

1981 91 1982 97 1983 100 1984 104 2015 237

A. What is the inflation rate between 1983 and 1984?

B. Ivy League college tuition was $9,000 a year in 1981.

Using the CPI table above, how much is this in 2015 $

(to the nearest $)?

C. You were making a two-year loan to your friend in

1981 (the loan would be paid back in 1983). You want

to earn a 5% real return per year. Using the CPI table

above, what annual nominal interest do you need to

charge?

5

4. (6 points) Suppose the prices of all goods unexpectedly increase by 10% and wages of all

workers unexpectedly increase by 10%. In the blank spaces list 3 reasons from class why

inflation of this type may be problematic.

5. (10 points) A town contains 100 people, of which 10 are children under age sixteen. There

are 5 retired persons, 4 full-time students over age sixteen, 6 full-time homemakers, 8

involuntary part-time workers, 2 discouraged workers, and 20 people actively searching for

work. The other 45 people have full-time jobs, though 3 of them are “on leave” from their

jobs.

a. (4 pts) What is the unemployment rate in this economy?

b. (4 pts) What is the labor force participation rate in this economy?

6

6. (10 points)

A. If the employment-population ratio is growing at 2 percent per year and average labor

productivity is growing at 4 percent per year, GDP per capita is growing at

B. Given the GDP per capita you found in part A, how many years would it take for the GDP per capita to double?

7

Part 2: Multiple Choice (4 pts each)

Please write your answers with CAPITAL LETTERS in the box.

1. GDP excludes most nonmarket transactions. Therefore, GDP tends to:

A. Overestimate the amount of production of the economy

B. Underestimate the rate of inflation in the economy

C. Overestimate the rate of inflation in the economy

D. Underestimate the amount of production in the economy

2. An upward sloping labor supply curve is the result of:

A. Increasing female labor force participation.

B. Increasing retirement of the baby boomers.

C. Income effects that are greater than substitution effects.

D. Substitution effects that are greater than income effects.

E. The effect of inflation on real wages.

3. Suppose manufacturers introduce a new model car to replace a car currently included

in the CPI basket. The price of the new car is 10 percent higher than the discontinued

model, but the new car also includes additional safety features. In this situation the CPI

will tend to ______ inflation as a result of ______ bias.

A. understate; quality adjustment

B. overstate; substitution

C. overstate; quality adjustment

D. accurately measure; substitution

4. Suppose that the labor supply curve is moving out faster than the labor demand curve.

Which of the following is consistent with this? Nominal wages are rising at __________

per year, inflation is _________ per year, and employment is ______________ per year.

A. 5%; 3%; rising at 4%

B. 5%; 3%; falling at 4%

C. 8%; 10%; rising at 4%

D. 8%; 10%; falling at 4%

E. 12%; 7%; rising at 6%

5. Which of the following is NOT classified as a final good?

A. A new house purchased by a family

B. A new machine purchased by a business

C. Fresh vegetables purchased by a restaurant

D. New clothing purchased by a college student

8

6. The value of U.S. imports is:

A. added when calculating GDP because imports do not constitute production in the

United States.

B. subtracted from exports when calculating GDP because imports do not constitute

spending by Americans.

C. added to exports when calculating GDP because imports reflect spending by

Americans.

D. subtracted from exports when calculating GDP because imports do not constitute

production in the United States.

7. Bob is an unskilled worker, who is currently unemployed. He has been offered a

minimum wage job paying $40 a day, but he is currently receiving unemployment

insurance benefits of $50 a day, so he chooses not to accept the minimum wage job and

to continue looking for a better job. Bob is unemployed.

A. frictionally

B. structurally

C. cyclically

D. not

8. The real wage is the wage:

A. measured in current dollars.

B. required to maintain a minimum standard of living.

C. employers are required to pay workers.

D. measured in terms of how much stuff you can purchase.

9. Production data for Joe’s Pizza Parlor are as follows. For simplicity assume that labor

is the only input. Each pizza sells for $5.

Number of Workers Pizzas Baked Per Day

0 0

1 10

2 18

3 24

4 30

5 32

How many workers will Joe hire if he must pay each one $35 a day?

A. 1

B. 2

C. 3

D. 4

9

10. Here are some data for an economy. What is labor income?

Consumption expenditures $50 Imports 40

Government purchases of goods and services 20

Construction of new homes and apartments 30

Sales of existing homes and apartments 40

Exports 50

Government payments to retirees 10

Beginning-of-year inventory 10

End-of-year inventory 20

Business fixed investment 30

Capital income 50

A. 100

B. 140

C. 150

D. 160

E. 320

Practice Problems: Chapter 15 GDP

1. Fill in the table using the correct units.

Year Nominal GDP

(in billions)

Price Index

(Base year

2000)

Population (in

millions)

Real GDP (in billions

of 2000 $)

1950

14 152 4,996

2000

10,290 100 282

2013

16,661 233 316

Nominal GDP per capita in 2013 (in dollars, not millions or billions of dollars) _________

2. Given the following data for the economy, compute the value of GDP.

3. Given the following data for an economy, compute the value of GDP.

4. An economy produces 500,000 tables valued at $100 each. Households purchase 100,000

tables of which 50,000 are imported. Businesses purchase 200,000 domestically produced

tables. The government purchases 100,000 domestically produced tables and 50,000

domestically produced tables are sold abroad. The unsold tables at the end of the year are

held in inventory by the table manufacturers. What is value of the investment component of

GDP?

5. In the year 2006, Pete Rich purchases a painting done by Rembrandt in 1642 for $20

million. He also pays a one percent commission to the auction house that sold the painting.

What is the contribution of this transaction to GDP in the year 2006?

6. Assume an economy produces only hamburgers and hotdogs and the base year is 2005.

What is the value of real GDP in 2006?

7. Bob's Barber Shop cut 3,000 heads of hair in the year 2005 and 3,100 in the year 2006. The

price of a hair cut was $7 in 2005 and $8 in 2006. If the year 2005 is the base year, what was

Bob's contribution to real GDP in the year 2006?

Multiple Choice:

1. Which of the following would be included in the GDP of the United States?

A. Boeing builds a plane in Seattle that is sold to Air Canada.

B. Daimler Chrysler produces a car in Germany that is sold in Michigan.

C. Nestle produces a candy bar in Switzerland that is sold in San Francisco.

D. Planet Hollywood provides dining services in a restaurant in Hong Kong.

2. Which of the following is NOT a capital good?

A. Batteries purchased by a car manufacturer to install in new cars

B. Machines purchased by a car manufacturer to measure metal thicknesses

C. A new house purchased by a family

D. A new apartment building purchased by a corporation

3. Which of the following would increase the consumption component of U.S. GDP?

A. You purchase a bottle of California wine.

B. A person in Paris purchases a bottle of California wine.

C. A restaurant in Denver purchases a bottle of California wine to include on its wine list.

D. The U.S. government buys a bottle of California wine to serve at a state dinner in the White

House.

4. Investment spending includes spending on:

A. durables, nondurables, and services.

B. stocks, bonds, and other financial instruments.

C. capital goods, residential housing, and changes in inventories.

D. goods and services by federal, state, and local governments.

5. Government purchases include all of the following EXCEPT:

A. social security benefits paid by the federal government.

B. the construction of a new court house built by a county government.

C. the salary paid to an elementary school teacher employed by a local public school district.

D. the purchase of new military hardware by the U.S. Army.

6. Three equivalent ways to measure GDP are total_______, total_______, and total_______.

A. profits; production; saving.

B. expenditure; income; profits

C. investment; consumption; saving

D. production; income; expenditure

7. To compare the change in physical production (GDP) between 2000 and 2006, we should

compare GDP in 2000 with ________ GDP in 2006.

A. real; real

B. real; nominal

C. nominal; nominal

D. current dollar; current dollar

8. Which of the following GDP components can be negative? Check all that apply.

___ Consumption expenditures

___ Inventory investment

___ Government purchases

___ Net exports

9. Intermediate goods and services are _____ production and _____ counted in GDP.

A. the end product of; are

B. the end product of; are not

C. used up in the process of; are

D. used up in the process of; are not

10. GDP excludes important factors that affect people's well-being, such as the value of:

A. services purchased by households

B. government purchases of goods and services

C. leisure time

D. goods produced domestically, but sold to foreigners

Chapter 15: Spending, Income and GDP

By the end of this chapter, you will be able to:

• Define GDP

• Calculate GDP by:

• adding up value added of production.

• adding up expenditure.

• adding up income.

• Distinguish nominal GDP from real GDP.

• List some uses and limitations of GDP as a measure

of welfare. 1

2

GDP Definition

1. Market Value:

Suppose the country of Econland produces the following:

10 scientific calculators

5 textbooks

1 Economic lecture

Would it make sense to add them to get output?

10+5+1=16?

Definition: Gross Domestic Product (GDP) is the market value of all of the final goods and services produced within a country in a given time period. 4 parts of definition

3

1. Market Value - continued

We must convert the goods to comparable units in order to add them. How should we do this?

Weigh them?

1. No. Because weight isn’t closely related to how much a

good is valued by consumers.

2. We can’t weigh services.

Market price? $/ calculator, multiply by calculators, etc. and

everything is in the same units.

Yes. Think back to micro – consumers buy goods until

their marginal valuation is equal to the price. Thus, it is a good

measure of value

Quantity Price per unit

Calculator 10 $10

Textbook 5 $100

Economic lecture 1 $200

1. Market Value - continued

10 x $10 + 5 x $100 + 1 x $200 = $800 This is how current dollar or nominal GDP is calculated.

4

$4,000 worth of iron ore $8,000 worth of steel $1,000 worth of tires

$20,000 car

2. Why Just Final Goods and Services?

Should we say that GDP is $4,000 + $8,000 + $1,000 + $20,000 = $33,000?

Only the $20,000 car should be counted since the value of the intermediate goods is embedded in the car.

No, because we would be double counting

6

Final vs. Intermediate Goods and Services

Intermediate goods and services are produced on the way to making the final good.

In order not to double count, we only count final

goods in GDP.

Exception: Capital goods – factories and machines

Capital goods are not completely used up in

production. We count them as final goods.

7

3. Produced within a Country

Production that takes place within a country’s borders.

Which of these are counted as U.S. GDP?

a. Expeditions from US Ford Plant

Yes

b. Accords from US Honda Plant Yes

c. Cars from General Motors Mexico Plant

No

Which of the following should not be counted in U.S. GDP?

A. UCSD tuition

B. A foreign tourist’s San Diego Zoo admission

C. An American’s vacation in Italy

D. A car produced at Honda’s Ohio factory

Question

8

9

4. In a given time period

Flow of output during period – normally a quarter or year.

Even if quarterly, it is often reported at an annual rate.



• Define GDP

• Calculate GDP by: • adding up value added of production.





of welfare. 10

11

Measuring GDP by Measuring Production

We already saw how to calculate GDP by adding up the market value of production in a simple economy.

Recall that it gets more complicated when we talk about economies that produce intermediate goods.

In practice, we can’t just add up the market value of “final goods” companies because:

• Some production processes take time.

• Many companies produce both intermediate and final goods.

That is why economists have developed the concept of “value added.”

12

Definition:

Value added for a firm

= market value of its product – cost of inputs purchased from other firms.

Note:

1.We subtract out only inputs purchased from other firms, such as raw materials, electricity, business services, rented buildings, leased equipment, etc.

2.We do not subtract out payments to labor (e.g. wages) or the cost of buying equipment and buildings.

In fact, it is the labor and capital that create the value added! Thus, what you pay to labor and capital is not subtracted.

Suppose a pizzeria sells $2,000 worth of pizza in a day.

Item Cost

Cheese, tomatoes, flour $400 Gas and electricity $100 Bakers’ wages $700 Building rental $500

The pizzeria uses its own pizza oven that it bought for $6,000. What is the value added?

13

Clicker Question

A. 300 B. 1000 C. 1500 D. 2000 E. None of the above

14

To calculate GDP for the economy, we can either:

1.Add up only final goods production

or

2.Calculate value added for each producer and then sum it up over all producers to get GDP.

We should get the same answer!

To demonstrate, let’s take a really simple example of a bakery that uses only one intermediate good.

The bakery sells $1,000 worth of baked goods in a day.

Item Cost

Flour $400

Bakers’ wages $500

Value added is

$600

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16

Now let’s go up the supply chain.

$240 in grain

$ 0 in inputs

So the $400 in flour we subtracted out from the bakery gets measured in VA from the flour company and farmer. VA across the three = $1,000.

VA =$600 VA = $240

Bakery

$400 in flour

$240 in grain

VA = $160

Flour mill

Farm



• Define GDP






of welfare. 17

Measuring GDP using Expenditures

• So far we have measured GDP by counting up production

• But any good or service produced is also purchased

by someone

Amount spent = market value

• => Can also construct GDP as a sum of expenditures

18


• Four users of final goods

– Households

– Government

– Firms

– Foreigners

• Households consume => Consumption (C)

• Firms invest => Investment (I)

• Governments provide public goods => Government Purchases (G)

• Foreigners buy our goods => Exports (X)

19


Y = C + I + G + NX

• Y = gross domestic product, or output

• C = consumption expenditure

• I = investment

• G = government purchases

• NX = net exports = ($ of exports – $ of imports)

20

Consumption (C)

Consumption is spending by households on goods and services, such as food, clothing, and entertainment

long-lived consumer goods • Durable goods

– Examples: cars, furniture

– (But not new housing, which is Investment)

shorter-lived • Nondurable goods

– Examples: food, clothing

• Services

– Examples: haircuts, taxi rides, legal services 21

Consumption (C)

22

Investment (I)

Investment is spending by firms on final goods and services, primarily capital goods (goods that are used in producing other goods)

• Business fixed investments

– Machinery, factories, and office buildings

• Residential investment

– Construction of new homes and apartment buildings

• Inventory investment

– Recall: change in inventory (can be positive or negative) 23

Investment (I)

• Notice the emphasis on physical capital

• This is the typical use of ‘Investment’ in our class

• Investment here does not refer to stocks, bonds,

mutual funds

– Those do not create new physical capital

24

Investment (I)

25

Government Purchases (G)

Final goods and services bought by federal, state, and local governments

– Examples: fighter jets, roads, public education

• Does not include transfer payments

– Examples: Social Security benefits, unemployment benefits,

government pensions, welfare payments

– No new goods/services received from these

• Also excludes interest paid on foreign debt 26

Government Purchases (G)

27

Net Exports (NX)

NX = $ of exports – $ of imports

• Exports:

• Imports:

produced domestically but sold abroad

produced abroad but sold domestically

• Subtract $ of imports to avoid double-counting

– When you buy imported goods at the store, that already appears in consumption

– But it is not a domestically produced good. Do not want it to count toward GDP. Subtract off from import

– (Similarly for imports in ‘I’ or ‘G’)

28

Net Exports (NX)

29

Clicker Question

You buy an iPhone in the US. Its most expensive

component – the software – was produced in the US,

but its camera was made in Germany, its processor

in Korea, and its touchscreen in Japan. Lastly, your

iPhone was assembled in China. Your purchase

A. decreases US GDP because it increases

imports from Germany, Korea, and Japan.

B. decreases US GDP because it increases

imports from China .

C. increases US GDP because it increases US

consumption more than imports .

D. Increases US GDP because it increases US

exports more than imports.



• Define GDP






of welfare. 31

Measuring GDP using Income

Already saw that GDP can be thought of as output or expenditure But it can also be thought of as income – Capital and Labor income, specifically

Reason: Whenever a good or service is produced and sold, the revenue from the sale is distributed to the workers and owners of capital involved in production

32

Measuring GDP using Income - continued

GDP = labor income + capital income • Labor income: wages, salaries, income of self-employed • Capital income: payments to owners of physical capital and intangible capital (copyrights/patents) Profits for business owners; rent for land; interest for bond holders; royalties • Labor income is about 2/3 of GDP Capital income about 1/3

33

Clicker Question

Suppose the we have the following data for an

economy. What is GDP and what is labor income?

A.GDP is $800 and labor income is $600

B.GDP is $1,000 and labor income is $700

C.GDP is $1,300 and labor income is $600

D.GDP is $1,000 but there is not enough information to

calculate labor income

Category Amount

Consumption expenditures $600

Investment expenditures $150

Government expenditures $200

Net Exports $ 50

Capital Income $300



• Define GDP






of welfare. 35

Nominal GDP, Real GDP and the Price Level

Suppose we are given the following information on production and prices for The Shire:

GDP in 2006 = 9 x $4 + 3 x $100 = 336

GDP in 2016 = 12 x $5 + 4 x $120 = 540

Because we use current prices, this is called “current” or “nominal”

GDP

Year Quantity of

mince pies

Price of

mince pies

Quantity of

Swords

Price of

Swords

2006 9 $4 3 $100

2016 12 $5 4 $120

36

37

This is a 60% increase.

Why did But actual quantities only rose by 33%. nominal GDP go up so much?

Because prices rose by 20%

Implied change in GDP:

Nominal GDP in 2006 = $336

Nominal GDP in 2016 = $540

38

If we want to measure how much actual output rose, we need to decompose the GDP change into 2 parts:

1. The change in actual quantities 2. The change in prices

But remember that it makes no sense to add up quantities.

We still need to use market prices to weight the quantities.

39

Definition: Real GDP is the value of final goods and services produced in a given year when valued at constant prices.

The idea: to calculate real GDP in some year t, use the quantities of goods in year t, but use prices from a designated base year. This is the traditional method for calculating real GDP.

40

Back to our example: What is real GDP in 2016 valued in 2006 base year prices?

Year Quantity of

mince pies

Price of

mince pies

Quantity of

Swords

Price of

Swords

2006 9 $4 3 $100

2016 12 $5 4 $120

Clicker Question

A.12 x $5 + 4 x $120 = $540

B.12 x $4 + 4 x $100 = $448

C. 9 x $5 + 3 x $120 = $405

D. 9 x $4 + 3 x $100 = $336

41

The Bureau of Economic Analysis used to use fixed, base-year weights for calculating real GDP. In recent years, they switched to chain weighting, which is more complicated but is less sensitive to the choice of base year.

One of the reasons for the switch is that the rapid decline in computer prices made results change a lot when the base year changed.



• Define GDP







of welfare. 42

43

Important things not counted in GDP

1. Leisure time (see next graph)

2. Household production

3. Underground economic activity

4. Health and life expectancy

5. Environmental quality

However, there is a high correlation between other quality of life

indicators and GDP.

Evidence on Leisure Trends from

“A Century of Work and Leisure” by Valerie Ramey and Neville Francis

44

GDP is highly correlated with measures of happiness (Stevenson and Wolfers, Brookings, 2008)

45



• Define GDP







of welfare. 46

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