BUS 529 WK 5 The Sale of Used Goods Is Not Included in GDP Worksheet

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ECONOMICS
GDP Worksheet
1.
Components of GDP: Fill in the blank with the component of GDP each of these items would fit into.
A mechanic repairs a transmission.
2.
A business purchases computer software and a PC.
3.
A local library purchases new audio books.
4.
A retailer purchases tennis shoes from a Chinese manufacturer
then sells them.
5.
A mother purchases the same shoes from the retailer.
Write one more example for each of the four components.
6.
Consumer Spending ___________________________________________________________
7.
Investment _________________________________________________________________
8.
Government Spending
9.
Net Exports
__________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
10.
Explain why the sale of used goods is not included in GDP:
B.
Nominal and real GDP
You are an economist who has been asked to calculate your nation’s GDP, which produces only three
goods/services. Calculate nominal GDP for Year 1 and Year 2. GDP = Price x Quantity.
Year 1 Nominal GDP
Good
Oil changes
Hamburgers
MP3 players
1.
Price
$ 15
$ 2
$150
Year 2 Nominal GDP
Quantity
5
20
3
TOTAL:
GDP
Good
Oil Changes
Hamburgers
MP3 players
How much did nominal GDP increase from Year 1 to Year 2?
Price
$ 18
$ 3
$175
Quantity
6
25
5
TOTAL:
GDP
Now calculate Year 2 real GDP using Year 1 as the base year (that means you use Year 1 prices to calculate
Year 2’s GDP)
Year 1 Real GDP
Good
Price
Oil changes $ 15
Hamburgers $ 2
MP3 players $150
Year 2 Rea1 GDP (Year 1 is the base year)
Quantity
5
20
3
TOTAL:
GDP
Good
Oil Changes
Hamburgers
MP3 players
Price
$____
$____
$____ .
Quantity
6
25
5
TOTAL:
12.
How much did Year 2’s nominal GDP overstate GDP in Year 2 when compared to real GDP?
13.
How much did real GDP increase from Year 1 to Year 2?
14.
Why is it important to adjust nominal GDP to real GDP to account for inflation?
GDP
C. Assume that a country has a closed economy with only three goods/services (no next exports). In a
given year, the economy produces: a) three haircuts at $10 each; b) two factory machines at $100 each;
and c) one highway repair that costs $500.
15.
What is total GDP for this economy?
16.
What percent of GDP is consumption?
17.
What percent of GDP is investment?
18.
What percent of GDP is government spending?
19.
Suppose an economy’s nominal GDP increased 3 percent in 2005. Why is this information alone not
enough to determine whether the economy experienced economic growth? What other information would you
need to determine that?
20.
Why is GDP not a true measure of the standard of living? What other factors should be considered
when determining a country’s standard of living?
BUS529 Week 5 Lesson 3
Macroeconomic Model
AD =Aggregate Demand
AS= Aggregate Supply
1
Macroeconomic Model
P
LRAS
AS
P = Price Level
AD
Qf
Real GDP= Q
2
Long Run Aggregate Supply (LRAS)
P
LRAS
P = Price Level
Qf
Real GDP= Q
3
Short Run Aggregate Demand – Aggregate Supply
AS
P
P = Price Level
AD
0
Real GDP=Q
4
MACROECONOMIC MODEL: Short Run Aggregate demand (AD) – Aggregate Supply (AS) Model
AGGREGATE DEMAND (AD)
AGGREGATE SUPPLY (AS)
Explain its Slope:
Explain its Slope:
What shifts AD?
Nonprice determinants of AD
1)change in Consumption spending (C)
a) Consumer wealth (not income)
b) Consumer expectations
c) Household debt
d) Personal Income Taxes (T)
*(interest rates)
What shifts AS?
Nonprice determinants of AS
1)change in production costs
a) Productivity
b) Price and availability of
resources
•
Domestic
•
Imported **
c) Legal-Institutional Environment
•
Business Taxes (T)
•
Business subsidies
•
Regulation
2)change in Investment (Ig)
a) Expected rate of return
•
Business Outlook
•
Degree of Excess Capacity
•
Product specific technology
•
Business Taxes/subsidies/regulation
b) Interest rate (i)*
3) Government spending (G)
4) Net Exports (Xn)
a) National income abroad
b) Exchange rates (e)**
* Money Market: interest rate (i)
** International: exchange rates (e)
5
Aggregate Demand
• Definition:
Demand for all goods and services in an
economy a
• Relationship between Price and Real GDP
is __negative__________________
• If Price changes….
• If nonprice determinants change…
6
Shifts or Changes in AD
P
Aggregate Demand
Increase
P = Price Level
AD2
AD1
Real GDPor Q
7
Shifts or Changes in AD
P
Aggregate Demand
Decrease
P = Price Level
AD3
AD1
Real GDP or Q
8
SHIFTS in Aggregate Demand (AD)
Nonprice Determinants of AD
1)______ C = Consumer spending
2)______ Ig = Investment spending
3)______ G = Government spending
4)______ Xn = Exports (X) – Imports (M)
9
1) C = Consumer Spending
a)Consumer Wealth
b)Consumer Expectations
c)Consumer Indebtedness
d)Taxes
(* interest rates)
10
2) Ig = Investment Spending
a) Expected Returns
•
•
•
•
Business Outlook
Degree of Excess Capacity
(product specific technology)
Business taxes/subsidies
b) Interest Rates
11
3) Government Spending
4) Net Export Spending
a)National Income Abroad
b) Exchange Rates
12
Short Run Aggregate Demand – Aggregate Supply
AS
P
Price= P
AD
0
Real GDP=Q
13
AS increase…
AS2
Price level
AS1
0
Real GDP
14
AS decrease…
AS2
Price level
AS1
0
Real GDP
15
Aggregate Supply
• Definition:
• Total goods and services produced
• Relationship between Price and Real GDP
is ____positive ________________
• If Price changes….
• If nonprice determinants change…
16
What shifts Aggregate Supply?
• In general…
• If production costs decrease
______________
• If production costs increase
______________
17
Nonprice determinants of AS
1) Production Costs
a) Productivity
b)Price and Availability of Resources
c) Legal-Institutional Environment
18
a) Productivity
b) Price and Availability of Resources
• Domestic
• Imported **
**exchange rates
19
c) Legal-Institutional Environment
• Business Taxes
• Business Subsidies
• Government Regulation
20
Short Run (SR)
AD– AS Model
AS
P
P = Price Level
AD
0
Real GDP=Q
EQUILIBRIUM: AD=AS
21
Comparative Statics Review
• Definition:
• If AD and or AS changes (shifts)….
New equilibrium price level …
New equilibrium Real GDP …
22
AD increases…New Equilibrium
AS1
P
2
P = Price Level
1
AD2
AD1
0
Real GDP = Q
23
AS increases…New Equilibrium
AS1
P
AS2
P = Price Level
1
2
AD1
0
Real GDP= Q
24
AD and AS increases…New Equilibrium
Price level
AS1
1
AS2
2
AD2
AD1
0
Real GDP
25
Slope of AS and AD
•
AS has a positive slope…
– In general, increasing Price is incentive for
firms to produce more
•
AD has a negative slope…
–
1)
2)
3)
3 reasons
Real Wealth Effect (Consumers )
Interest Rate Effect (Firms)
Foreign Purchasing Effect (ROW)
26
BUS529 Week 5
Lesson 2
Key Indicators
1
Key Indicators
1.
2.
3.
4.
5.
Real GDP
Inflation
Unemployment Rate
Interest Rate
Exchange Rate
2
Goal of an Economy
?
Promote Long Term Economic Growth
Economic growth – Why is it important?
?
Maintain Short Term Stability
Business Cycle
Real GDP
Secular Trend
time
3
Shaded areas indicate recessions in U.S.
7
6
4
2
3
5
2007Q4
2009Q2
1
GDP in 1999 dollars, 1959-2002
http://research.stlouisfed.org
4
Retrieved from https://www.bea.gov/system/files/inline-images/gdp2q19_2nd_0.png
9/12/2019
World Economic Growth Rates:
https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/ADVEC/
WEOWORLD
5
https://www.bea.gov/news/2022/gross-domestic-product-fourthquarter-and-year-2021-advance-estimate
Different Economy Growth Rates:
https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/A
DVEC/WEOWORLD
6
By-Products of the Business Cycle
?
Recession
?
?
NBER definition
By-Product of Slow economy:
Unemployment
_______________
increases
Recovery
?
?
Positive economic growth
By-Product of overheating economy:
Inflation
________________
increases
7
How Is the Unemployment
Rate Computed?
Number of Unemployed
U = —————————————–Labor Force
* 100
(Civilian) Labor Force = Number employed + Number unemployed
part-time workers included
discouraged workers not included
.
8
HOUSEHOLD DATA
Summary table A. Household data, seasonally
adjusted [Numbers in thousands]
Jan.
Nov.
Dec.
Jan.
Change
from:
2021
2021
2021
2022
Dec.
2021Jan.
2022
Employment status
Civilian noninstitutional population
Civilian labor force
Participation rate
Employed
Employment-population ratio
Unemployed
Unemployment rate
Not in labor force
260,851
262,029
262,136
263,202

160,184
162,126
162,294
163,687

61.4
61.9
61.9
62.2

150,004
57.5
10,180
155,324
59.3
6,802
155,975
59.5
6,319
157,174
59.7
6,513

6.4
4.2
3.9
4

100,667
99,902
99,842
99,516

6.4
4.2
3.9
4
Unemployment rates
Total, 16 years and over
9
U.S. Unemployment Rates
Jan 2011-Jan 2021
Source: Bureau of Labor Statistics
10
https://fred.stlouisfed.org/series/NROU#:~:text=The%20natural%20rate%20of%20
unemployment,the%20long%2Dterm%20natural%20rate.
Types of Unemployment
?
Frictional unemployment
?
Structural unemployment
?
Cyclical unemployment
12
Natural Unemployment Rate UN
Natural unemployment rate estimated.
Frictional+Structural 4.5%
Cyclical
___%
Unemployment Rate
4.0%
(Natural or Full employment)
Total
*January 2021
Natural Rate if Unemployment can change overtime …
1980s UN=6%
2000 UN=5%
2020 UN=4.5%
https://fred.stlouisfed.org/series/NROU
13
Inflation
https://www.bls.gov/cpi/tables/supplemental-files/home.htm
Month/Year
CPI
Jan 2021
261.582
Jan 2022
281.148
By what percentage did the cost of
living rise in 2022?
Inflation = Percentage change CPI= 7.5%
Inflation and Purchasing Power
14
Disinflation versus Deflation
?
http://www.frbsf.org/education/activities/drecon/1999/9909.html
15
Types of Inflation
?
Demand-Pull Inflation
?
Cost-Push inflation
?
Hyperinflation
16
4. Interest Rates
?
?
?
?
Short Term versus Long Term Rates
R = Nominal Interest Rate
r = Real interest Rate
h = Expected Inflation rate
Fed Chairman
Jerome H. Powell
R = r +h
https://www.federalreserve.gov/aboutthefed.htm
17
THE MARKET FOR CURRENCY
Dollar price of one Euro
*1/15/2022
P
$1.14
Exchange rate*
$1.14 = 1 Euro
S
Euro
Appreciates
Euro
Depreciates
D
Quantity of Euro
Q
19
Exchange Rates
http://www.x-rates.com/graph/?from=EUR&to=USD&amount=1.00
Determinants of Exchange Rates
1. Changes in Tastes of either country
2. Changes in Relative Incomes
3. Changes in Relative Prices
4. Changes in Relative Interest Rates
5. Speculation
20

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