Macroeconomic Policy in the Global Economy Issue Paper
zack1011
ITRN503_2020-Spring_Session-02_GDP-and-Wealth-of-Nations.pdf
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ITRN 503: Investment and Macroeconomics Auerswald
Professor Philip Auerswald
Session No. 2:
GDP and the Wealth of Nations
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ITRN 503: Investment and Macroeconomics Auerswald
Lecture 8 3
Consumer and Producer Surplus
Supply Curve
Demand Curve
Consumer Surplus
Producer Surplus
Price, Cost
Output
P*
Q*
At Q’’, a consumer is willing to pay PC, but actually pays (only) P*.
Q’’
PC
It costs only PS for suppliers to produce Q’’, but the suppliers sells the amount Q’’ for P* per unit. PS
B
A
C
The area ABC represents the ““welfare benefit”” of a competitive market. How does the welfare benefit change with government intervention?
N. Koizumi
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Outline
• What is “economic growth”? • What accounts for economic growth? • What is the relationship between GDP and well-being in society?
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Economic Indicators
• Basic Terms – Prices, volumes, and value – Real and nominal values – Focusing on trends
• GDP – the most commonly used indicator of economic activity • GDP change is economic growth when positive, and recession when
persistently negative
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ITRN 503: Investment and Macroeconomics Auerswald
Session #2 6
Basic Economic Terms Price, Value, and Index Numbers
• Volume x Price = Value – Volume – tonnes of steel, barrels of oil – Price – market price of 1 ton of steel or 1 barrel of oil – Value – market value of the steel or oil produced
• Index Numbers (Indices or Indexes) – Express changes as a percentage of a single base figure,
no units Ex. Consumer Price Index [Marketplace report--see syllabus]
GDP
Economic Indicators
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More Basic Terms: Nominal and Real changes in output
• Distinguish between the effects of inflation and changes in the real level of economic activity:
• Value calculated based on actual selling prices – nominal or current value; includes inflationary effects
• Value calculated based on fixed (e.g. 1995) prices – constant value; excludes inflationary effects
GDP
Economic Indicators
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Session #2 8
Motivating example: The impact of Katrina
“We're moving forward with a comprehensive recovery strategy. We're working hard to restore electric power, repair transportation infrastructure, restart energy production, and of course, strategize as to how to provide housing for these folks. I met with Chairman Greenspan at lunch, as well as the economic team, to evaluate the impact of Hurricane Katrina. We particularly spent a lot of time talking about the damage done to our energy infrastructure and its effect on the availability and price of gasoline.”
—President GW Bush September 1, 2005
<http://www.whitehouse.gov/news/releases/2005/09/20050901-3.html>
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Motivating example: The impact of Katrina
“The value of physical property in the flooded areas is approximately $100 billion. While the majority of property damage occurs once flood waters enter a structure, prolonged immersion of wooden residential buildings in warm polluted water will lead to rapid deterioration requiring an increasing proportion of the building stock to be completely replaced. There will also be significant costs associated with land and building decontamination. “Losses from business interruption and displacement of residents are highly dependent on the duration of the flooding. RMS estimates that the costs of interrupted economic activity exceed $100 million per day. There is also some risk that businesses may choose to relocate if they are unable to return in a timely manner, impacting the city’s long-term economic recovery.”
— Risk Management Solutions, September 2, 2005 <http://www.rms.com/NewsPress/PR_090205_HUKatrina.asp>
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ITRN 503: Investment and Macroeconomics Auerswald
Session #2 10
Motivating example: The impact of Katrina
“The good news—and it’s hard for some to see it now—is that out of this chaos is going to come a fantastic Gulf Coast… Out of the rubble of Trent Lott’s house…. there’s going to be a fantastic house. And I’m looking forward to sitting on the porch.”
—President George W. Bush Statement on Arrival at Mobile Regional Airport
<http://www.whitehouse.gov/news/releases/2005/09/print/20050902-2.html>
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Motivating example: The impact of Katrina
“Hurricane Katrina destroyed hundreds of thousands of homes, threw at least a million people out of work, disrupted supply lines for businesses and brought misery to untold numbers. Will it also put an end to the housing boom? “There are good reasons to think so: The storm has led to rising oil prices, and shortages of building materials, and is likely to shake consumer confidence. But most experts think the housing market's five-year run still has a way to go before it peters out. “In a weird twist of fate, the storm could even extend the housing boom, which in recent weeks had seemed to be running out of steam. That is certainly true in places like Houston, Atlanta and Baton Rouge, La., which are experiencing a surge in rental and home-buying activity as a result of the storm and the exodus that followed.”
—New York Times September 5, 2005
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Long-term Trend in Global GDP
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Distribution of Global GDP
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ITRN 503: Investment and Macroeconomics Auerswald
Origins of GDP
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How to Measure GDP Level?
• Nominal GDP – total economic activity in current prices. – US nominal GDP in 2014 was $ 17.6 trillion – Global nominal GDP in 2014 was $76.7 trillion
• Real GDP – total economic activity in constant prices – Changes in real GDP show changes in economic activity after
adjusting for inflation • GDP per capita – output per person
– GDP / population • GDP per sector- ex. manufacturing, services
GDP
Economic Indicators
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Changes in GDP
• A Change in GDP = Economic Growth
• How to Measure: – Real, Nominal, Constant – Index to some past year
GDP
Economic Indicators
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ITRN 503: Investment and Macroeconomics Auerswald
Fluctuations in US Growth Rates (1948-2013)
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Descriptive statistics
Chart 1. GDP levels in Country A and Country B over eight years (fictitious)
Mean for both data
sets? Standard deviation? Which is
more “volatile”?
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Economic Growth
§ Economic developments should be judged in the context of trends and cycles – Trend: a long-term rate of economic expansion – Cycle: short-term fluctuations around the trend.
• Economic growth is driven by: – the number of people working (population and employment) – Productivity - output per worker, which, in turn, depends on – technological progress and investments
Economic Growth
Economic Indicators
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Things to remember about GDP
• Nominal and Real GDP – Nominal GDP is in current prices – Real GDP is today’s output in constant prices (no inflation) – Check whether GDP is adjusted for inflation!
• An inflation rate of 5 % and GDP growth of 3 % indicates a 2 % real GDP growth
• GDP per capita is one indicator of economic well-being, but not the only indicator
Economic Indicators
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• Modeling growth
S0 à à Sn S1= (1.05) S0 … SN= (1+r)N S0
• Implications for policy: Why care about inflation?
Models
model
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