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0:01
[Music]
0:21
In 2008, with the U.S. economy in process of suffering from its worst downturn since the 1930s, sales of Ford cars and trucks plummeted. General Motors and Chrysler declared bankruptcy but survived because of a $62 billion investment, or bail out, from the U.S. federal government. Although Ford suffered heavy losses, it did not require direct government aid. By 2013, as the economy recovered from the downturn, Ford's sales were rising.
0:57
Ford and the automobile industry as a whole were experiencing the effects of the business cycle. The level of economic activity is important not just to firms such as Ford, but to workers wondering whether they will be able to keep their jobs and to college students wondering whether they will be able to find productive jobs when they graduate.
1:23
Throughout this class, you will hear me tell you to be critical about what you hear and read. That does not mean you should not trust others, it means you should be able to prove facts for yourself. One of those items is the use of the Unemployment rate in a state or the country. It is batted around in the media as if the true meaning is clearly understood by everyone. You might not even understand what it is yourself, at least not yet.
1:55
You will learn in this class about the collection of data feeding these statistics. On one hand, it includes the number of people currently receiving Unemployment Benefits. But, Unemployment Benefits expire after a set amount of time. If the Unemployed Person has not yet found a new job, and the benefits expire, then this person is no longer considered Unemployed: they are in the "other category". The second side of this calculation is the Current Population Survey; a monthly survey
2:30
of households conducted by the Bureau of Census for the Bureau of Labor Statistics. It is a non-binding call to a random selection of households around the country to find out if everyone has a job or has been looking for one. There is no confirmation of facts for these calls but the data are combined to make the Unemployment Rate for states and the country. On this graph you see the RED line of the number of people with a job and also included
3:00
on the records of the Internal Revenue Service, the IRS, as Full Time EMPLOYED PERSONS since the end of the Great Depression in 1939. Find the start of the 2001 Recession to see how the employment line shown in red departs from the trend line shown in blue. Actual number of employed persons needs to increase at a significant rate to attain the number of employed persons witnessed through historic trends of 1940 through 2000.
3:33
These data show a job deficit in the USA of about 43.6 million people as of May 2016. Putting these measures on this statistic, you would find a current NOT EMPLOYED rate of about 23.25%. Which measurement provides you the proof you need? Are we at 5% unemployment or closer to 23%? Think about it.
4:03
Along this same theme, one of the online places I urge you to continue visiting when considering macroeconomic issues is the FRED site in St. Louis. The Federal Reserve Economic Data portal contains data from several federal accumulators of valuable economic data, such as these, the Producer Price Index - called simply PPI - and the Consumer Price Index, called CPI, to give indication of how the market basket of goods for producers and consumers changes in normalized terms.
4:40
On this chart, observe how after the Great Recession, in 2010, the CPI index rose, fell, staggered through a stagflation series, and started falling again in 2014. The PPI provides us with a strong measurement using the double-edged dagger of what producers are paying for goods used in production, while also revealing the changing prices for the goods they sell. Important and valuable tools are found here. This 2014 through 2016 drop in the PPI matches with the CPI dip and recovery to reveal the
5:20
makings of a strong recession, maybe the Greater Recession? We will not know officially until after it has ended, because the National Bureau of Economic Research's Business Cycle Dating Committee holds their confirmation until AFTER recovery has started.
5:40
Macroeconomics means the Gross Domestic Product. It is a significant measurement of each Nation's Economy. The core of this class is footed on the GDP, what makes it, how each component is measured, and how they are reported. Fundamentally, you need to grasp the GDP firmly as you move through this class. It is a part of assignments, a part of quizzes, and each Exam you take here. Be ready, it is coming to you!
6:36
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. Macroeconomics is the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth. The business cycle refers to alternating periods of economic expansion and economic recession or contraction. An expansion is the period of a business cycle during which total production and total employment
7:10
are increasing. A recession is the period of a business cycle during which total production and total employment are decreasing. Economic growth refers to the ability of an economy to produce increasing quantities of goods and services. The inflation rate is the percentage increase in the price level from one year to the next. These terms are used to define what happens in the economy and how they affect business and consumer behavior.
7:42
These are the themes we explore to understand how the economy progresses.
7:51
In this chapter we begin to assemble tools of articulation - the description of how well or how poor the economy is operating. Keep your attention to new terms, or phrases that carry a specific meaning in economics. As made clear in these videos, I urge you to give specific attention to the Gross Domestic Product, the GDP. This is the central focus of macroeconomics in this class. It all comes around to this nexus.
8:26
what's the best way to measure our country's economic growth and the prosperity of its citizens something the US government is using the wrong yardstick particularly amid concerns about income inequality and other quality of life issues our economics correspondent Paul Solman takes a look at alternatives to the quarterly report known as GDP the first he had to penetrate a bunch of confusing initials it's part of his ongoing reporting
8:52
making sense of financial news in 1968 then presidential candidate Robert Kennedy blasted our country's main measure of economic progress called GNP in those days it counts napalm and it counts nuclear warhead if the gross national product does not allow the health of our children the quality of their education or the joy of their play it measures everything in short except that which makes life worthwhile these days we rely on GDP
9:29
gross domestic product GNP is near proxy which measures the total dollar value of goods and services sold in the US in a year plus exports minus imports the measure still leaves out the things Kennedy emphasized but that's because they're just too tough to measure they're very large and they're quite uncertain in their magnitude Steve land of health runs the Bureau of Economic Analysis the DEA which tallies the GDP the DEA sticks to measures of market
10:02
transactions and the data has become fundamental it is used by the Federal Reserve Board for economic policy our consumer spending inflation rate comes from us the entire federal budget is based on the baseline that comes out of BPA's data GDP has become the king of all statistics and the king for almost all countries adds economics writer Zachary Karabell governments rise and fall on their ability to say I enhanced GDP or the populace is ability to say no
10:32
you didn't you know GDP went down under your watch but how does GDP still lofty status we're with Robert Kennedy's 1968 critique look or with more recent evidence of its limits which Nobel economist Joseph Stiglitz has pointed out thirty years ago we weren't talking about climate change environmental degradation was not as important as it is today in 2009 Stiglitz chaired an international panel tasked with finding better measures of progress that included the environment and economic
11:06
inequality GDP has been going up per capita but most Americans are actually we're soft so median household income is actually falling like them or not better prosperity gauges are hardly a novel innovation since the 1970s for example in the Hamal use the Buddhist Kingdom of Bhutan with GDP per person less than that of the Congo has used Gross National Happiness instead it's GNH score turns out to be as elevated as its location then back down here at sea level
11:45
there's the GPI it simply takes into account not only our economy but the health of our environment the health of our society Dave Gosselin works for Maryland the first US state to adopt a metric called the genuine progress indicator made up of 26 different factors nine of them environmental he walked us around Annapolis to explain when we cut down an acre of trees to put a strip mall in that strip mall puts people to work it
12:17
contributes to our economy our tax base all those are very good things and it's GDP and going up as a result exactly at the same time it is costing us to clean up the water that is degraded as a result of taking away those trees we as a society recognize that but we don't account for that in the GDP and the GPI is a way of doing that the GPI does it by subtracting an estimated value of water pollution from total economic output also subtracted the presumed
12:48
costs of climate change in Maryland we have sea as a result in part of climate change is increasing considerably afoot over the past century so one foot right here this is a foot higher than it was a century ago yes and the best projections are that that rate will increase over the next century even faster than a foot that has major impacts to a lot of our low line and Islands shorelines where people live farm fields that are now
13:18
inundated with salt water where they can't produce crops and how do you put a number on crop less fields or polluted water economists have gone out and surveyed the general public and ask them questions such as what would you be willing to pay to bring your local River up to a state where you can swim in it in a national comparison of the two measures GPI and GDP grew together until about 1980 when GPI flatlined in Maryland GPI has risen modestly since
13:49
then but it still trails GDP growth I hear in the news all the time when people comment about well the economic indicators are looking up or coming out of the recession you frequently hear people comment but I don't feel any better and I think this is a reflection of that and that in turn may hinge on another component of the GPI social well-being Annapolis being the landing place for the hero of Alex Haley's roots Kunta Kinte
14:17
we took a seat next to the author to probe the value of leisure how do you calculate the value of say Alex Haley reading to these kids well if it counts as education the value of an education is included in the GPI if you count it as leisure time not having that time this comes a Lawson GPI and we also have the value of housework which includes things like cleaning the house and dusting but also interacting with your children that's a value that's in the
14:46
GPI what about air pollution from cars or the amount of time it takes you to commute to work caustic computing is considered in the GPI and that is one that's hurting Maryland because here in Maryland we spend more time in our cars commuting to the most state information for people will tell you a great radio show comes on and they go in sick and I'm listening to NPR and loving my commute exactly and to some degree what we're doing with the
15:10
GPI is putting a price on the unpossible but at least we're being consistent and see whether they go up or down Maryland's GPI is boosted by a highly educated population but remember even here GPI hasn't gone up as much as GDP for years now so why gas horn says a big reason is what Joe Stiglitz highlighted in 2009 rising economic inequality the same amount of money spent by a few very wealthy people would be attributed differently to the GPI than an equal
15:46
amount of money spend a little bit by a lot of people so imagine that in the extreme one Marylander earned most of the state's money and amassed a fleet of fully loaded Mercedes she never drove while the rest were reduced to commuting by bus in that case GDP might rise since car sales boost the value of total output but overall welfare wouldn't it's a subtle point a debatable one but even the beas of land FL degrees distribution of income may be the answer to me to
16:22
this problem of the disconnect between GDP and GDP per capita going up and most Americans feeling down but Landa field has serious reservations about alternatives like the GPI the subjectivity is the Achilles heel of it how much do I subtract for the commuting time if I enjoy my commute maybe it's one thing maybe not they end up being systems of indicators that are troubling for an economist who's trying to put together objective accounts or at least
16:51
not make normative judgments about what should be then again all economic indicators involves some subjectivity says Zachary Karabell one synthetic number that purports to describe lived reality with an average has to make choices about what you include what do you add what do you explore but you can include everything and so long as you don't you can't really quantify human wellbeing especially if there's any truth to the maxim that the best things in life are free the GDP report
17:30
for the first quarter of 2014 is due Wednesday read Paul's extended conversation with authors accurate Carrabelle about how relying on an outdated short-term measurement could reduce prosperity over the long term that's unmaking cents.
17:47
[Music]
17:53
Economists use gross domestic product to measure total production. Gross domestic product, or GDP, is the market value of all final goods and services produced in a country during a period of time, typically one year. In the United States, the Bureau of Economic Analysis, the BEA, compiles data used to compute GDP. Market Value is the price an asset fetches in the marketplace. In our macroeconomic context, we focus on the aggregate value in the economy, or the
18:30
combination of prices with the volume of products sold to make the GDP. By focusing on this "macro" measurement we can track the performance of the economy through time.
18:48
Economists measure total production in an economy by taking the value, in dollar terms, of all goods and services produced. GDP includes only final goods and services. A final good or service is a good or service purchased by a final user. An intermediate good or service is a good or service that is an input into another good or service, such as a tire on a truck. The truck is the new good, the tire is part of it.
19:21
If we included the value of intermediate goods and services in GDP, we would be double counting. GDP includes only production that takes place during the indicated time period. GDP does not include the value of used goods. These are important distinctions to understand: do not count used good value in the GDP, and do not include something that will become a part of a final good because its value will be included in that item's value.
20:01
When we add up the value of total production in the economy by calculating GDP, we are simultaneously measuring the value of total income. Not surprisingly, total income is measured by the Federal Government, by the Internal Revenue Service. Each year these totals are made and serve as one way of checking the values measured in the GDP. It makes for a decent checks-and-balances measurement between the two approaches.
20:32
The circular-flow diagram illustrates the interaction of firms and households in markets. Firms sell goods and services to domestic households, foreign firms and households, and the government. Firms use factors of production to produce goods and services. Households supply the factors of production to firms in exchange for income. Transfer payments are payments by the government to households for which the government does not receive a new good or service in return.
21:07
The circular-flow diagram allows us to trace the ways households use their income. The circular-flow diagram shows that we can measure GDP either by calculating the total value of expenditures on final goods or services or by calculating the value of total income. We get the same dollar amount of GDP with either approach. Study this diagram, become comfortable with the location of each component, and be able to reproduce it by understanding how these are combined into this Circular Flow Diagram.
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We will continue to come back to it through this class.
21:57
The BEA divides its statistics on GDP into four major categories of expenditures. Economists use these categories to understand why GDP fluctuates and to forecast future GDP.
22:14
Personal consumption expenditures, or consumption, is spending by households on goods and services, not including spending on new houses. We will frequently come back to this formula in this class. Understand it, commit it to your memory, and be able to reproduce what it means. I cannot repeat this part too much: know this will appear on assignments, quizzes, and exams when you address macroeconomics. Consumption expenditures are divided into expenditures on services, nondurable goods,
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and durable goods. Gross private domestic investment, or investment, is spending by firms on new factories, office buildings, machinery, and additions to inventories, plus spending by households and firms on new houses. Government consumption and gross investment, or government purchases, are spending by federal, tribal, state, and local governments on goods and services. Net exports of goods and services or net exports are equal to exports minus imports.
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Now we look at each of these in more detail.
23:34
I keep coming back to this, but simple equation sums up the components of GDP:
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The equation tells us that GDP (Y) equals consumption (C) plus investment (I) plus government purchases (G) plus net exports (NX). Household final consumption expenditure also called private consumption, is the market value of all goods and services, including durable products like cars, washing machines, and home computers, purchased by households. It excludes purchases of dwellings but includes imputed rent for owner-occupied dwellings.
24:27
It also includes payments and fees to governments to obtain permits and licenses. Here, household consumption expenditure includes the expenditures of nonprofit institutions serving households.
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"I" for investment includes business investment in equipment, but does not include exchanges of existing assets. Examples include construction of a new mine, purchase of software, or purchase of machinery and equipment for a factory. Spending by households, not the government, on new houses is also included in investment. In contrast to its colloquial meaning, "investment" in GDP does not mean purchases of financial products.
25:20
Buying financial products is classed as 'saving', as opposed to investment. This avoids double-counting: if one buys shares in a company, and the company uses the money received to buy a facility, equipment, and associated stuff, the amount will be counted toward GDP when the company spends the money on those things.; To also count it when one gives it to the company would be to count two times an amount that only corresponds to one group of products.
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Buying bonds or stocks is a swapping of deeds, a transfer of claims on future production, not directly an expenditure on products. "G" for government spending, is the sum of government expenditures on final goods and services. It includes salaries of public servants, purchases of weapons for the military and any investment expenditure by all levels of government, from the school district to the city, county, state, tribe, or federal government.
26:28
It does not include any transfer payments, such as social security or unemployment benefits. "NX" is for net exports, representing gross exports less gross imports. GDP captures the amount a country produces, including goods and services produced for other nations' consumption. This Gross Export amount is reduced by gross imports. Imports are subtracted since imported goods will be included in the terms G, I, or C,
27:04
and must be deducted to avoid double counting foreign supply as domestic products.
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The components of GDP in 2012 were personal consumption at 68.8%, business investment at 15.2%, government spending at 19.5%, and net exports at negative 3.4%. They tell you what a country was good at producing in that year. That's because GDP is the country's total annual economic output. It's equivalent to what is being spent in the economy. In the USA, consumption is by far the largest component at about half of total production. We consume about half of what we produce.
28:01
Updating this information we see how this has changed into 2015 as Consumption went up slightly from $11.15 trillion to $11.21 trillion, Investment from 2.475 to 2.850 trillion, Government Spending down from from 3.167 to 2.860 trillion, and net exports virtually level from -547 to -540 billion US dollars. Expressed as a percent of the total, only Investments increased while Government Spending decreased. Both Consumption and Net Exports remained relatively constant.
28:49
Total GDP only marginally increased by slightly less than 1%. We will revisit this minor change during upcoming discussions, so stay tuned!
29:04
The federal government established the Department of Homeland Security after September 11, 2001, to guard against future terrorist attacks within the United States. Spending by this department is intended to increase the security of the nation's borders and transportation system, identify and arrest terrorists within the United States, and gather intelligence on potential terrorist threats. FEMA is also the nexus of natural disaster mitigation and recovery for the entire nation.
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Through the identification of natural disaster risks to wildland fires, flooding, earthquakes, landslides, hurricanes, and associated natural disasters, the Federal Government has transferred funds to Indian Tribes, States, Counties, and Cities where the recipients provide matching funds to the Federal Dollars. Most jurisdictions then contract the work to specialists in the private sector where consumption spending is further increased adding to the GDP.
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We will talk more about this multiplier effect of spending in a later lecture for this macroeconomics class!
30:19
Through time, consumption in the United States has increased as a fraction of GDP. Through much of the 1960s and 70s, consumption was less than 60% of GDP. It fluctuated between 60% and 63% until the mid-1980s. By the early 2000s, consumption had increased to above 67% of GDP and resided around that level through the end of 2015. U.S. households financed this increased consumption partly by reducing saving and partly by increasing borrowing.
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Although households were saving about 10% of their income in the mid-1980s, saving dropped to about 1% by 2005. Low saving rates were partly due to an increase in household wealth resulting from rising housing prices and rising stock prices. In many parts of the country, housing prices increased rapidly during 2001 and 2006. Stock prices, as measured by the Dow Jones Industrial Average and the S&P 500, reached record highs in October 2007.
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Some households felt less need to save out of their current incomes because their homes and investments in the stock market were increasing in value. At least it was until the Great Recession forced changes to the US and global Economies.
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Final goods and services are those purchases made by the ultimate consumers, that is, they are neither intended for resale, nor consumed in a subsequent production process. GDP excludes intermediate goods and services, which are used up in the production of other goods in the same period they themselves were produced. There is a significant exception when accounting for government expenditures. The government may spend money for which it does not receive any good or service in return.
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Transfer payments, such as social security benefits, unemployment compensation, and various welfare benefits, are excluded from government spending in GDP accounting because they do not reflect productive activity in the period in which they occur. Similarly, interest payments on the national debt are not counted as part of government spending in the GDP accounts.
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GDP is the nation's expenditures on all FINAL goods and services produced during the year at market prices. The Value-Added method of calculating GDP makes addition of value created by a manufacturer preparing the good for final sale. Intermediate goods and services, which are used in the production of final goods and services, are not included in the Value-Added approach to GDP because expenditures on intermediate
33:27
goods and services are included in the market value of expenditures made on final goods and services. Including expenditures on both intermediate and final goods and services would lead to double counting and an exaggeration of the true market value of GDP.
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Using the value-added method to calculate GDP, the value added is the market value each firm adds to a product. It is equal to the difference between the price for which the firm sells a good and the price it paid other firms for intermediate goods. At each phase of production a value is added to the product. By doing this for each phase of production, the total value added is summed to show the increase to GDP.
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[Music]
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Economists use GDP to measure total production in the economy. Most economists believe that GDP does a good "but not flawless" job of measuring production. We recognize how GDP provides only a rough measure of well-being. Remember Chapter 2 when we talked of Normative and Positive discussions in Economics. We strive to put our measurements into the Positive arena of discussions using facts and figures. Well-being is normally expressed in Normative terms, and although we can make general comments
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about it, these make opinions from inferences about the suitability of economic measurements.
35:16
When the BEA calculates GDP, it does not include two types of production: production in the home and production in the underground economy. Household production refers to goods and services people produce for themselves. These are neither bought in a marketplace, nor are they sold in one. The garden grown at home produces food that if bought in a store would be included in GDP, but since it does not move through the economy, instead staying in the household, it is not in GDP.
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Does consumer well-being increase? Yes, mostly it does, but the measurements of GDP completely miss this part of the equation.
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The underground economy refers to buying and selling of goods and services that are concealed from the government to avoid taxes or regulations, or because the goods and services are illegal. An interesting recent change in the legalization of marijuana in four states and the District of Columbia, has modified the previously illegal underground economy to legalize it and bring the contributions of marijuana sales into the realm of state sales tax and the inclusion to the GDP.
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In 2012, the first year of legalized marijuana sales in Washington State, $70 million in tax revenue was generated statewide from marijuana sales. The Washington State Liquor Control Board, which oversees the state's cannabis industry, reported that dispensaries sold more than $257 million worth of legal marijuana in Washington State. This is a net GDP addition.
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The US economy is made of people and business working through the circular flow model concept. Because the factors of production in the US economy, and the relative size of household production, it is expected that the loss of measured household production is not a factor changing between years so the net change in GDP is most likely not biased by omitting these measurements. Conversely, a parent in 1950 who stayed at home to raise children while a spouse left
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the house to work, provided productive services to the household economy that were not included in GDP. Today, when it is normal for both parents to enter the workforce daily and hire child care services, contributions to GDP both from their dual-employment contributions, and for the value of child care services in the marketplace, are significant.
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Economists have long thought the underground economy, the vast, unregulated market encompassing everything from street vendors to unlicensed cab drivers, was bad news for the world economy. Now it's taking on a new role as one of the last safe havens in a darkening financial climate, forcing analysts to rethink their views. At the Manek Chowk market, in this Indian city's congested center, vendors peddle everything
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from beans to brass pots from a row of derelict stalls as monkeys scramble overhead. One man sharpens nails using a spinning blade attached to a moving bicycle wheel. In many cities across the developing world, informal labor plays a critical role. From a roadside beverage vendor in Bangkok to a sidewalk seamstress booth in Ahmedabad, India, many individuals are creating their own job market in the face of factory closings and waning employment opportunities in the formal economy.
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The main purpose of GDP is to measure a country's total production. Although increases in GDP often lead to increases in the well-being of the population, GDP is not a perfect measure of well-being. The value of leisure is not included in GDP, and GDP is not immediately adjusted for pollution or other negative effects of production. GDP is not adjusted for changes in crime and other social problems, and GDP may not provide
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good information about the goods and services consumed by the typical person. Be cautious of using economic measurements to quantify feelings of well-being. GDP is a Positive tool, only weakly applied to Normative issues.
40:25
The expenditures for the wars and for the Department of Homeland Security likely increased measured GDP and GDP per person. However, this is not necessarily the same thing as saying that the welfare of the average person increased. The experience during World War II shows that we should be suspicious of the claim that every increase in measured GDP per person translates into increases in welfare for the average person.
40:55
Our current experiences are much less dramatic than that of World War II because military expenditures explain only a small part of the increase in the size of the economy since 2001. Nevertheless, a significant amount of the country's resources were devoted to homeland security and to the wars, and these resources could have been devoted to other activities that would have increased the amount of consumption goods available.
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Whether well-being has been increased by using resources for homeland security and for fighting the wars in Iraq and Afghanistan rather than for other purposes is a normative question.
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[Music]
41:43
I introduce you to an important concept in economics: Real values versus Nominal Values. Your advantage is to understand these terms and how to apply them. Nominal values are seen every time there is a transaction. It happened when you purchased a gallon of gasoline for $3.25 in 2012: your purchase price was $3.25 per gallon in June 2012 NOMINAL terms. To restate this price in 2016 terms, you want to first remove the effects of inflation from the date of transaction to today.
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For this we can use the Consumer Price Index with a June 2012 value of 229.478 to compare to a CPI value of 239.20 in April 2016. The restatement of the 2012 price of $3.25 per gallon Nominal becomes $3.39 per gallon Real 2016 price. That means that paying $3.25 in June 2012 would be equivalent to paying $3.39 in April 2016, all things being held constant, that is, with the effects of inflation removed. When we compare the price at the pump in today's Nominal terms, we can make comparison if the
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cost rose, or fell, in Real terms. Now we can use this idea behind a Real Tool to apply to the GDP from year to year.
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The BEA separates price changes from quantity changes by calculating a measure of production called Real GDP. Nominal GDP is the value of final goods and services evaluated at current-year prices. Always stated in terms of the year indicated. Real GDP is the value of final goods and services evaluated at base-year prices. Real GDP is calculated by designating a particular year as the base year and then using the prices
44:10
of goods and services in the base year to calculate the value of goods and services in all other years. When dealing with the GDP, and many other commodity based conversions, it is standard to select a base year: in this case 2009. The BEA uses Chain-Weighted Prices to compare GDP changes through time.
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When we converted prices at the gas pump from 2012 Nominal terms to Real terms we used the Consumer Price Index values. Now we can use the actual GDP prices in our index year, in this case 2009. Start by calculating the GDP in 2009 as price times quantity, revealing a GDP of $5,540 billion. For the Chain-Weighted exercise, we hold the prices for the commodity at 2009 levels, but we update the quantities to 2015 levels. This reveals a Real Chain-Weighted GDP, in 2009 terms, at $6,680 billion.
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The Nominal GDP in 2015 was $7,800 billion, but by putting it in Real terms it makes it possible to compare growth in respect to production, and not prices. Can you look at this process to find the obvious shortcoming?
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What if the prices for 2009 do not include products manufactured in the current year?
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It might be the new and super-powerful Smart Phone with capabilities not even considered in 2009 when the base year was selected. How would you multiply the production of Smart Phones in 2016 if there is not a decent price to multiply it by? It is a short coming of the process, and one of the reasons the base year is updated ad-hoc and as needed. It is also one of the reasons Consumer Price Index adjusted Nominal-to-Real prices are favored over Chain-Weighted Real prices.
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It takes more effort for the analyst to complete, but the utility of the results can make it more meaningful.
46:48
Real Gross Domestic Product holds prices constant, which makes it a representative measure over the nominal GDP in the production of goods and services from one year to the next. Because, on average, prices rise from one year to the next, real GDP is greater than nominal GDP in years before the base year and less than nominal GDP for years after the base year. In the base year, real and nominal GDP are the same. This is an important concept to master about Nominal and Real values.
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If we restate costs in current terms, meaning the terms of today, the Nominal and Real are the same value. Today's Nominal value is Today's Real value.
47:45
Economists and policymakers are interested not just in the level of production but also in the price level. The price level is a measure of the average prices of goods and services in the economy. The GDP deflator is a measure of the price level, calculated by dividing nominal GDP by real GDP and multiplying by 100. The GDP price deflator is an economic metric that accounts for inflation by converting output measured at current prices into constant-dollar GDP.
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The GDP deflator shows how much a change in the base year's GDP relies upon changes in the price level. Also known as the "GDP implicit price deflator." Because it isn't based on a fixed basket of goods and services, the GDP deflator has an advantage over the Consumer Price Index. Changes in consumption patterns or the introduction of new goods and services are automatically reflected in the deflator. The GDP deflator is allowed to change from year to year with people's consumption and
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investment patterns.
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The GDP deflator measures the ratio of nominal, or current-price GDP to the real, or chained volume, measure of GDP. The nominal GDP of a given year is computed using that year's prices, while the real GDP of that year is computed using the base year's prices. The formula implies that dividing the nominal GDP by the GDP deflator and multiplying it by 100 will give the real GDP, hence "deflating" the nominal GDP into a real measure.
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Unlike other price indices, like the CPI, the GDP deflator is not based on a fixed basket of goods and services. The basket is allowed to change with people's consumption and investment patterns. Specifically, for the GDP deflator, the "basket" in each year is the set of all goods that were produced domestically, weighted by the market value of the total consumption of each good. Therefore, new expenditure patterns are allowed to show up in the deflator as people respond to changing prices.
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The theory behind this approach is that the GDP deflator reflects up to date expenditure patterns. For instance, if the price of fish increases relative to the price of beef, it is claimed that people will likely spend more money on beef as a substitute for fish. This makes the adjustments revealed through the GDP Deflator more responsive to consumption responses as people make changes based on price factors.
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FOR A.TV the world is thinking one of the reasons for my interest in this subject is accounting frameworks do affect behavior you know we saw that in the United States in the 90s where people have bad accounting and that affected their behavior some of what we're going on now is a reflection of bad accounting so more generally information affects behavior and so what we gather our information about how we how we describe success affects what we strive for
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if GDP is what we think is success people will strive for GDP and political leaders all the time say you know look at what we've done I you know they always put it you know I've succeeded in getting the economy to grow at 6% now what the he did is hard to figure out but that's actually the politician does that you know I've created X million jobs so that's part of the political rhetoric the question is by doing that they focus policies on things that will
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increase GDP there's actually informing the Commission we've identified a large number of ways in which GDP is not a good measure of economic performance or societal well-being and so what we're trying to do is partly to focus the global conversation about these other measures but also come up with some summary counting frameworks statistics let me just mention a couple of them I want them I've already alluded to which is GDP doesn't tell you about what
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happens to the typical citizen and this is an increasing problem because when you have growing inequality in society you can have GDP going up as it has been in the United States but most people getting worse off not just poverty going up but the median income 50% or more of people getting worse off that's one example of a metric the focusing we ought to know what happened to the median person it's very hard to find statistics about that across
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countries one of the things that I tried to when I was at the Council of Economic Advisers tried to generate was a focus on green GDP that is it's a to take account of environmental degradation and resource depletion this is particularly important in developing countries that may be growing by cutting down their force but you know once they cut down the forest there's nothing there and so unless they do something it's not sustainable GDP tells you nothing about sustainability
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another example is GDP measures IMF thought the Argentina was doing great in the early 90s I happen to look at the data in a more fine-grain way and we said this is not sustainable if you only go to GDP you would not have realized that so in the first context there are ways that you can take out for depletion of Natural Resources degradation in the environment if you do that China's growth gets significantly lowered it's still doing well but it is much lower
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than it otherwise would have been interesting story about the role of special interest when we try to push for this and people in the Department of Commerce we're excited about doing this the coal industry basically passed a proviso or threatened to pass the proviso to take away funding for any research that would support these alternative measures because they knew that green GDP would not be good for the coal industry so you know to me that
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reinforced my belief why it's important to measure these things another example just do you know is is the difference between GDP and GNP those of you who are older when you went to school you talked about GM and about 1990 they switched to GDP well everybody's old just a little bit of difference well it turns out that it makes a great deal of difference for many countries and there's a little bit of sure somebody's going to write an
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article but whether there is a political context to the switch GDP looks at the output within the country GNP looks at the income of the people in the country well when you started privatizing a great deal you had economic activity within the country but the income from that economic activity more and more going to people outside the country so you have a mind somebody taking a mind in the country leaving behind environmental degradation
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royalties in some cases of one or two percent so almost none of the income from the mine goes to the people in the country so GDP is going up but any measure of Greene GNP would show the country cutting going down and some really dramatic examples like in Papua New Guinea where this actually is true so there are other aspects of health leisure the fact that just to give you two other examples United States as you know may know
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has about ten times as many people per capita in prison as other advanced industrial countries that contributes to our GDP because we have to spend money incarcerate them and some states now are spending as much on prisons construction of prisons as they are in universities well that's good for GDP but any measure societal well-being says it's not good to have so many people in prison and it's a symptom of something dysfunctional you know we
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can long discussion about what it is like this funds you know but it's not positive another example is we spend more on health care than any other country Britta's percentage of GDP and our health outcomes are much lower than in other advanced industrial countries and actually lower than many developing countries well the extra money that we spent on health care shows up as a contribution to GDP if we got more efficient our GDP could go down well that's clearly not you know you don't
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want to you're looking at the wrong thing and so I think this is it will provide a good forum for thinking a lot more about the strengths and weaknesses of each of our societies
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National income accounting refers to the methods the BEA uses to track total production and total income in the economy. In addition to computing GDP, the BEA computes the following four measures of production and income: gross national product, national income, personal income, and disposable personal income. The National Income and Product Accounts, the NIPA, are part of the national accounts of the United States.
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They are produced by the Bureau of Economic Analysis of the Department of Commerce. They are one of the main sources of data on general economic activity in the United States. They use double-entry accounting to report the monetary value and sources of output produced in the country and the distribution of incomes that production generates. Data are available at the national and industry levels.
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Gross National Product, or GNP, is the value of final goods and services produced by residents of the United States, even if the production takes place outside the United States. GNP includes foreign production by U.S. firms but excludes U.S. production by foreign firms. For the United States, GNP is almost always the same as GDP. In producing goods and services, some machinery, buildings and equipment wear out and have to be replaced.
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Depreciation is referred to as the consumption of fixed capital. If we subtract this value from GDP, we are left with national income. Personal income is income received by households. To calculate personal income, we subtract the earnings that corporations retain rather than pay to shareholders in the form of dividends. We add in the payments received by households from the government in the form of transfer payments or interest on government bonds.
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Disposable personal income is equal to personal income minus personal tax payments, such as the federal personal income tax. Disposable personal income is the best measure of the income households have available to spend. As we progress through these chart components, we recognize GDP as larger than Gross National Product, since GNP is GDP less depreciation. National Income is more than Personal Income, which is larger than Disposable Personal Income.
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Each measurement shows the distribution of production and income throughout the economy, from the national government, to households.
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We can measure GDP in terms of total expenditure or as the total income received by households. GDP calculated as the sum of income payments to households is sometimes referred to gross domestic income. The largest component of gross domestic income is wages, which are about three times as large as profits.
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Be careful when applying these measurements and using the results. As I have told you before, in economics we strive to collect positive data, based on measurements of the economy like production and prices. Despite this, the results are sometimes applied to normative conditions like where the "best place to live" is located. Economic data like the Real GDP, or GNP, can be used as supportive information, but generally will not "prove anything" in that realm.
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On the other hand, they are spot-on useful for articulating the performance of economic conditions currently, and through time.
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