FIN 30220: Macroeconomic Analysis National Income by Source: 2014Q1

FIN 30220: Macroeconomic Analysis National Income by Source: 2014Q1 www.phwiki.com

FIN 30220: Macroeconomic Analysis National Income by Source: 2014Q1

Wild, David, Contributing Editor has reference to this Academic Journal, PHwiki organized this Journal FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy U.S. GDP of $17 Trillion represents approximately one fifth of total worldwide production ($85 Trillion) in addition to makes the United States the largest single country economy on the planet!! Source: CIA Factbook Note: 20013 GDP estimates measured on a Purchasing Power Parity Basis GDP is the st in addition to ard benchmark as long as economic well being. Is it a good indicator of well being VS 1950: $275B 2010: $14,600B 1950: $1,696B 2010: $12,973B 1950: $10,941 2010: $42,120 1950: $20,000 2010: $50,233 Principle 1: What exactly are you trying to measure Is your definition consistent with what you are trying to measure Ratio 2005 Dollars 2008 Dollars 2005 Dollars

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GDP is the st in addition to ard benchmark as long as economic well being VS Annual defense spending has grown from $35B in 1950 to $795B in 2009. Should this be subtracted out The service industry has grown from 30M employees in 1950 to 113M in 2009. Is this really “new activity” Should we count things like pollution as economic “bads” How do we account as long as the added quality in addition to convenience of new products in addition to technologies The Genuine Progress indicator corrects as long as social “bads” VS Gross Domestic Product measures the current market value of all goods in addition to services produced within a country’s borders over a certain time period (usually a quarter) Farmer A produces 1,000 bushels of Apples (Apples cost $10/bushel) Farmer B produces 2,000 bushels of Corn (Corn costs $15/bushel) GDP = ($10)(1,000) + ($15)(2,000) = $40,000 Principle 2: How is your variable measured

Suppose that Intel produces 1,000 computer chips (P = $100) 100 Chips sold to consumers 900 Chips sold to Dell Dell produces 500 computers (P = $1,000) $100,000 $500,000 – $90,000 $40,000 – $0 $100,000 $450,000 Sales Materials Expenses Materials Expenses Sales Change in Inventories Total = $550,000 Value Added Approach (The remaining 400 chips were added to Dell’s inventories) Example: Microsoft Sales: $600,000 Expenses: $420,000 Labor Costs: $200,000 R&D Costs: $50,000 Materials: $100,000 Lease: $20,000 Utilities: $10,000 Equipment Purchase: $40,000 Inventories: BOY: $620,000 EOY: $640,000 Value Added: $600,000 – $220,000 (Non-Labor Exp) + $40,000 (Equipment Inv) + $20,000 (Inv. Investment) + $50,000 (R&D) – NEW $490,000 Product Markets Factor Markets Factor Services Goods & Services (GDP) Income Expenditures

The Circular Flow of Payments suggests that we could also calculate GDP by measuring total expenditures on the goods in addition to services produced GDP Gross Business Investment Structures Equipment Inventories Residential Investment Consumer Expenditures Durables Non-Durables Services Government Purchases (Federal, State, in addition to Local) Suppose that Intel produces 1,000 computer chips (P = $100) 100 Chips sold to consumers 900 Chips sold to Dell $0 $40,000 Inventory Investment Total = $550,000 Expenditure Approach $510,000 Consumer Durables Dell produces 500 computers (P = $1,000) (The remaining 400 chips were added to Dell’s inventories) What’s so Gross about GDP Suppose that we have the following in as long as mation from GM’s financial statements Sales: $300M Depreciation: $5M Change in Inventories: $20M Materials Costs: $150M $300,000 – $150,000 $20,000 Materials Expenses (000s) Sales (000s) Change in Inventories (000s) Total = $170,000 Strictly speaking, depreciation should be counted as a cost of production. GDP calculations do not include depreciation expenses!

Exports of Goods in addition to Services US Citizens Working Abroad Imports of Goods in addition to Services Foreign Citizens Working in the US US Acquisition of Foreign Assets Foreign Acquisition of US Assets BMW operates a manufacturing facility in Spartanburg South Carolina. Meanwhile, Nike operates 73 production facilities in Thail in addition to . How should we count this production $130,000 – $70,000 Labor Costs (000s) Value Added (000s) $400,000 – $50,000 Labor Costs (000s) Value Added (000s) $60,000 Profits (000s) $350,000 Profits (000s) Gross Domestic Product = Total Production within US borders Gross National Product = Total Production by US Citizens The $60,000 in profits from BMW accrue to as long as eign nationals in addition to should not be counted in US GNP. However, GNP would need to include the profits from Nike’s Thail in addition to plants. BMW operates a manufacturing facility in Spartanburg South Carolina. Meanwhile, Nike operates 73 production facilities in Thail in addition to . How should we count this production $130,000 – $70,000 Labor Costs (000s) Value Added (000s) $400,000 – $50,000 Labor Costs (000s) Value Added (000s) $60,000 Profits (000s) $350,000 Profits (000s) GDP = $130,000 GNP = $70,000 + $350,000 = $420,000 $420,000 = $130,000 +($350,000 – $60,000) GNP GDP Net Factor Payments

With the global economy, we need to keep track of expenditures between the US in addition to the rest of the world as well as domestic expenditures GDP Gross Investment Consumer Expenditures Government Purchases Net Exports = Exports – Imports GDP is calculated using a method of double entry accounting – each dollar of production should have a corresponding expenditure. GDP: 2014Q1 Recall that total income (national income) in the US should accrue from the production undertaken by American citizens Gross Domestic Product = $17,101B First, we need to correct as long as income earned abroad as well as domestic production accruing to as long as eign nationals + Net Factor Payments = $235B Gross National Product = $17,336B Now, recall that depreciation is an expense that should be deducted as a production cost – Depreciation Expense = $2,721B Net National Product = $14,615B Finally, we need to correct as long as indirect taxes/transfers (essentially, sales taxes) – Indirect Taxes = $198B National Income = $14,417B

National Income by Source: 2014Q1 To get to the flow of funds accounts, begin with GDP equals aggregate expenditures Now, add net factor payments to both sides Current Account = NX + NFP Lastly subtract depreciation in addition to indirect taxes from both sides Net Investment (Gross Investment minus depreciation) National Income Consumer Outlays (Net of Indirect Taxes) National Income = Personal Income + Undistributed Corporate Profits Now, Subtract Consumption from both sides Subtract taxes from both sides . The flow of funds measures financial market transactions Net Private Saving = Personal Saving + Undistributed Profits

Last year, the US current account was -$380B. What does this mean Total US Income Total US Outlays Net lending abroad In other words, the US is borrowing $1B per day from abroad! Should we be worried about this This number continues to shrink as US consumers overspend!! This number continues to grow as the US government overspends!!! Think of the current account as the savings of the entire economy. We have become a debtor nation! Billions of Dollars What a wacky world we live in! Currently, China is running a $30B trade surplus with the world Currently, the US is running a $380B trade deficit with the world What’s wrong with this picture

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Nominal Variables are in terms of a current year’s prices. For example, you’re starting salary after college might be $50,000 per year. Real variables are in terms of some tangible commodity or some constant year’s prices. Real variables measure purchasing power. Principle 3: Is your variable in terms of current prices or fixed prices (Real vs. Nominal) VS. How do we construct a measure of prices The objective of a price index is to measure cost of living. To state this precisely, a price index measures the dollar cost of obtaining a fixed level of utility (happiness). Example: $3.50 $2.00 Suppose at the current prices, you elect to buy 3 slices of pizza in addition to 2 beers The absolute dollar cost of your current happiness is (2)($3.50) + (3)($2.00) = $13 If beer increases in price to $4.50 (25% increase) in addition to pizza increases to $2.20 (10% increase), this level of happiness now costs (2)($4.50) + (3)($2.20) = $15.60 Base Year Expenditure: (2)($3.50) + (3)($2.00) = $13 Beer Expenditure Share: (2)($3.50)/$13 =.54 Pizza Expenditure Share: (3)($2)/$13 = .46 Alternatively, we could write the price index in terms of relative dollars (relative to a base year) instead of absolute dollars (Or, 100) (Or, 120)

The CPI is calculated by the Bureau of Labor Statistics (BLS) on a monthly basis The CPI is composed of 211 individual products over 38 geographic areas. Consumer Price Index When calculating the CPI, be sure to use the same weights each year! Household Budget CPI inflation (2013 – 2014) (Or, 425) The CPI is an example of a fixed weight index ( or, 443 ) ( or, 100 ) Average CPI inflation 1983 = 100 CPI CPI Inflation Rate CPI The Consumer Price Index (1948 – 2014) Average Inflation = 3.54%

The US has had 13 Cycles since the great depression

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