GNP – Ownership All goods/services produced legally for pay by citizens of a country. [ Citizenship mattered, not geography] Nike in Indonesia Plano,

GNPGNP – Ownership – OwnershipAll goods/services produced All goods/services produced legally for pay legally for pay byby citizens of a country. citizens of a country.[[CitizenshipCitizenship mattered, mattered, not geographynot geography]] Nike inNike in

IndonesiaIndonesiaPlano, TXPlano, TX

ChinaChina EuropeEurope

BMWBMW in Waco in Waco

Provo,UTProvo,UT

Honda in OhioHonda in Ohio

in Chicagoin Chicago

GDPGDP - Location - LocationAll goods/services produced All goods/services produced legally for pay legally for pay inin a country’s borders. a country’s borders.[[GeographyGeography matters, matters, not citizenshipnot citizenship]]

The difference between GDP & GNP is about The difference between GDP & GNP is about 2/10 of 1%2/10 of 1%..

0 Real GDP

ADAD11ADAD22 AS1 ASAS22

PL2

PLPL33

Y*1 Y2 YY33

Can sustain a much greater increase in AD if the AS curve isCan sustain a much greater increase in AD if the AS curve isalso shifting to the right, due to also shifting to the right, due to increasing productivityincreasing productivity.

Economy’s Economy’s Speed LimitSpeed Limit at at FFull ull EEmploymentmployment isis 44%%,, instead ofinstead of 2.52.5%%..

In the early 90’s, at FE, 2.5%In the early 90’s, at FE, 2.5%was the speed limit. AS shiftedwas the speed limit. AS shiftedslowly due to low productivity.slowly due to low productivity.

So, at FE, theSo, at FE, the “goldilocks“goldilockseconomy”economy” has expanded.has expanded.

PL1

4%4%

Real GDP under 4%Real GDP under 4%

17 increases17 increases

““Goldilocks Economy”Goldilocks Economy”[not too fast or slow][not too fast or slow]

Increasing productivity Increasing productivity of the late 90’s allowed of the late 90’s allowed more growth more growth at at FE GDP.FE GDP.

*Represents*Represents “GDP Speed Limit”“GDP Speed Limit” at full employmentat full employment

<10 years without<10 years without a a recession>recession>

Billions of1996 Dollars

$10,000

9,000

8,000

7,000

6,000

5,000

4,000

3,0001970 1975 1980 1985 1990 20001995

Copyright © 2004 South-Western

Personal Consumption Expenditure Personal Consumption Expenditure ( C )( C )Personal Consumption Expenditure Personal Consumption Expenditure ( C )( C )

GDP = C(66%) + Ig(18%) + G(17%) + XnGDP = C(66%) + Ig(18%) + G(17%) + Xn

•DDurable urable CConsumeronsumer GGoods[12%]oods[12%]

•NNondurableondurables[29s[29%][soup & soap]%][soup & soap]

•Consumer ExpendituresConsumer Expenditures for Services[59%] for Services[59%]

Ferrari Ferrari producedproduced here hereMaytag Maytag producedproduced here here

Spending by HH on all g/sSpending by HH on all g/sexcept for new housing.except for new housing.

COMPOSITION OF CONSUMER Spending, 2005COMPOSITION OF CONSUMER Spending, 2005

ServicesServices$5,155 billion$5,155 billion

(59%)(59%)

Nondurable GoodsNondurable Goods$2,564 billion$2,564 billion

(29%)(29%)

Durable GoodsDurable Goods$1,027 billion$1,027 billion

(12%)(12%)

Total of $8,746 billionTotal of $8,746 billion

Personal Consumption Expenditure ( C )Personal Consumption Expenditure ( C )Personal Consumption Expenditure ( C )Personal Consumption Expenditure ( C )

3 S3 Subcategoriesubcategories [*spending on output not consumed]

A. Business fixed investment-purchase of tools, machinery, & plants

B. Residential fixed investment–construction of new houses [can rent for financial return] & apartments. C. Inventory investment – change in inventories

[A net net increaseincrease in in inventoriesinventories is investmentinvestment; a netnet decrease decrease in inventoriesin inventories is negative investmentnegative investment or disinvestmentdisinvestment (disinvestmentdisinvestment represents

sale of output output produced in a previous yearproduced in a previous year)

Let’s say this Porsche isLet’s say this Porsche is produced by a foreign co. produced by a foreign co. in Plano, Texas.in Plano, Texas.

BusinessesBusinessesBusinesses

Gross Private Domestic Investment Gross Private Domestic Investment (I(IGG))Gross Private Domestic Investment Gross Private Domestic Investment (I(IGG))

U.S. capital stock is over $30 trillion.U.S. capital stock is over $30 trillion.

GGovernmentovernment P Purchasesurchases (G) (G) [state, local & federal][state, local & federal]GGovernmentovernment P Purchasesurchases (G) (G) [state, local & federal][state, local & federal]

Personal Consumption Expenditure ( C )Personal Consumption Expenditure ( C )Personal Consumption Expenditure ( C )Personal Consumption Expenditure ( C )

Gross Private Gross Private DomesticDomestic Investment ( I Investment ( Igg ) )Gross Private Gross Private DomesticDomestic Investment ( I Investment ( Igg ) )

[“G” purchases of goods/svcs produced (not transfer payments)

3 Subcategories of Government A. Federal government [40%] B. 50 State governments C. 84,000 local governments [60% for state and local]

Government Purchases ( G )Government Purchases ( G )Government Purchases ( G )Government Purchases ( G )

Net Exports( XNet Exports( Xnn)) Net Exports( XNet Exports( Xnn))

Personal Consumption Expenditure Personal Consumption Expenditure (C)(C)Personal Consumption Expenditure Personal Consumption Expenditure (C)(C)

Gross Private Domestic Gross Private Domestic Investment (IInvestment (Igg))Gross Private Domestic Gross Private Domestic Investment (IInvestment (Igg))

Net Exports (Xn)=Exports (X)–Imports (M)

[M represents production outside a country]

Consumption 69%

Government Purchases

18% Net Exports -3 %

Investment16%

ConsumptionConsumption

9,429,3009,429,300[70%][70%]

InvestmentInvestment

$2,186$2,186[16%][16%]

GGovernmentovernment

purchasespurchases

$2,570$2,570[19%][19%]

Export Export SpendingSpending

$1.210$1.210ImportImport

SpendingSpending

$2.238$2.238

-5%-5%

3.53.5

19001900ToTo

20072007

The key is to keep the economy growing. At The key is to keep the economy growing. At 2.5% growth2.5% growth, the U.S. , the U.S. economy will economy will expand to expand to $23 trillion$23 trillion in in 2525 years years. But – at . But – at 3%3%, it would reach , it would reach $26 trillion$26 trillion, which is like , which is like another Germanyanother Germany, with , with Saudi ArabiaSaudi Arabia thrown in. thrown in.

00

1%1%

2%2%

3%3%

4%4%

5%5%

19291929ToTo

19401940

19401940ToTo

19501950

19501950ToTo

19601960

19601960ToTo

19701970

19701970ToTo

19801980

19801980ToTo

19901990

19291929ToTo

20002000

0.8%0.8%

4.5%4.5%

3.3%3.3%

3.8%3.8%

2.8%2.8% 2.7%2.7% 2.6%2.6%LongLongTermTerm

GrowthGrowth

3.2%3.2%

19901990ToTo

20002000

U.S.Japan

GermanyChina

U.K.France

ItalyCanada

SpainBrazil

S. KoreaIndia

MexicoRussia

Australia

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14Comparative GDPs in Trillions, 2006

1313

4.54.5

2.82.8

795795

2.22.2

2.22.2

2.72.7

1.71.7

1.11.1

790790

780780

770770

763763

708708

1.11.1

U.S.Japan

GermanyChina

U.K.France

ItalyCanada

SpainBrazil

S. KoreaIndia

MexicoRussia

Australia

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14Comparative GDPs in Trillions, 2006

13.413.4

4.54.5

2.82.8

795795

2.22.2

2.22.2

2.72.7

1.71.7

1.11.1

.790.790

780780

770770

763763

708708

1.11.1

If California and Texas were countries, If California and Texas were countries, where would they rank?where would they rank?

Calif. 1.7Calif. 1.7

TX 1.1TX 1.1

We have 20% of the world’s GDP, 25% of global trade, We have 20% of the world’s GDP, 25% of global trade, 4040% of world stock market capitalization, and nearly % of world stock market capitalization, and nearly 50% of the world’s largest companies.50% of the world’s largest companies.

Texas, at $1.1 trillion would Texas, at $1.1 trillion would be thebe the 8th largest country. 8th largest country.Texas produces 20% more than India. Texas produces 20% more than India.

California, with California, with a $a $1.71.7 trillion GDP would be number trillion GDP would be number 77..

We make upWe make up 4.74.7%% of the world’s population, of the world’s population,

but produce but produce 2020% of GDP [output]% of GDP [output]..

Gross World Product is Gross World Product is $66 $66 trilliontrillion/6.6 /6.6 bilbil.= $10.200.= $10.200

So, World Per Capita So, World Per Capita is aboutis about $10,200$10,200..

China, India, Indonesia, & Bangladesh have over 40%China, India, Indonesia, & Bangladesh have over 40%of the world’s population, but produce only 7% of theof the world’s population, but produce only 7% of theworld’s GDP.world’s GDP.

[Selected Countries]

Country Per CapitaLLuxembourguxembourg 55,600 55,600Switzerland 48,230Switzerland 48,230U.S.U.S. $45,600 $45,600

Japan 37,180Norway 30,800

France 30,090Denmark 29,800

Canada 29,700Austria 27,000

Germany 27,000Belgium 26,100

China and India are still poorer than he U.S. was in 1900.China and India are still poorer than he U.S. was in 1900.4646% of % of Africans live on less than $1 a day Africans live on less than $1 a day & it is& it is getting worse. getting worse.

Country Per CapitUnited Kingdom $24,700Sweden 24,700

Italy 24,300Australia 24,000

New Zealand 19,500Greece 17,900

Hungary 12,000Mexico 6,770

China 2,000Pakistan 600

Rwanda 220Liberia 110

12 tril.12 tril.

10 tril.10 tril.

9 tril.9 tril.

8 tril.8 tril.

7 tril.7 tril.

6 tril.6 tril.

5 tril.5 tril.

4 tril.4 tril.

3 tril.3 tril.

2 tril.2 tril.

1 tril.1 tril.

001929 1940 1950 1960 1970 1980 1990 2006 1929 1940 1950 1960 1970 1980 1990 2006

709709 773773 1,2041,2041,6651,665

2,4162,4163,1873,187

4,1524,152

13.4 tril.13.4 tril.

Per Per CapitaCapita

$$45,60045,600[If GDP increases, p[If GDP increases, per er ccapitaapita income increases] income increases]

1313 tril. tril.

GDP Per CapitaGDP Per Capita[in 1992 dollars][in 1992 dollars]

TThe he PoorestPoorest NationNationssNation Nation Per CapitaPer Capita1. Afghanistan1. Afghanistan $125$1252. Sierra Leone2. Sierra Leone $510$5103. Ethiopia3. Ethiopia $600$6004. Somalia4. Somalia $600$6005. Congo5. Congo $600$6006. Eritrea6. Eritrea $710$7107. Tanzania7. Tanzania $710$7108. Burundi8. Burundi $720$7209. Rwanda9. Rwanda $900$90010. Malawi10. Malawi $900$90011. Mozambique 11. Mozambique $1,000$1,000 DjiboutiDjibouti $1,300$1,300

There are 6.6 billion people on our planet; 5 b5 billion illion are are in thein the Third ThirdWorldWorld. 2.5 billion2.5 billion live on less than $2 a dayless than $2 a day. The direst povertydirest poverty is in AfricaAfrica, home of the world’s 10world’s 10 poorest countriespoorest countries. Over ½½ the people of Sub-Sahara Africathe people of Sub-Sahara Africa live on less thanless than $2 a day$2 a day.

8 million people die each year because they are too poor to stay alive.8 million people die each year because they are too poor to stay alive.

$6,538$6,538

19291929

$15,931$15,931

19671967

$25,989$25,989

19961996

$45,600$45,600

20062006

½ of the world’s ½ of the world’s population have population have yet to yet to make theirmake their first phone call.first phone call.

GDPGDP – – measures legal production in U.S. measures legal production in U.S. in one year. in one year.

GDP measures allGDP measures all final goods/services final goods/services produced produced byby workers workers and and capital located capital located in the U.S.in the U.S., regardless of ownership., regardless of ownership. [[Domestically located resourcesDomestically located resources]]

1. 1. Intermediate GoodsIntermediate Goods – components of the final good. – components of the final good. A. Ford buys A. Ford buys batteries or tiresbatteries or tires for its cars. for its cars.

B. KFC buys B. KFC buys chickenschickens to eventually sell to customers. to eventually sell to customers.

Value AddedValue Added – increase in the market value at each stage

$1$1

$4$4

$7$7

$8$8

$1$1 $1$1 $1$1

$4$4$4$4

$7$7

Val

ue

of

Ou

tpu

t($)

Val

ue

of

Ou

tpu

t($)

$20$20

$12$12

$5$5

$1$1

Final GoodFinal GoodRetail ShirtRetail Shirt

WWholesaleholesale

ShirtShirt

ClothCloth

CottonCotton

Val

ue

Ad

ded

($)

Val

ue

Ad

ded

($)

Intermediate GoodIntermediate Good

SSum = um = $$3838CottonCottonFarmerFarmer

TextileTextileMillMill

ShirtShirtManufacturerManufacturer

00RetailRetailStoreStore

$20 = sum$20 = sum

88

77

44

11

So, to avoidSo, to avoid “multiple counting”“multiple counting”, we count the, we count the $20$20 final price, notfinal price, not $38$38..

$20 $20 ““Wife-beaterWife-beater””Shirt from KohlsShirt from Kohls

Only Only Final SalesFinal Sales($20)($20) CountCount [[to prevent to prevent “multiple counting”“multiple counting”(($38$38))]]

..

Value AddedValue Added

$2.02$2.02

[It has not been produced again[It has not been produced again in in 19631963 & & would not count.]would not count.]

2. 22. 2nd nd Hand SalesHand Sales – – no no current production.current production. A. 1957 Chevy boughtA. 1957 Chevy bought in in 20072007

The salesman is doing productive work. His commission would count.The salesman is doing productive work. His commission would count.B. Boots producedB. Boots produced in in 1980 are bought 1980 are bought in ain a Thrift Store in 07. Thrift Store in 07.

They also have not been produced again.They also have not been produced again.Salesman’s commission would count.Salesman’s commission would count.You are buying his services.You are buying his services.

SalesmanSalesman

Shoe salesmanShoe salesman

57 Chevy57 Chevy

The salesman’s commission does countThe salesman’s commission does count

• So again, So again, second hand salessecond hand sales, let’s say , let’s say from Salvation Army, do not count. from Salvation Army, do not count.

3. Purely Financial TransactionsPurely Financial Transactions – stocks, bonds, CDs. There is no current productionno current production. Ex: If 100 shares of Dell stock100 shares of Dell stock is bought

I’m not buying a Dell computerI’m not buying a Dell computerbut part ownership of Dell.but part ownership of Dell.

Exchanging one financial asset for anotherExchanging one financial asset for another

Buying stock is not buying a product butBuying stock is not buying a product but buying buying ownership of the firmownership of the firm. .

GDPGDP – – what is not counted [#4].what is not counted [#4].4. 4. Transfer PaymentTransfer Paymentss –welfare, unemployment, social security –welfare, unemployment, social security. [There is nono contribution to final productioncontribution to final production]

“Now that I’ve gotten my welfare check, I can get an iPhone”

5.5. Unreported “Legal” Business Unreported “Legal” Business ActivityActivity

Unreported “legal”“legal” business activity does not count.This is two-thirdstwo-thirds of the “underground economy.”“underground economy.”

Then he has LASIK but the

surgeon doesn’t reportdoesn’t report

$500$500 of his $3,400 bill?

And what if thiswaitress doesn’tdoesn’treport all tipsreport all tips?

And what if the dentist doesn’t doesn’t report $400 forreport $400 forteeth whiteningteeth whitening?

Before LASIK SurgeryBefore LASIK Surgery

6.6. Illegal business activityIllegal business activity is also not is also not counted.counted.

Illegal business activity, because Illegal business activity, because it it goes unreported, goes unreported, also doesalso does

not count. Making up not count. Making up 1/31/3 of the of the “underground economy,”“underground economy,” it it includes murder for hire, gambling, drugs, and prostitutionincludes murder for hire, gambling, drugs, and prostitution..

And, what about“Jane Ho”?

“I’m getting $1,000 to killyou, Ziggy, but at least itwill not count in GDP.”

SSelf elf EEmployedmployed $255$255

OOther ther Legal $25Legal $25RRents & ents & RoyaltiesRoyalties $ $3030

CCorporate

orporate Profits $50

Profits $50

Interest $55

Interest $55

Wages andWages andSalaries $185Salaries $185

Drugs $120

Drugs $120

Bribery $35

Bribery $35Gambling andGambling andLoan Sharking $10

Loan Sharking $10

Pornography $20Pornography $20

Fraud $30

Fraud $30

Other I

llegal $

20

Other I

llegal $

20

Prost

itutio

n $30

Prost

itutio

n $30

Stol

en G

oods

$35

Sto

len

Goo

ds $

35

IIllegalllegal$300 B$300 B

LLegalegal$600 B$600 B

What gets reported isWhat gets reported isthe “Above Ground”the “Above Ground”

WWhat hat doesn’t get reporteddoesn’t get reportedis the “Underground”is the “Underground”

7.7. Non-market Transactions Non-market Transactions Are Not Are Not CountedCounted

Work in your own householdown household or volunteer workvolunteer work in the community does not count because there was no payment.

You need to do some ofYou need to do some ofthis housework.this housework.

7. 7. Non-market Transactions Are Not CountedNon-market Transactions Are Not Counted

Work in your own householdown household or volunteer workvolunteer work in the community does not count because there was no payment.

So, don’t marry your don’t marry your maidmaid, , gardenergardener, or , or fitness instructorfitness instructor, or you will hurt GDP.

IfIf U. S. corporationsU. S. corporations produce goods overseasproduce goods overseas, it does not count in GDP, but would count in GNP.it does not count in GDP, but would count in GNP.Remember, we are measuring production insideRemember, we are measuring production insidethe U.S. Imports represent production outside ofthe U.S. Imports represent production outside ofthe U.S. the U.S.

GM in GM in FranceFrance

Nike in Nike in IndonesiaIndonesia

1. Second Hand Sales[no production]2. Public/Private Transfer Payments3. Purely Financial Transactions4. Intermediate Goods

5. U.S. Corporations producing overseas6. Non-market transactions [household or volunteer work]Underground EconomyUnderground Economy7. Illegal business activity8. Unreported legal business activity

- WWhen Outback buys potatoes for baked potatoeshen Outback buys potatoes for baked potatoes- When a tattoo business buys When a tattoo business buys ink for tattoosink for tattoos- When Tom Thumb buys When Tom Thumb buys spam to sell it to you spam to sell it to you - WhenWhen the the popsicle maker buys popsicle maker buys the the stickssticks- Dell buys a computer monitor frame Dell buys a computer monitor frame - Ice cream Ice cream that Braums buys for sundaesthat Braums buys for sundaes- A bakery A bakery buys anbuys an apple to put apple to put in itsin its pies pies- WWhen hen FFord ord buys abuys a windshield wiper windshield wiper for a carfor a car

- WhenWhen hooker, J-Lo Ho, is paid $200.00 hooker, J-Lo Ho, is paid $200.00

NominalNominal [money][money] GDPGDP v. v. Real GDPReal GDPAn increase in pricesincrease in prices and/or outputoutput will increasenominal GDP.

Only an increase in outputincrease in output will increase will increase real GDPreal GDP.Nominal GDP could increase even if output falls.

Real GDP = Nominal Y/GDP deflator x 100

So, nominal GDP measures output & pricesnominal GDP measures output & prices.

Real measures only output [actual production]Real measures only output [actual production]

Constant (real) GDPConstant (real) GDP v. current (money) GDPcurrent (money) GDP

NominalNominal [ ][ ] GDP GDP v. v. RealReal GDP GDP

Nominal [Current) GDPNominal [Current) GDPv.v.

Real (constant) GDPReal (constant) GDP

Price of Market Basket(2001Price of Market Basket(2001) [nominal GDP][nominal GDP] $64$64GDP Price IndexGDP Price Index = Price = Price of sameof same Market Basket(1998)x100; Market Basket(1998)x100; [Real GDP] $50x100=128[Real GDP] $50x100=128[GDP Deflator][GDP Deflator] in the base year (1998) in the base year (1998) [$64/128 x 100 = $50][$64/128 x 100 = $50]

BBase yearase year[$50/$50=1x100=100][$50/$50=1x100=100] $46/$50x100=92 $46/$50x100=92 [deflation of 8%][deflation of 8%]

The “GDP” BalloonThe “GDP” Balloon

takes Nominal – measured in terms of money.

Real–measured in terms of goods/services.

$6,736.9/126.1 x 100 = $5,342.5

[[Real GDPReal GDP must decline for 6 months] must decline for 6 months]

RecessionRecession[[RealReal, not , not nominal GDPnominal GDP has declined] has declined]

1990-911990-91

Real GDPReal GDP

InflationInflationcomponentcomponent

19301930 19401940 19501950 19601960 19701970 19801980 19901990 20002000

Annual Annual growthgrowth

GR

OW

TH

RA

TE

(pe

rcen

t pe

r ye

ar)

Long-term average Long-term average growth (3%)growth (3%)

RecessionsRecessions

Zero growth

0

35

10

15

20

-10

-5

The Business Cycle in U.S. The Business Cycle in U.S. HistoryHistory [11 Recessions since WWII, from 6 months to 16 months][11 Recessions since WWII, from 6 months to 16 months]

20052005