Gross Domestic Product and Other Measures - Lecture Notes | ECO 155, Study notes of Introduction to Macroeconomics

Download Gross Domestic Product and Other Measures - Lecture Notes | ECO 155 and more Study notes Introduction to Macroeconomics in PDF only on Docsity! ECO 155 750 LECTURE SEVENTEEN 1 OKAY. WELL, LET'S GET STARTED. WHAT WE WANT TO DO IS CONTINUE TALKING ABOUT GROSS DOMESTIC PRODUCT AND OTHER MEASURES THAT ARE SIMILAR. IF YOU'LL REMEMBER -- AND I WON'T TAKE MUCH TIME WITH THIS, BUT WE STARTED OFF THE OTHER DAY WITH THIS CIRCULAR FLOW MODEL. WHAT SIDE DID I PUT THE HOUSEHOLDS ON? IT SEEMS LIKE THE HOUSEHOLDS WERE HERE AND THE FIRMS WERE HERE, OR BUSINESS SECTOR. OKAY. YOU COULD'VE JUST, YOU KNOW, LIKE TURNED THE PAPER OVER AND LOOKED AT IT FROM THE BACK. HERE'S THE FIRMS, OR BUSINESSES OR WHATEVER, AND HERE'S THE HOUSEHOLDS. AND THE HOUSEHOLDS SEND RESOURCES TO THE FIRMS. THEY ARE PAID BY THE FIRMS WITH THEIR DOLLARS. OKAY. THEN THE HOUSEHOLDS SPEND SOME OF THAT MONEY TO BUY GOODS AND SERVICES. AND THEN WHAT WE DID, WE SAID, YOU KNOW, THIS IS SORT OF A GENERAL MODEL OF THE ECONOMY RATHER THAN TRYING TO CAPTURE EVERY LITTLE DETAIL ABOUT WHAT'S GOING ON. THESE DOLLARS GOING OUT WE CALL SPENDING. OVER HERE, WHEN THEY COME INTO THE FIRM, WE CALL 'EM REVENUES. AND I DON'T THINK I USED EXACTLY THESE SAME LABELS THE OTHER DAY, BUT YOU DON'T NEED TO GO BACK AND CHANGE YOUR NOTES. IF YOU DON'T HAVE ANYTHING THERE, YOU'RE WELCOME TO CHANGE. BUT I'M JUST TRYING TO ILLUSTRATE THESE IDEAS AGAIN. AND THEN THE FIRMS PAY FOR RESOURCES. THEY SEE THESE AS COSTS, BUT THEN THE HOUSEHOLDS SEE THIS AS INCOME. AND THE POINT I ECO 155 750 LECTURE SEVENTEEN 2 WAS MAKING TO YOU, OR ONE OF THE POINTS THE OTHER DAY, IS THAT, YOU KNOW, IF WE WANT TO MEASURE MACROECONOMIC ACTIVITY, HOW MUCH BUSINESS ACTIVITY IS TAKING PLACE IN THE ECONOMY, WE CAN MEASURE THAT SEVERAL PLACES. AND WE'LL TALK ABOUT SOME EXCEPTIONS TO THIS RULE LATER ON. BUT IN GENERAL TERMS, THE AMOUNT OF DOLLARS GOING AROUND THIS THING IS PRETTY MUCH THE SAME, NO MATTER WHERE YOU CATCH IT. AND SO IF WE WANT TO MEASURE ALL OF THE INCOME PEOPLE HAVE, THAT WOULD KIND OF TELL US, "HEY, HOW MUCH MACROECONOMIC ACTIVITY IS THERE IN THE UNITED STATES?" BUT IF WE ALSO WANTED TO MEASURE ALL THE SPENDING THAT TAKES PLACE, THAT WOULD MEASURE HOW MUCH MACROECONOMIC ACTIVITY IS THERE. OKAY. AND WE COULD GO OVER HERE AND DO THE SAME THING. WHAT WE WERE DOING LAST TIME IS WE WERE TALKING ABOUT MEASURING GROSS DOMESTIC PRODUCT AND WE SAID THERE'S TWO APPROACHES. I'VE HIGHLIGHTED THOSE TWO RIGHT HERE. AND THE ONE APPROACH, WHICH IS WHAT WE WERE TALKING ABOUT LAST TIME, IS WHERE WE MEASURE ALL THE SPENDING IN THE UNITED STATES AND THAT WOULD BE GROSS DOMESTIC PRODUCT. AND THE OTHER APPROACH WE'LL COME BACK TO LATER, WHERE WE MEASURE ALL THE INCOME. BUT ANYWAY, THE FIRST ONE -- A FIRST WAY TO MEASURE GDP: EXPENDITURE APPROACH. AND THEN WE HAD CATEGORIES OF SPENDING, PERSONAL CONSUMPTION EXPENDITURES. WE HAD THREE CATEGORIES, ECO 155 750 LECTURE SEVENTEEN 5 TOO FAR FROM HOME, THERE'S A DECENT CHANCE THEY'LL COME TO SPRINGFIELD TO GO TO COLLEGE. AND IF NOT AT SMS, THEN MAYBE AT DRURY. IF NOT A DRURY, THEN MAYBE ONE OF THE OTHER SCHOOLS HERE IN TOWN. WELL, EDUCATIONAL SERVICES IS WHAT THEY'RE BUYING. SO WHAT I'M SAYING IS, THE MERE FACT THAT WE'RE SORT OF A BIG TOWN HERE FOR OUR REGION, OUR CORNER OF THE STATE, THAT'S TELLING US THAT WE'LL BE A SERVICE PROVIDER FOR THAT REGION. ANOTHER TYPE OF SERVICE THAT WE PROVIDE HERE IN SPRINGFIELD IS HEALTHCARE SERVICES. YOU MAY OR MAY NOT SORT OF KEEP UP WITH THE TRENDS HERE, BUT WHAT'S HAPPENED IN THE LAST TWENTY YEARS IN HEALTHCARE SERVICES IS THAT HOSPITALS IN SMALL TOWNS HAVE BEEN CLOSING UP, OR AT LEAST CONTRACTING, GETTING SMALLER. AND WHEN PEOPLE HAVE SERIOUS ILLNESSES, THEN THEY GET SHIPPED INTO BIGGER TOWNS WHERE THEY HAVE SORT OF BIG HOSPITALS, LOTS OF DOCTORS, AND SO FORTH. AND SO LIKE, LET'S SAY, YOU'RE LIVING IN WEST PLAINS AND YOU NEED A HEART OPERATION, THEY DON'T JUST TAKE YOU DOWN TO THE WEST PLAINS HOSPITAL AND DO THAT HEART OPERATION. PROBABLY THEY'LL SEND YOU TO SPRINGFIELD. AND YOU COULD GO SOMEPLACE ELSE. BUT THE POINT IS, A LOT OF PEOPLE WOULD COME TO SPRINGFIELD FOR THAT OPERATION. SO WE'RE A BIG HEALTHCARE CENTER FOR OUR REGION. AND THERE'S OTHER TYPES OF SERVICES, TOO. LET'S SAY THAT A GROCERY STORE IN -- YOU KNOW, AND YOU CAN KIND OF THINK OF THESE ECO 155 750 LECTURE SEVENTEEN 6 LITTLE TOWNS SURROUNDING SPRINGFIELD, FIFTY MILES AWAY OR WHATEVER. LET'S SAY A GROCERY STORE NEEDS TO ORDER SOME GROCERIES. YOU KNOW, THE GROCERY STORE ITSELF HAS GOTTA ORDER GROCERIES FROM SOMEBODY. WHERE DO THEY ORDER THOSE? AND THE ANSWER IS, FROM A WHOLESALER. AND THE WHOLESALER IS LOCATED WHERE? GOOD CHANCE IT'D BE IN SPRINGFIELD. SO WHAT I'M SAYING IS, THINGS GET MANUFACTURED -- WHETHER IT'S CLOTHES OR FOOD OR WHATEVER -- AND THEY GET SENT TO WHOLESALERS IN SPRINGFIELD. AND THEN WHAT HAPPENS IS THE RETAILERS, FOR FIFTY OR A HUNDRED MILES IN A CIRCLE AROUND SPRINGFIELD, THEY'LL CALL UP AND SAY, "HEY, SEND US OUT, YOU KNOW, A TRUCKLOAD OF CANNED GOODS" OR "SEND US OUT SOME CLOTHES" OR SEND US OUT THIS OR THAT. INDUSTRIAL SUPPLIES, TOO. WE HAVE A LOT OF WHOLESALING SERVICES IN SPRINGFIELD FOR BUSINESS SUPPLIES. SO THOSE ARE SERVICES, THESE WHOLESALING SERVICES, BECAUSE NOTHING GETS PRODUCED BY THE WHOLESALER. WHAT HAPPENS IS THE WHOLESALER BUYS SOMETHING. HE'S GOT A BIG WAREHOUSE AND STORES THE STUFF IN THE WAREHOUSE. THAT'S A SERVICE, STORAGE SERVICES. WHEN THE ORDER COMES IN, PICK IT UP, PUT IT ON A TRUCK. THAT'S A SERVICE, MOVING IT AROUND. AND THEN TAKE THE TRUCK AND DRIVE IT TO THAT TOWN, THAT SMALL TOWN FIFTY MILES AWAY OR WHATEVER, AND UNLOAD IT. THAT'S A SERVICE, TRANSPORTATION SERVICES. SPRINGFIELD DOES A LOT OF THAT. ECO 155 750 LECTURE SEVENTEEN 7 ENTERTAINMENT SERVICES. YOU KNOW, IF YOU WANT TO GO TO A CONCERT OR KIND OF A NIGHT OUT ON THE TOWN, OR WHATEVER, AND YOU LIVE IN A SMALL TOWN, WHAT DO YOU DO? JUMP IN THE CAR AND DRIVE TO SPRINGFIELD. OR MAYBE JUMP IN THE CAR AND DRIVE TO BRANSON. AND THERE'S OTHER PLACES YOU CAN GO AND I DON'T MEAN TO SAY THAT YOU CAN'T HAVE A GOOD TIME IN A SMALL TOWN. BUT I JUST MEAN THAT IF YOU'RE IN A SMALL TOWN, YOU'RE PRETTY SURE THAT THERE'S NOT LIKE SOME BIG CONCERT COMING TO TOWN. YOU KNOW, IF YOU'VE GOT NINE THOUSAND PEOPLE LIVING IN YOUR TOWN, THEY DON'T HAVE BIG CONCERTS THERE. WHY NOT? BECAUSE THE ANSWER IS THEY'D HAVE LIKE TWO HUNDRED PEOPLE SHOW UP. THEY COME TO A BIGGER TOWN AND THEN IF YOU'RE LIVING IN A SMALL TOWN, YOU DRIVE TO THE BIGGER TOWN AND GO SEE THE CONCERT. AND, OF COURSE, PEOPLE IN SPRINGFIELD DRIVE TO ST. LOUIS OR KANSAS CITY OR TULSA, OR SOMEPLACE LIKE THAT TO SEE THINGS THAT DON'T COME TO SPRINGFIELD. I DON'T MEAN THIS IS THE CENTER OF THE UNIVERSE. BUT THE POINT IS, FOR QUITE A DISTANCE AROUND HERE, WE'RE THE PLACE TO COME AND SO WE PROVIDE A LOT OF SERVICES. SPRINGFIELD HAS A BIG SERVICE ECONOMY, MUCH MORE SO THAN THE REST OF THE STATE. MORE SO THAN KANSAS CITY OR ST. LOUIS. AND I DON'T MEAN TO SAY OUR SERVICE ECONOMY IS BIGGER THAN ST. LOUIS OR KANSAS CITY. I MEAN AS A PERCENT OF OUR TOTAL ECONOMY, OUR SERVICE ECONOMY IS BIGGER THAN ST. LOUIS OR KANSAS CITY OR THE ECO 155 750 LECTURE SEVENTEEN 10 REMEMBER LAND, LABOR, CAPITAL, ENTREPRENEURSHIP ARE OUR FACTORS OF PRODUCTION. AND I'M SAYING THE THIRD OF THOSE, CAPITAL, IS WHAT WE'RE TALKING ABOUT HERE -- INVESTMENTS, NEW CAPITAL PURCHASED OR ACQUIRED. YOU COULD PRODUCE IT FOR YOURSELF. BUT WHETHER YOU PRODUCE IT FOR YOURSELF OR YOU PURCHASE IT, ACCUMULATION OF CAPITAL GOODS IS TAKING PLACE AND WE CALL THAT INVESTMENT. NOW, THERE'S TWO KINDS OF INVESTMENT. ONE IS FIXED INVESTMENT AND THE OTHER IS CHANGES IN INVENTORIES. NOW, FIXED INVESTMENT -- WHAT'RE WE TALKING ABOUT? WE'RE TALKING ABOUT STRUCTURES (BUILDINGS), TOOLS, EQUIPMENT, ET CETERA. I WON'T GO AHEAD AND LIST ANYTHING ELSE BUT YOU GET THE IDEA. STRUCTURES -- I'VE ALREADY MENTIONED THIS TO YOU BUT I DON'T WANT YOU TO FORGET THAT I DID. LAST TIME I SAID, YOU KNOW -- WHEN WE WERE TALKING ABOUT CONSUMPTION EXPENDITURES -- I SAID IF SOMEBODY BUILDS A HOME, WE DON'T WANT TO INCLUDE THAT HOME IN CONSUMPTION EXPENDITURES. I SAID WE CALL THAT INVESTMENT. IF A BUILDING -- OR IF A COMPANY HAS A NEW BUILDING BUILT, NEW FACTORY OR WAREHOUSE, WE WOULD CALL THAT FIXED INVESTMENT A STRUCTURE. BUT ALSO, IF YOU HAD A NEW HOME BUILT, WE WOULD CALL THAT A FIXED INVESTMENT STRUCTURE. THE WAY WE DO THIS, THE WAY WE PRETEND -- AND THIS IS NOT -- IT DEPENDS ON, YOU KNOW, HOW YOU LOOK AT IT. BUT IT'S NOT THE WAY YOU NORMALLY THINK OF IT. BUT WHAT WE PRETEND IS THIS: IF YOU BUILD A ECO 155 750 LECTURE SEVENTEEN 11 HOUSE THAT, IN A SENSE, YOU'RE A LANDLORD AND YOU HAVE INVESTED IN HOUSING -- A LANDLORD, YOU'VE GOT A BUSINESS NOW. YOU'VE INVESTED IN HOUSING. AND THEN YOU WILL RENT THAT HOUSE TO YOURSELF EVERY MONTH. AND JUST EACH MONTH'S RENT, WE WOULD CALL THAT CONSUMPTION SPENDING. BUT WE'RE SORT OF TREATING YOU LIKE TWO PEOPLE: A LANDLORD OR A BUSINESSPERSON AS WELL AS A CONSUMER. OKAY. NOW, WHY DO WE DO THAT? AND THE ANSWER IS: WHEN YOU BUILT THAT HOUSE YOU KNEW THAT YOU WEREN'T GONNA USE IT UP IN THE CURRENT PERIOD. YOU KNEW THAT IT WAS GONNA BE THERE FOR YEARS. AND YOU KNOW THAT EVEN TEN OR TWENTY YEARS LATER, YOU'LL MOVE AWAY, IT'S STILL GONNA HAVE A LOT OF VALUE AND YOU'RE GONNA SELL IT TO SOMEBODY ELSE. THIS IS MORE LIKE A BUSINESS INVESTMENT THAN IT IS -- YOU KNOW, BUYING A HOUSE IS MORE LIKE A BUSINESS INVESTMENT THAN IT IS LIKE JUST SPENDING THE MONEY AND IT'S GONE. SO ANYWAY, THAT'S WHERE WE PUT THE HOUSING. CHANGES IN INVENTORIES. THAT S IS NOT VERY GOOD, IS IT? CHANGES IN INVENTORIES. ALL WE'RE TALKING ABOUT HERE IS WHEN A COMPANY PRODUCES SOMETHING AND DOESN'T SELL IT. RIGHT? IF SOMETHING GETS PRODUCED -- LET'S SAY SOMETHING IS PRODUCED THIS YEAR, A NEW CAR GETS PRODUCED THIS YEAR, AND IT DOESN'T GET SOLD. OF COURSE, MILLIONS OF CARS GET PRODUCED EVERY YEAR. BUT LET'S SAY OUT OF THE MILLIONS OF CARS THAT ARE PRODUCED EVERY YEAR, THIS ECO 155 750 LECTURE SEVENTEEN 12 YEAR ONE OF THOSE CARS DOES NOT GET SOLD. THEN WHAT WOULD HAPPEN IS, THE INVENTORIES OF CAR MAKERS WOULD GO UP. PRODUCED BUT NOT SOLD. AND WE COUNT THAT PRODUCED BUT NOT SOLD -- WE COUNT THAT IN GROSS DOMESTIC PRODUCT. WHY? AND THE ANSWER IS, 'CAUSE IT WAS PRODUCED. AND WHAT WE'RE TRYING TO DO IS GET A MEASURE OF ECONOMIC ACTIVITY, HOW MUCH PRODUCTION'S TAKING PLACE, AND WHAT WE HAD HERE IS GOODS AND SERVICES. WHEN THAT FIRM PRODUCES THAT GOOD, WE'RE GONNA LET ON LIKE THAT GOES IN GROSS DOMESTIC PRODUCT THIS YEAR, WHENEVER IT GETS PRODUCED. AND IF THE COMPANY HOLDS ON TO IT FOR AWHILE AND SELLS IT NEXT YEAR, WE'LL JUST SAY, "WELL, YOU KNOW, THE YEAR BEFORE, WHEN THE CAR GOT PRODUCED, IT WAS BUILT, IT WENT INTO GROSS DOMESTIC PRODUCT." AND WHAT CATEGORY? INVENTORIES. AND SO THAT'S THE WAY -- AND YOU MAY OR MAY NOT AGREE WITH SOME OF THESE. AND THE SAME THING FOR ME. I DIDN'T MAKE THIS STUFF UP. THE POINT IS, WE HAVE TO HAVE RULES -- YOU KNOW THIS IF YOU'VE EVER TAKEN AN ACCOUNTING CLASS. WE HAVE TO HAVE RULES THAT DECIDE, YOU KNOW, OR DETERMINE DOES SOMETHING GO IN THIS CATEGORY OR THAT CATEGORY. WE NEED TO KEEP THINGS STRAIGHT. AND THAT'S HOW WE KEEP THIS STRAIGHT. IF A GOOD GETS PRODUCED AND DOES NOT GET SOLD IN THE CURRENT YEAR, THEN WHAT WE SAY IS, IN A SENSE THE COMPANY'S SOLD IT TO ITSELF. THE COMPANY PRODUCED THE ECO 155 750 LECTURE SEVENTEEN 15 AND SO THERE WASN'T VERY GOOD PLANNING AT THE FIRST OF THE YEAR. WE'VE PRODUCED TOO MANY CARS, MORE THAN WE COULD SELL, AND NOW WE SEND THE WORKERS HOME, THEY'RE ON LAYOFF, AND NOW THEY STOPPED SPENDING QUITE SO MUCH. AND THEN OTHER BUSINESSES START SAYING, "WOW, THOSE CAR WORKERS AREN'T BUYING GROCERIES; THEY'RE NOT BUYING CLOTHES AND SO FORTH." AND SO THEN THE GROCERY STORES SAY, "WELL, MAN, YOU KNOW. LET'S DON'T GO OVERBOARD ON ORDERING IN SUPPLIES HERE, YOU KNOW, FROM THE WHOLESALER." ANYWAY, THE POINT IS, THERE'S A RIPPLE EFFECT THAT WORKS ITS WAY THROUGH THE ECONOMY. AND BEFORE YOU KNOW IT, MAYBE WE'VE GOT A RECESSION NOW. IT STARTED OFF WHEN CONSUMERS JUST SAID, "YOU KNOW, I'M NOT SO WILD ABOUT THESE CARS. I THINK I'M GONNA BUY FEWER," AND SO ALL OF A SUDDEN NOW WE'VE GOT A RECESSION. HERE'S WHAT HAPPENS TODAY. THEY START THE YEAR OFF AND THEY SAY, "YEAH, I THINK WE'RE GONNA PRODUCE ABOUT A HUNDRED THOUSAND CARS THIS YEAR BUT LET'S WAIT AND SEE. WHAT WE'LL DO IS, WE'LL JUST THINK ABOUT JANUARY FOR NOW." THEN THEY'LL START PRODUCING. AND IF THEY GET A LITTLE BIT AHEAD IN JANUARY, LET'S SAY SALES WOULD TURN DOWN JUST A LITTLE BIT, THEY HAVEN'T GOT THIRTY THOUSAND INVENTORY BUILT UP NOW. MAYBE THEY'VE GOT ONE OR TWO THOUSAND. AND SO WHAT THEY SAY IS, "HEY, SEND THE WORKERS HOME TOMORROW TWO HOURS EARLY. WE'LL DO THAT THIS NEXT WEEK, TWO HOURS EARLY EACH ECO 155 750 LECTURE SEVENTEEN 16 DAY." THE INVENTORIES WOULD BE WORKED OFF WITHIN A WEEK OR TWO. NO BIG DEAL. NOBODY GOT LAID OFF. THEY GOT SENT HOME A COUPLE HOURS EARLY. GIVE 'EM A CHANCE TO, YOU KNOW, GO TO A DENTIST APPOINTMENT OR DO A LITTLE BIT OF SHOPPING OR SOMETHING. NO BIG CRISIS. NOBODY WAS TOLD, "DON'T COME TO WORK TOMORROW." WHAT I'M SAYING TO YOU TODAY IS, THERE'S BETTER MANAGEMENT OF INVENTORIES -- BETTER PLANNING. IT'S NOT JUST THE INVENTORY MANAGEMENT, BUT IT'S THE PLANNING AT THE START OF THE YEAR. WHAT'S HAPPENING NOWADAYS IS, SOME COMPANIES ARE HOOKING UP THEIR SYSTEM OF, WHAT, PRODUCTION AND SO FORTH. THEY'RE WORKING -- HOOKING UP THEIR SYSTEMS OF PRODUCTION TO THEIR CUSTOMERS' USE OF THE PRODUCT OR CONSUMPTION OF THE PRODUCT. AND THE ONLY TIME THEY START PRODUCING MORE OF THE GOOD IS WHEN THE CONSUMER STARTS CONSUMING MORE. AND HOW DO YOU KNOW WHEN THE CONSUMER CONSUMES MORE? THE COMPUTER COMES IN AND TELLS YOU IMMEDIATELY. SO QUICK INFORMATION, GOOD INFORMATION ABOUT CONSUMPTION, LEADS BACK TO GOOD DECISIONS ABOUT MANUFACTURING. AND, THAT BEING THE CASE, WE DON'T HAVE A BIG INVENTORY BUILT UP. AND IF THERE'S NO BIG INVENTORY BUILT UP, THERE'S NO NEED TO SEND PEOPLE HOME. AND IF THERE'S NO NEED TO SEND PEOPLE HOME, THEN MAYBE WE DON'T HAVE THIS RECESSION. WHAT I'M TELLING YOU IS THIS: IF YOU GO BACK AND LOOK AT THE PAST, WHEN INVENTORIES HAVE STARTED INCREASING, THAT WAS A SIGN ECO 155 750 LECTURE SEVENTEEN 17 RECESSION'S ON THE WAY. AND THAT WOULD BE -- A LOT OF PEOPLE WOULD TALK ABOUT AN INVENTORY RECESSION. AND WHAT THEY WOULD MEAN BY THAT IS, INVENTORIES ARE BUILDING UP, THEY'RE GETTING OUT OF HAND, AND, YOU KNOW, EVENTUALLY THE MANUFACTURER WILL HAVE TO WORK THOSE INVENTORIES OFF. WORK 'EM OFF, SELL OUT OF THE INVENTORY AND STOP MANUFACTURING. WHEN THEY STOP THE MANUFACTURING, THAT'S WHEN THEY SEND THE WORKERS HOME. THAT'S WHEN THE RECESSION STARTS. SO AN INVENTORY RECESSION WE USED TO HAVE? NOT SO MUCH ANYMORE. INVENTORIES ARE MUCH BETTER MANAGED. WE DON'T LET 'EM GET OUT OF HAND AND THEY'RE MORE LIKE ON A STEADY STREAM HERE -- YOU KNOW, KEPT AT A STEADY LEVEL. AND SO INVENTORIES ARE KEPT UNDER CONTROL AND WE DON'T HAVE RECESSION SO OFTEN. THIS IS GOOD NEWS ABOUT THE ECONOMY. NUMBER THREE -- OH, LET ME TELL YOU A LITTLE BIT ABOUT THAT. GROSS PRIVATE DOMESTIC INVESTMENT. I PUT SOME NUMBERS UP HERE BEFORE SO LET ME CUT UP A COUPLE NUMBERS HERE. GROSS PRIVATE DOMESTIC INVESTMENT, ONE -- DID I DO THIS IN BILLIONS LAST TIME? TWELVE, SEVENTY BILLION DOLLARS. THIS IS ONE POINT THREE TRILLION DOLLARS. OKAY. AND WHAT DO WE HAVE HERE IS -- MAN, THERE'S A BUNCH OF NUMBERS HERE. I DON'T REALLY SEE -- DOESN'T BREAK IT DOWN. I DON'T EVEN SEE THE INVENTORY CHANGES AT ALL. LET'S ADD THESE UP. I CAN'T ADD 'EM UP. ECO 155 750 LECTURE SEVENTEEN 20 DOING, IS WE'RE TALKING ABOUT THE EXPENDITURE APPROACH TO MEASURING GROSS DOMESTIC PRODUCT. THE THIRD MEASURE IS GOVERNMENT PURCHASES OF GOODS AND SERVICES. GOVERNMENT PURCHASES OF GOODS AND SERVICES. MAYBE POINT OUT TO YOU HERE WHAT IT DOES SAY AND WHAT IT DOESN'T SAY. IT SAYS GOVERNMENT PURCHASES; IT DOES NOT SAY GOVERNMENT SPENDING. NOW, YOU MIGHT THINK, "AW, WHAT'S THE BIG DIFFERENCE?" AND THE ANSWER IS THERE IS A DIFFERENCE. GOVERNMENT SPENDING WOULD BE EVERYTHING THAT THE GOVERNMENT SORT OF SPENDS, MONEY COMING AWAY OUT OF THE GOVERNMENT. WELL, THE GOVERNMENT SPENDS SOME MONEY OR IT'S NOT BUYING ANYTHING. OF COURSE, WE KNOW ABOUT THAT. LIKE IF THE GOVERNMENT WOULD SEND YOU A SOCIAL SECURITY CHECK -- AND, OF COURSE, YOU'RE KIND OF YOUNG FOR THAT. BUT IF THE GOVERNMENT WERE TO SEND OUT A SOCIAL SECURITY CHECK, THEN THE GOVERNMENT IS SPENDING MONEY BUT IT'S NOT BUYING ANYTHING. AND SO WE'RE REALLY FOCUSING ON WHERE THE GOVERNMENT GOES OUT AND BUYS GOODS AND SERVICES. IT'S ACTUALLY HANDING OVER MONEY FOR SOMETHING IN RETURN. AND THOSE OTHER THINGS ARE CALLED TRANSFER PAYMENTS AND WE'LL TALK ABOUT THAT JUST IN A MOMENT. THIS INCLUDES GOVERNMENT PURCHASES OF GOODS AND SERVICES. THIS INCLUDES GOVERNMENT CONSUMPTION. AND IT ALSO INCLUDES GOVERNMENT INVESTMENT IN CAPITAL GOODS. NOW, THESE TWO ECO 155 750 LECTURE SEVENTEEN 21 CATEGORIES ARE JUST LIKE WHAT WE'VE TALKED ABOUT FOR HOUSEHOLDS AND BUSINESSES. HOUSEHOLDS HAVE CONSUMPTION SPENDING; BUSINESSES HAVE INVESTMENT. WELL, I'M SAYING THE GOVERNMENT CAN DO THE SAME THING. THE GOVERNMENT CONSUMES CERTAIN THINGS AND OTHER THINGS THE GOVERNMENT'S MAKING INVESTMENTS. IF THE GOVERNMENT, LET'S SAY, HAS A HIGHWAY BUILT, INTERSTATE HIGHWAY. THAT WOULD BE THE GOVERNMENT PURCHASING SOMETHING -- CEMENT, FOR EXAMPLE. THE GOVERNMENT'S PURCHASING SOMETHING AND WHAT IT'S DOING IS IT'S PURCHASING A CAPITAL GOOD, A HIGHWAY. ON THE OTHER HAND, PLENTY OF GOVERNMENT OFFICES USE PAPER -- I KNOW THEY DO IN MY OFFICE -- BUT THEY USE PAPER. SO IN THIS PARTICULAR CASE, THE GOVERNMENT SPENDS MONEY TO BUY PAPER SO IT'S A PURCHASE OF GOODS AND SERVICES, GOODS. BUT THE PAPER ITSELF IS USED UP AND GONE WELL BEFORE THE YEAR'S OVER. THAT WOULD BE GOVERNMENT CONSUMPTION SPENDING. AND WE DON'T INCLUDE THAT UP IN THESE CATEGORIES OF CONSUMPTION, BUT I'M JUST SAYING YOU CAN THINK OF THIS AS TWO DIFFERENT TYPES OF GOVERNMENT SPENDING. FOR THE MOST PART, GOVERNMENT SPENDING IS CONSUMPTION -- OR I'M SAYING GOVERNMENT PURCHASES. FOR THE MOST PART, THAT'S CONSUMPTION. FOR THE MOST PART, THE GOVERNMENT DOES NOT INVEST IN CAPITAL GOODS, BUT DOES SOME OF THAT. OKAY. AND THE THING I JUST MENTIONED A MOMENT AGO, DOES NOT INCLUDE TRANSFER PAYMENTS. TRANSFER PAYMENTS ARE JUST UNILATERAL PAYMENTS MADE TO ECO 155 750 LECTURE SEVENTEEN 22 SOMEBODY. UNILATERAL -- THE GOVERNMENT'S HANDING MONEY OVER AND GETS NOTHING BACK. UNI MEANS ONE, LATERAL MEANS -- I DON'T KNOW WHAT THAT MEANS. ANYWAY, THE GOVERNMENT'S HANDING MONEY OVER TO SOMEBODY AND DOESN'T SAY, "GIVE ME SOMETHING BACK." IN THE CASE OF GOVERNMENT SPENDING ON CONSUMPTION GOODS AND GOVERNMENT SPENDING ON CAPITAL GOODS, THE GOVERNMENT HANDS MONEY OVER AND SOMETHING IS HANDED BACK IN RETURN. THE GOVERNMENT HAS LOTS OF TRANSFER PAYMENTS. AND I MEAN IT'S NOT LIKE A LITTLE PIECE OF GOVERNMENT. IT MAY BE -- AND I'M TALKING NOW ABOUT THE FEDERAL GOVERNMENT OR THE NATIONAL GOVERNMENT IN WASHINGTON -- IT MAY BE THE CASE THAT THE TRANSFER PAYMENTS ARE BIGGER THAN THEIR PURCHASES OF GOODS AND SERVICES. THIS NUMBER, THE ONE POINT -- OH, ONE THOUSAND, THREE HUNDRED BILLION DOLLARS. THAT INCLUDES -- AND MAYBE I'LL WRITE THIS DOWN HERE -- INCLUDES FEDERAL, STATE AND LOCAL. GOOD. OUT OF ALL THE SPENDING OR THESE PURCHASES BY GOVERNMENT, YOU CAN SEE THAT ABOUT TWO-THIRDS OF THOSE PURCHASES ARE BY STATE AND LOCAL GOVERNMENTS. SO STATE AND LOCAL GOVERNMENTS ARE A LOT BIGGER THAN THE NATIONAL GOVERNMENT, THE FEDERAL GOVERNMENT, IN TERMS OF PURCHASING GOODS AND SERVICES. WHAT DO STATE AND LOCAL GOVERNMENTS PURCHASE? HIGHWAYS, SCHOOLS -- I MEAN, THEY ARE THE ONES THAT ARE BUILDING THIS STUFF ECO 155 750 LECTURE SEVENTEEN 25 ARE PEOPLE WHO RECEIVE UNEMPLOYMENT COMPENSATION, VARIOUS FORMS OF PUBLIC ASSISTANCE, AND SO FORTH. AND SO ANYWAY, WHAT I'M SAYING TO YOU IS, FOR THE MOST PART STATE AND LOCAL GOVERNMENTS -- WHEN THEY SPEND MONEY, THEY'RE BUYING SOMETHING. AND, FOR THE MOST PART, WHEN THE FEDERAL GOVERNMENT SPENDS MONEY, IT'S NOT BUYING ANYTHING. AND I'M NOT SAYING THIS IS GOOD; I'M NOT SAYING IT'S BAD. I'M TRYING TO INFORM YOU ABOUT THE WAY THE FEDERAL GOVERNMENT'S BUSINESS IS RUN IS IT'S MAINLY MOVING MONEY AROUND FROM ONE PLACE TO ANOTHER. SOME OF THE PEOPLE WHO RECEIVE -- AND IT'S NOT PEOPLE. SOME OF THE RECIPIENTS OF TRANSFER PAYMENTS ARE OTHER GOVERNMENTS. LIKE THE GOVERNMENT IN WASHINGTON WILL TAKE MONEY AND MAYBE GIVE SOME OF IT TO THE STATE OF MISSOURI, MAYBE GIVE SOME OF IT TO THE CITY OF SPRINGFIELD. WHAT FOR? AND THE ANSWER IS -- WELL, THEY MIGHT SAY TO THE CITY OF SPRINGFIELD, "IF YOU'LL START UP A CERTAIN KIND OF A PROGRAM IN YOUR SCHOOLS DOWN IN SPRINGFIELD, THEN WE WILL SUBSIDIZE YOU." AND THEN THEY MIGHT SEND IN A MILLION DOLLARS OR SOMETHING LIKE THAT. SO ANYWAY, TRANSFER PAYMENTS DON'T JUST GO TO INDIVIDUALS. SOME OF 'EM ALSO GO TO OTHER LEVELS OF GOVERNMENT, LOWER LEVELS OF GOVERNMENT. THE FEDERAL GOVERNMENT IS MAINLY IN THE BUSINESS OF MOVING MONEY FROM HAND TO HAND. SO WHEN WE COME BACK TO HERE AND SAY GOVERNMENT PURCHASES OF GOODS AND SERVICES, DO NOT THINK ABOUT ECO 155 750 LECTURE SEVENTEEN 26 TRANSFER PAYMENT 'CAUSE THEY'RE JUST NOT INCLUDED. LET ME SEE IF I CAN GET MY -- THIS IS A PRETTY SIMPLE PICTURE, BUT I DON'T KNOW HOW THIS IS GONNA HAPPEN. IF YOU'VE GOT GOVERNMENT OVER HERE, WHAT I'M SAYING IS THESE TRANSFER PAYMENTS -- OH, I'D BETTER BRING IT IN LIKE THIS. THE TRANSFER PAYMENTS COME INTO THE HOUSEHOLDS AS A FORM OF INCOME. NOT INCOME -- YOU KNOW, THIS OTHER INCOME THAT WE WERE TALKING ABOUT CAME FROM FIRMS IN RETURN FOR RESOURCES. BUT IN THIS PARTICULAR [BRIEF BLANK SECTION IN TAPE] NOT IN RETURN FOR RESOURCES. AND THEN WHAT WILL HAPPEN IS, WHEN THE HOUSEHOLD SPENDS THAT MONEY, IT'S COMING OUT HERE, SPENDING, THEN WE'LL CAPTURE THAT SPENDING AND PUT IT IN GROSS DOMESTIC PRODUCT WHEN THE HOUSEHOLD SPENDS IT. SO WE DON'T WANT TO COUNT IT HERE WHEN IT'S COMING IN AS A TRANSFER PAYMENT AND THEN IT AGAIN WHEN THE HOUSEHOLD SPENDS IT. JUST ONE TIME. THE FOURTH CATEGORY -- I'LL ERASE. THE FOURTH CATEGORY, NET EXPORTS EQUALS EXPORTS MINUS IMPORTS. AND THESE ARE MEASURED IN DOLLARS. AND, BY THE WAY, THIS IS EXPORTS OF GOODS AND SERVICES. EXPORTS MINUS IMPORTS. AND THE NET, WE'RE NETTING THE ONE OUT AGAINST THE OTHER. THESE ARE GROSS EXPORTS MINUS IMPORTS EQUALS THE NET. I SUPPOSE MOST PEOPLE ARE FAMILIAR WITH THESE TERMS. BUT ANYWAY, JUST TO MAKE IT CLEAR. IF WE MANUFACTURE SOMETHING HERE IN THE UNITED STATES OR IF WE PRODUCE SOME SERVICES HERE IN THE UNITED STATES, AND PROVIDE THAT TO ECO 155 750 LECTURE SEVENTEEN 27 FOREIGNERS, WE CALL THAT AN EXPORT. WE'VE EXPORTED THE GOODS OR EXPORTED THE SERVICES, AND THEN DOLLARS COME BACK IN RETURN. AND SO THOSE DOLLARS COMING BACK FROM THE FOREIGNERS, THAT CONSTITUTES AN INJECTION INTO THAT CIRCULAR FLOW. THE DOLLARS WEREN'T HERE A MOMENT AGO AND ALL OF A SUDDEN -- WHERE WOULD THAT COME FROM? FOREIGNERS BUY GOODS AND SERVICES. THAT SHOWS UP TO FIRMS AS A REVENUE. SO HERE'S THE FOREIGNERS OUT HERE. AND THE FOREIGNERS, THEY START SENDING REVENUES INTO OUR BUSINESS FIRMS -- THAT IS TO SAY DOLLARS -- FOR THE GOODS AND SERVICES. GOODS AND SERVICES GO BACK NOT TO THE HOUSEHOLD SECTOR IN THIS CASE, BUT TO GOODS AND SERVICES GO TO THE FOREIGNERS. SO THIS IS AN INJECTION OF DOLLARS INTO OUR CIRCULAR FLOW AND IT WILL STIMULATE THE ECONOMY. IMPORTS, WE SUBTRACT THOSE OUT. NOW, THIS PICTURE'S JUST GETTING SO MESSY UP HERE. I'M NOT SURE IF I CAN USE IT MUCH MORE. ONE MORE TRY. WITH IMPORTS, SOMETHING LIKE THIS HAPPENS. THE HOUSEHOLD SECTOR SAYS, "YEAH, WE'RE GONNA SPEND MONEY, BUT WE'RE NOT GONNA SPEND IT WITH THESE PEOPLE. WE'RE GONNA SEND OUR SPENDING OVER HERE TO THE" -- WELL, OVER THERE'S WHERE THE FOREIGNERS ARE, BUT THESE ARE DIFFERENT FOREIGNERS. FOREIGN PRODUCERS. "WE'LL SEND OUR DOLLARS THERE AND THEN THEY'LL SEND US BACK GOODS AND SERVICES." SO, FOR EXAMPLE, IF YOU BUY A TOYOTA THAT WAS MANUFACTURED ECO 155 750 LECTURE SEVENTEEN 30 PAY IN TUITION, NOT ONLY IS THAT AN EXPORT, BUT WHEN THE FOREIGNER COMES AND SITS IN THE CLASSROOM, THEN THEY ARE ALSO PROBABLY LIVING HERE IN SPRINGFIELD, PAYING RENT, EATING FOOD AND SO FORTH. THE RENT AND THE FOOD, THAT'S ALL AN EXPORT. AND SO HIGHER EDUCATION IS A BIG EXPORT OF THE UNITED STATES. IMPORTS. WHAT DO WE IMPORT A LOT OF? A COUPLE OF THINGS THAT COME TO MIND: CLOTHING AND CARS. CLOTHING -- WE BUY A LOT OF CLOTHING FROM CHINA. AND THERE ARE SOME OTHER PLACES, BUT A LOT FROM CHINA. AND CARS? WE BUY A LOT OF CARS FROM JAPAN AND GERMANY. BUT THOSE ARE A COUPLE OF BIG IMPORTS. WE ALSO BUY A LOT OF CARS FROM CANADA, A LITTLE BIT CLOSER TO HOME HERE. HOW MUCH ARE NET EXPORTS? WELL, LET'S SEE IF WE CAN FIND THIS. OH, DON'T TELL ME THAT'S NOT HERE. WELL, I SEE EXPORTS BUT IT'S STATED AS A PERCENT, PERCENTAGE CHANGE. OKAY. THEN I'M JUST GONNA HAVE TO MAKE SOMETHING UP. I WON'T MAKE IT UP. I MEAN, I KIND OF KNOW THESE NUMBERS ANYWAY. I DO HAVE TO DO A LITTLE MULTIPLICATION, THOUGH. JUST A SECOND. THESE TWO THINGS ADDED TOGETHER, EXPORTS PLUS IMPORTS, THOSE TWO THINGS ADDED TOGETHER ADD UP TO ABOUT TWO TRILLION DOLLARS. OH, LET ME WRITE IT AGAIN IN BILLIONS, TWO THOUSAND BILLION. AND I THINK THAT THIS IS MORE LIKE ABOUT -- I DON'T KNOW. I'M NOT EVEN GONNA TRY TO WRITE THAT DOWN, HOW MUCH. I THINK THAT THE IMPORTS ARE GREATER THAN EXPORTS. ECO 155 750 LECTURE SEVENTEEN 31 AND, BY THE WAY, I'M GONNA CONFUSE YOU HERE. I DO NOT MEAN TO SAY THAT OUR NET EXPORTS ARE TWO THOUSAND BILLION. I DO NOT MEAN TO SAY THAT. I MEAN, THESE TWO THINGS, IF WE ADDED 'EM TOGETHER, WE'RE NETTING 'EM OUT ONE AGAINST THE OTHER HERE IN THIS FORMULA. AND THE NET MIGHT BE MINUS TWO HUNDRED BILLION DOLLARS. AND AGAIN, I DON'T HAVE THAT NUMBER HERE IN THE SURVEY OF CURRENT BUSINESS, SO I'M NOT TELLING YOU THAT'S EXACT. BUT ABOUT TWO HUNDRED BILLION DOLLARS. AND THAT'S A NEGATIVE SAYING THAT OUR EXPORTS ARE ACTUALLY SMALLER THAN OUR IMPORTS. THE NEGATIVE THING THERE THAT WE'RE SUBTRACTING, THE IMPORTS, THAT'S A BIGGER THING BY A COUPLE HUNDRED BILLION DOLLARS A YEAR, SO THIS IS NEGATIVE. SO REALLY WHAT WE DO WHEN WE GET GDP IS WE'VE GOT ONE, TWO, THREE POSITIVE NUMBERS AND THEN WE'VE GOT A NEGATIVE NUMBER THAT SUBTRACTS FROM IT. AND WHAT I WAS TELLING YOU ABOUT THE TWO THOUSAND BILLION, WHAT I WAS WORKING WITH WAS THIS: TOTAL AMOUNT OF FOREIGN TRADE, BOTH EXPORTS AND IMPORTS ADDED TOGETHER, ARE ABOUT ONE-FOURTH AS BIG AS GROSS DOMESTIC PRODUCT. AND THAT'S JUST A BALLPARK NUMBER. AND SO THESE NUMBERS, WE'RE TALKING -- AND IF I HAD TO GUESS, I WOULD GUESS THAT WE'VE GOT SOMETHING LIKE TWELVE HUNDRED BILLION DOLLARS, ONE POINT TWO TRILLION, AND THEN MAYBE EIGHT HUNDRED -- NO, THAT WON'T QUITE WORK, WILL IT? MAYBE NINE HUNDRED AND ELEVEN HUNDRED. THERE WE GO. AND THOSE ARE JUST BALLPARK NUMBERS, BUT YOU GET THE IDEA. ECO 155 750 LECTURE SEVENTEEN 32 IF WE EXPORT NINE HUNDRED BILLION DOLLARS WORTH OF GOODS AND SERVICES, IMPORT ELEVEN HUNDRED BILLION, THEN WE'RE TWO HUNDRED BILLION DOLLARS IN THE HOLE ON NET IMPORTS. NET EXPORTS ARE MINUS TWO HUNDRED BILLION DOLLARS. AND YET THE TWO OF 'EM ADD UP TO ABOUT A QUARTER OF GDP. AND THE REASON I'M TELLING YOU THIS IS, A QUARTER OF GDP IS KIND OF A BIG NUMBER. A LOT OF PEOPLE IN THE UNITED STATES ARE INVOLVED IN EITHER EXPORTING OR IMPORTING, AND A LOT MORE OF US IN CONSUMING OUR IMPORTS. ANY QUESTIONS ABOUT THIS? LET ME TAKE JUST ONE MORE MINUTE AND THEN WE'LL STOP. WHAT WE'RE GONNA DO NEXT TIME IS THIS: THERE'S TWO APPROACHES TO MEASURING GDP. THE FIRST ONE IS THE EXPENDITURE APPROACH AND WE'VE JUST FINISHED THAT. THE OTHER IS CALLED THE INCOME APPROACH. AND WHAT WE WILL DO FOR THE INCOME APPROACH IS, WE WILL COME BACK AND TALK ABOUT AND MEASURE THESE DOLLARS. ALL THE DOLLARS COMING INTO HOUSEHOLDS IN THE FORM OF INCOME, WHICH WOULD BE LIKE WAGES AND RENT AND INTERESTS AND PROFITS, ALL THAT INCOME RECEIVED BY HOUSEHOLDS, THAT WILL ADD UP TO FIND THE INCOME APPROACH TO GDP. SEE YOU NEXT TIME.