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

Download Measuring Gross Domestic Product - Lecture Notes | ECO 155 and more Study notes Introduction to Macroeconomics in PDF only on Docsity! ECO 155 750 LECTURE EIGHTEEN 1 WELL, WE WANT TO GET A START AGAIN TALKING ABOUT -- NOT A START, BUT CONTINUE TALKING ABOUT DIFFERENT WAYS -- TWO APPROACHES, IF YOU'LL REMEMBER, TO MEASURING GROSS DOMESTIC PRODUCT. WE'VE ALREADY TALKED ABOUT THE EXPENDITURE APPROACH. AND IN THAT PARTICULAR CASE, IN ORDER TO CALCULATE GDP, WE HAD CONSUMPTION PLUS INVESTMENT PLUS GOVERNMENT SPENDING PLUS NET EXPORTS. THERE YOU GO. IT'S ALL IN ONE SIMPLE FORMULA. OKAY. THE OTHER WAY OF MEASURING GROSS DOMESTIC PRODUCT IS NOT BY MEASURING HOW MUCH PEOPLE SPEND, PEOPLE IN BUSINESS AND GOVERNMENT AND SO FORTH, BUT MEASURING THE INCOME OF THE FACTORS OF PRODUCTION OR PRODUCTIVE RESOURCES. AND SO THIS IS CALLED THE INCOME APPROACH TO MEASURING REAL GROSS DOMESTIC PRODUCT -- OR JUST GROSS DOMESTIC PRODUCT. AND I'LL GO THROUGH THESE IN JUST A SECOND. BUT IT'S WAGES PLUS RENT PLUS INTEREST PLUS PROFITS. THAT'S THE INCOME, THE CATEGORIES OF INCOME. IF YOU'LL REMEMBER, I TOLD YOU BEFORE THERE WERE FOUR FACTORS OF PRODUCTION. I SAID THERE WAS LAND, LABOR, CAPITAL AND ENTREPRENEURSHIP. AND SO WE'VE GOT THOSE FOUR FACTORS OF PRODUCTION OR FOUR PRODUCTIVE RESOURCES, AND EACH ONE OF THOSE FACTORS OF PRODUCTION HAS A RETURN OR A PAYMENT AND WE GIVE 'EM THOSE NAMES. ECO 155 750 LECTURE EIGHTEEN 2 AND SO, AS I TOLD YOU BEFORE, THESE ARE NOT NECESSARILY HOW YOU WOULD USE THE TERMS. LAND, IF YOU'LL REMEMBER, I USED NATURAL RESOURCES SUCH AS AIR AND WATER AND THE SOIL, AND SO FORTH. BUT THESE TERMS AREN'T EXACTLY THE TERMS YOU MIGHT USE IN YOUR EVERYDAY LANGUAGE, BUT NEVERTHELESS ECONOMISTS PUT ALL PRODUCTIVE RESOURCES INTO FOUR CATEGORIES. WELL, THEN, EACH ONE OF THOSE CATEGORIES HAS A CORRESPONDING PAYMENT NAME. AND SO THE PAYMENT FOR LABOR IS WAGES, AND THE PAYMENT FOR LAND IS RENT, AND THE PAYMENT FOR CAPITAL IS INTEREST, AND THE PAYMENT FOR ENTREPRENEURSHIP IS PROFITS. OKAY. SO THAT'S REALLY WHAT WE ADD UP IN ORDER TO FIND -- AND THAT'S NOT THE WHOLE STORY, BUT THAT'S THE INCOME APPROACH TO CALCULATING GROSS DOMESTIC PRODUCT. I BELIEVE WHAT I STARTED LAST TIME WAS WE'D TALKED ABOUT THIS INCOME APPROACH AND I THINK I PUT UP HERE, DIDN'T I, COMPENSATION OF EMPLOYEES. AND THAT HAS TWO COMPONENTS, MONEY WAGES AND FRINGE BENEFITS. SO THAT COMPENSATION OF EMPLOYEES IS WHAT I'M SAYING IS THE RETURN TO LABOR. OKAY. ALL THE MONEY YOU GET PAID FOR WORKING PLUS THE FRINGE BENEFITS. WHAT KIND OF FRINGE BENEFITS? OH, THINGS LIKE HOSPITALIZATION INSURANCE -- YOU KNOW, IF YOU -- OR HEALTH INSURANCE. IF YOU GET SICK YOU CAN GO TO A HOSPITAL AND THE INSURANCE PAYS THE BILL. YOU MIGHT HAVE SOME SICK DAYS; YOU MIGHT ECO 155 750 LECTURE EIGHTEEN 5 EVERYBODY WAS GONNA BUY ANYWAY. OKAY. THE SECOND THING I'LL MENTION TO YOU IS THIS. A BIG COST, A BIG EXPENSE OF FRINGE BENEFITS IS HEALTH INSURANCE. THAT'S A PRETTY BIG EXPENSE FOR EMPLOYERS. AND THAT, OVER THE YEARS, OVER THE LAST COUPLE OF DECADES, HAS GROWN VERY RAPIDLY. AND SO SINCE IT'S GROWN RAPIDLY, THEN FRINGE BENEFITS HAVE CAPTURED A GROWING SHARE OF TOTAL COMPENSATION. I'LL GIVE YOU SORT OF A QUICK GRAPH AND DON'T TAKE ANYTHING HERE AS EXACT. I'LL PUT DOLLARS HERE AND TIME HERE, THE YEAR AND SO FORTH. AND WHAT I'M SAYING IS THIS, IS THAT MONEY WAGES HAVE SORT OF GROWN LIKE THAT. FRINGE BENEFITS HAVE GROWN LIKE THIS, THE COST OF FRINGE BENEFITS. AND SO -- HERE'S F. AND THAT BEING THE CASE, TOTAL COMPENSATION IS GROWING -- THIS IS A PRETTY BAD GRAPH. BUT TOTAL COMPENSATION IS GROWING FASTER THAN WAGES AND FRINGE BENEFITS ARE ABSORBING A GROWING SHARE OF TOTAL COMPENSATION. OKAY. SO ANYWAY, THIS IS -- IN RECENT YEARS, THIS TREND HAS IF NOT COME TO AN END, AT LEAST SLOWED DOWN. HEALTHCARE COSTS HAVE COME UNDER CONTROL AS THE COUNTRY HAS SWITCHED TO MANAGED CARE AND, WHAT, HMO'S AND PPO'S AND ALL THESE OTHER INSTITUTIONS. THEY'VE BEEN ABLE TO HOLD DOWN -- NOT LOWER, BUT AT LEAST PREVENT THE COST FROM RISING AS RAPIDLY FOR THIS HEALTHCARE INSURANCE. SO ECO 155 750 LECTURE EIGHTEEN 6 ANYWAY, WHO KNOWS WHAT THE FUTURE'S GONNA HOLD. BUT THAT'S KIND OF A TREND THAT WE'VE OBSERVED IN THE PAST, IS THE FRINGE BENEFIT COST RISING MORE RAPIDLY THAN WAGES. SO MAYBE YOUR PAY, ALL THINGS CONSIDERED, YOUR COMPENSATION, IT MAYBE GOES UP FIVE PERCENT. YOUR WAGES GO UP TWO PERCENT BUT THE FRINGE BENEFIT COSTS GO UP SEVEN OR EIGHT PERCENT. THAT'S JUST AN EXAMPLE. OKAY. SO LET'S GO ON. NUMBER TWO. THE SECOND COMPONENT OF THIS MEASURE IS, WHAT, PROPRIETORS' INCOME. PROPRIETORS' INCOME IS ONE OF THESE RETURNS TO ENTREPRENEURS. A PROPRIETOR IS A BUSINESS OWNER. OKAY. AND SO PROPRIETORS' INCOME -- AND I'M ACTUALLY GONNA DIVIDE THIS PROFIT THING INTO TWO CATEGORIES AND ONE OF 'EM IS THE PROPRIETORS' INCOME. SO THAT IS A PROFIT MEASURE, REALLY. THIS IS INCOME EARNED BY SELF-EMPLOYED INDIVIDUALS, OWNERS OF UNINCORPORATED BUSINESSES. THEY HAVE NOT INCORPORATED. OWNERS OF FARMS, A LOT OF FARMS, UNINCORPORATED FARMS, FOR EXAMPLE. SO ANYWAY, WE'RE TALKING ABOUT THOSE TYPES OF THINGS. THIS SAYS "INCOME," BUT THIS IS A PROFIT. IT'S A RETURN TO THE OWNERS OF BUSINESSES. OKAY. A THIRD CATEGORY, CORPORATE PROFITS. THAT IS ANOTHER ONE OF THESE RETURNS TO THE ENTREPRENEUR. SO IT'S REALLY THOSE TWO CATEGORIES OF PROPRIETORS' INCOME AND CORPORATE PROFITS, THOSE ECO 155 750 LECTURE EIGHTEEN 7 BOTH ADD UP TO WHAT I CALLED PROFITS BEFORE. CORPORATE PROFITS, THAT'S THE NET INCOME. YOU'VE GOT ALL THE REVENUES COMING IN FROM SALES. YOU KNOW, LIKE LET'S SAY YOU'VE GOT A COMPANY. IT SELLS A MILLION DOLLARS WORTH OF MERCHANDISE SO REVENUE COMING IN IS A MILLION DOLLARS. BUT THEN YOUR COMPANY HAS TO PAY WORKERS, HAS TO PAY THE RENT, HAS TO PAY FOR RAW MATERIALS AND SO FORTH. SO AFTER YOU PAY ALL THOSE COSTS, MAYBE YOU'VE GOT NINE HUNDRED AND FIFTY THOUSAND DOLLARS WORTH OF COST GOING OUT. SO AT THE END OF THE YEAR, THERE'S A MILLION COMING IN, NINE HUNDRED AND FIFTY THOUSAND GOING OUT, AND YOU'VE GOT FIFTY THOUSAND DOLLARS IN CORPORATE PROFITS. OKAY. SO THIS IS NOT THE -- I'M NOT SAYING HERE WE'RE MEASURING THE GROSS REVENUE COMING IN TO COMPANIES. THIS IS THE NET AMOUNT THEY'RE LEFT WITH AFTER THEY PAY THEIR BILLS, AFTER THEY PAY THEIR COSTS. WHAT HAPPENS TO THESE PROFITS? THREE THINGS: TAXES -- AND, OF COURSE, THIS IS CORPORATE INCOME TAX. WE ALL KNOW ABOUT THE PERSONAL INCOME TAX. BUT THERE'S A CORPORATE PROFITS TAX -- OR A CORPORATE INCOME TAX. SOME OF THESE PROFITS ARE PAID OUT AS DIVIDENDS. LET ME NOT JUST PUT THESE LITTLE BULLETS OUT HERE, BUT LET ME DO THIS AS A FORMULA. CORPORATE PROFITS EQUALS TAXES PLUS DIVIDENDS PLUS THERE'S ONE OTHER PLACE THESE CAN GO. THEY CAN BE ECO 155 750 LECTURE EIGHTEEN 10 THE ENTREPRENEURS. THE OTHER TWO CATEGORIES, RENTAL INCOME OF PERSONS -- LET ME ERASE A LITTLE BIT. RENTAL INCOME OF PERSONS. NOW, WHY "OF PERSONS"? WHY NOT JUST RENTAL INCOME? AND THE ANSWER IS, WELL, LIKE IF A CORPORATION HAD SOME RENTAL INCOME -- LET'S SAY A CORPORATION OWNED AN APARTMENT BUILDING AND RENTED THAT APARTMENT BUILDING AND PEOPLE PAID RENT. WHY DON'T WE PUT THAT RENT RIGHT HERE? AND THE ANSWER IS, 'CAUSE WE ALREADY CAPTURED THE RENT THAT CORPORATIONS GET. WE'VE ALREADY GOT THAT IN CORPORATE PROFITS. WE'RE TALKING ABOUT THE RENT THAT WE HAVEN'T INCLUDED ANYWHERE ELSE. THIS IS INCOME FOR BASICALLY NOT JUST HOUSES. I MEAN, RENT. WE'RE USED TO THINKING OF THAT. BUT THAT WOULD INCLUDE RENT ON -- LIKE IF I OWNED A HOUSE AND RENTED IT OUT, IT WOULD INCLUDE THAT. IF I OWNED A BUILDING AND RENTED THAT OUT TO SOMEBODY, LET'S SAY A WAREHOUSE -- IF I OWNED SOME FARMLAND AND RENTED THAT TO SOMEBODY IT WOULD COUNT HERE. SO ANYWAY, RENTING ALL SORTS OF ASSETS, THE RENT ON THOSE ASSETS GOES INTO THIS CATEGORY. HERE'S SOMETHING ELSE THAT YOU MAYBE DON'T THINK WOULD BE IN HERE BUT IT IS. I THINK I SORT OF INDIRECTLY MENTIONED THIS THE OTHER DAY. THERE IS AN IMPUTED -- LET ME WRITE DOWN IMPUTED -- HMM, LET ME SEE HOW I'VE WRITTEN THIS DOWN HERE. IMPUTED VALUE OF OWNER OCCUPIED HOMES. THERE WE GO. IMPUTED RENT FOR OWNER OCCUPIED ECO 155 750 LECTURE EIGHTEEN 11 HOMES. THE OTHER DAY WHEN WE WERE TALKING ABOUT INVESTMENT SPENDING, MAYBE YOU'LL REMEMBER OR MAYBE YOU HAVE IT IN YOUR NOTES -- BUT WHEN WE WERE TALKING ABOUT INVESTMENT SPENDING THE OTHER DAY, I SAID, YOU KNOW -- WELL, OR LET ME EVEN BACK UP. IT WAS WHEN WE WERE TALKING ABOUT CONSUMPTION SPENDING. I SAID IF YOU GO OUT AND BUY A HOUSE, BUILD A HOME, IT DOES NOT GO IN THAT C, CONSUMPTION SPENDING. YOU REMEMBER WE HAD CONSUMPTION OF DURABLES, NONDURABLES AND SERVICES. I SAID THAT DOESN'T INCLUDE HOUSING. AND THE REASON IT DOESN'T INCLUDE HOUSING IS, IF YOU BUILD A HOME, WE TREAT YOU AS THOUGH YOU ARE A BUSINESS OWNER AND YOU'VE MADE AN INVESTMENT, AND SO WE PUT THAT HOUSE IN THE INVESTMENT CATEGORY. WE SAID YOU HAVE MADE AN INVESTMENT. WELL, OKAY. YOU'RE NOW THE OWNER OF A HOME. YOU'RE RENTING IT, WE PRETEND, TO YOURSELF, AND SO NOW THAT'S WHAT WE'RE TALKING ABOUT RIGHT HERE. YOU AS THE OWNER OF THE HOME -- YOU'VE GOT RENTAL INCOME. YOU DON'T DECLARE THIS ON YOUR TAXES BUT THIS IS HOW THE NATIONAL INCOME ACCOUNTS SHOW THIS, IS THAT YOU'RE A BUSINESS OWNER. YOU OWN A HOME. YOU RENT IT TO YOU. SO THEN HERE IS AN IMPUTED -- AND "IMPUTED" JUST MEANS THERE'S NOT AN ACTUAL RENTAL PAYMENT MADE. IT'S NOT LIKE YOU TAKE FOUR ECO 155 750 LECTURE EIGHTEEN 12 HUNDRED DOLLARS OUT OF THIS POCKET AND PUT IT OVER IN THAT POCKET, AND SAY, "OKAY, NOW I'VE PAID THE RENT FOR THE MONTH. I FEEL A LOT BETTER." BUT IT'S IF YOU WERE RENTING THAT HOUSE TO SOMEBODY, HOW MUCH WOULD YOU RECEIVE FOR IT? AND SO WE IMPUTE A RENTAL VALUE FOR THAT HOUSE AND THAT'S WHAT WE PUT IN HERE. AND THESE ARE OWNER OCCUPIED HOMES. THIS IS YOU LIVING IN YOUR OWN HOUSE. WE PRETEND IN OUR NATIONAL INCOME ACCOUNTS THAT YOU'RE RENTING THAT HOME. OKAY. QUESTIONS ABOUT THAT? SO THAT'S NOT ALL THIS RENTAL INCOME OF PERSONS IS. IT'S RENT RECEIVED -- YOU REMEMBER I WAS TELLING YOU ABOUT LAND AND BUILDINGS AND HOMES, AND THEN -- BUT I'M SAYING IT ALSO INCLUDES AN IMPUTED VALUE FOR RENT ON YOUR OWN HOME THAT YOU'RE LIVING IN. AND IT ALSO INCLUDES SOME OTHER INCOME THAT MAYBE YOU HADN'T THOUGHT ABOUT BEFORE. SOME COPYRIGHT ROYALTIES AND -- WHAT ELSE - - PATENTS, YEAH. PATENT HOLDERS, THEIR INCOME. THEN, YOU KNOW -- AND MAYBE YOU DON'T KNOW ABOUT IT AND MAYBE YOU DO, BUT A PATENT OR A COPYRIGHT, THOSE ARE KIND OF LEGAL MONOPOLIES GRANTED BY THE GOVERNMENT. IF YOU WRITE SOMETHING OR IF YOU INVENT SOMETHING, THE GOVERNMENT BASICALLY SAYS YOU'VE GOT A RIGHT FOR A CERTAIN NUMBER OF YEARS TO OWN THIS EXCLUSIVELY. IF I WRITE A BOOK, IT'S MY BOOK. YOU CAN'T GO AN XEROX IT -- OR COPY IT, I SHOULD SAY -- AND SELL THAT TO OTHER PEOPLE. IT'S MINE; I HOLD THE ECO 155 750 LECTURE EIGHTEEN 15 HALF TRILLION DOLLARS. AND IF YOU THINK ABOUT -- LET'S SAY THE INTEREST RATE ON THE NATIONAL DEBT -- LET'S JUST TAKE A PRETTY LOW INTEREST RATE. LET'S SAY IT'S FIVE PERCENT. IF THE INTEREST RATE IS FIVE PERCENT ON FIVE AND A HALF TRILLION DOLLARS -- SEE IF I CAN DO THIS IN MY HEAD -- THEN WHAT THAT WOULD MEAN IS THE GOVERNMENT WOULD HAVE TO PAY TWO HUNDRED AND SEVENTY-FIVE BILLION DOLLARS A YEAR IN INTEREST. THAT'S THE NATIONAL GOVERNMENT IN WASHINGTON. SO ANYWAY, WHERE WE SAY INTEREST RECEIVED BY HOUSEHOLDS AND GOVERNMENT, WELL, THERE'S ONE GOVERNMENT THAT DOESN'T RECEIVE; IT PAYS TWO HUNDRED AND SEVENTY-FIVE BILLION DOLLARS IN INTEREST A YEAR, MORE OR LESS. NOW, OTHER GOVERNMENTS, STATE AND LOCAL, THEY RECEIVE A LITTLE BIT OF INTEREST. PARTLY BECAUSE STATE AND LOCAL GOVERNMENTS ARE MANAGING THE PENSIONS OF THEIR EMPLOYEES. I WORK FOR THE STATE OF MISSOURI. THE STATE OF MISSOURI PUTS A LITTLE BIT OF MONEY AWAY EVERY MONTH FOR ME. I THINK IT'S ABOUT FIFTY DOLLARS A MONTH THERE, IF I'M NOT MISTAKEN. BUT THEY PUT A LITTLE BIT OF MONEY AWAY EVERY MONTH FOR ME. AND THEN WHERE DO THEY PUT THAT? AND THE ANSWER IS THEY INVEST IT, STOCKS AND BONDS AND THINGS LIKE THAT. AND THAT BEING THE CASE, THEN THE STATE OF MISSOURI IS GONNA HAVE A LITTLE BIT OF INTEREST INCOME. MOST OF THIS INTEREST INCOME IS RECEIVED BY HOUSEHOLDS, INDIVIDUALS LIKE US. NOT ECO 155 750 LECTURE EIGHTEEN 16 THAT THERE ARE INDIVIDUALS LIKE US, BUT INDIVIDUALS NEVERTHELESS. SO ANYWAY, LET ME GET MY SURVEY OF CURRENT BUSINESS OUT AND SEE I HAVE THESE NUMBERS, AND SEE IF I CAN'T JUST KIND OF WRITE A FEW OF THESE DOWN HERE. COMPENSATION OF EMPLOYEES. LET'S SEE. FOUR FOUR ONE OH BILLION. THAT'S FOUR TRILLION, FOUR HUNDRED AND TEN BILLION DOLLARS. OH, THAT'S NOT THE RIGHT NUMBER. I'M SORRY. THAT WAS THE WRONG YEAR. I'LL DO BETTER NEXT TIME. LET'S TRY FIVE OH ONE OH. HEY, FIVE OH ONE OH BILLION. ABOUT FIVE TRILLION DOLLARS IS COMPENSATION OF EMPLOYEES. HOW MANY EMPLOYEES ARE WE TALKING ABOUT? WELL, IF YOU REMEMBER A FEW DAYS AGO, WE WERE IN HERE AND TALKING ABOUT WHAT'S THE LABOR FORCE, HOW MANY PEOPLE ARE EMPLOYED, HOW MANY ARE UNEMPLOYED, AND I THINK THAT WE SAID THERE WERE, WHAT, A HUNDRED AND THIRTY MILLION, MORE OR LESS, PEOPLE THAT ARE WORKING, SO THERE'D BE ABOUT A HUNDRED AND THIRTY MILLION PEOPLE SHARING IN THIS FIVE POINT OH ONE TRILLION DOLLARS. ANYWAY, COMPENSATION OF EMPLOYEES. AND THAT DOES INCLUDE FRINGES AS WELL AS WAGES AND SALARIES. I DON'T HAVE ALL THAT BROKEN DOWN HERE. WHAT DO WE HAVE NEXT? PROPRIETORS' INCOME, FIVE SEVENTY-SIX BILLION. FIVE HUNDRED AND SEVENTY-SIX BILLION DOLLARS. CORPORATE PROFITS, EIGHT HUNDRED AND TWENTY-FIVE BILLION DOLLARS. NOT BAD, HUH? RENTAL INCOME OF PERSONS, A HUNDRED AND SIXTY-FOUR BILLION ECO 155 750 LECTURE EIGHTEEN 17 DOLLARS. AND THEN NET INTEREST, FOUR HUNDRED AND FIFTY BILLION DOLLARS. WHAT'S THE LARGEST COMPONENT OF THIS -- OH, AND I DIDN'T TELL YOU THE TOTAL, DID I? WHAT'S THE LARGEST COMPONENT? WELL, IT'S NOT EVEN A CLOSE RACE, IS IT? COMPENSATION OF EMPLOYEES IS BY FAR THE GREATEST. THIS TOTAL WAS -- YOU KNOW, IF YOU ADD ALL THESE UP, SEVEN OH THREE OH, I WAS ROUNDING OFF AS I WENT ALONG SO THESE MAY NOT ADD UP EXACTLY, BUT PRETTY CLOSE. A LITTLE OVER SEVEN TRILLION DOLLARS. YES, SIR? [STUDENT SPEAKING INAUDIBLE] DO YOU NEED TO KNOW THESE? DO YOU MEAN THESE NUMBERS? I DON'T KNOW 'EM UNLESS I TURN AROUND. SO, NO, YOU DON'T NEED TO KNOW THESE FOR THE TEST. I MEAN, I DON'T REMEMBER ONE OF 'EM RIGHT NOW, OTHER THAN THE LAST THING I REMEMBER SAYING IS SEVEN TRILLION DOLLARS. SO I'M GONNA SAY THAT NUMBER AT THE TOP HAS GOT A SEVEN TO BEGIN. BUT, NO, YOU DON'T NEED TO MEMORIZE THOSE. I WANTED YOU TO HAVE AN IDEA ABOUT THE MAGNITUDES, WHAT WE'RE TALKING ABOUT HERE, RATHER THAN MEMORIZING NUMBERS. DO YOU NEED TO KNOW THESE? YEAH, I THINK SO. I WILL MENTION TO YOU BEFORE I GO ON THAT USUALLY WHEN ECONOMISTS ARE GETTING TO GROSS DOMESTIC PRODUCT, USUALLY THEY TAKE THIS APPROACH; USUALLY NOT THIS APPROACH. OKAY. BUT ANYWAY, THE EXPENDITURE APPROACH IS MOST COMMON. SO IF I HAD A CERTAIN AMOUNT OF BRAIN POWER AND HAD IT DIVIDED BETWEEN THESE TWO ECO 155 750 LECTURE EIGHTEEN 20 YOU MAY WANT TO ABBREVIATE THIS IBT BECAUSE THERE'S NOTHING ELSE THAT SOUNDS LIKE IBT. SO ONCE YOU PUT IT THERE, THEN YOU'VE GOT IT. OKAY. NOW, AT THIS POINT -- AND THEN WE'RE GONNA GO ON A LITTLE BIT MORE -- NATIONAL INCOME PLUS CAPITAL CONSUMPTION ALLOWANCE PLUS INDIRECT BUSINESS TAXES, THAT IS THE OLD GROSS NATIONAL PRODUCT THAT USED TO BE EVERYBODY WOULD TALK ABOUT IS -- THAT WAS THE BROADEST MEASURE OF ECONOMIC ACTIVITY IN THE UNITED STATES WAS GROSS NATIONAL PRODUCT. AND SO THAT WAS NATIONAL INCOME PLUS CAPITAL CONSUMPTION PLUS INDIRECT BUSINESS TAXES, GNP. STILL A LOT OF PEOPLE USE THAT TERM, GNP, BUT GDP IS THE THING THAT IS REALLY IN VOGUE NOW AND PROBABLY WILL BE FOR THE INDEFINITE FUTURE, YEARS AND YEARS. WHAT ELSE WOULD THERE BE MAYBE? SOME KIND OF A GROSS PRODUCT MEASURE FOR THE SOLAR SYSTEM OR SOMETHING LIKE THAT. MAYBE SOMETHING WILL REPLACE THIS ONCE WE HAVE, YOU KNOW, LIKE PRODUCTION TAKING PLACE ON THE MOON AND MARS AND THINGS LIKE THAT. BUT AS LONG AS WE'RE SORT OF -- YOU KNOW, THE WORLD IS HOOKED UP THE WAY IT IS RIGHT NOW, PROBABLY GROSS DOMESTIC PRODUCT IS THE MEASURE THAT WE'LL HAVE FOR MANY, MANY YEARS TO COME. THEN WE MAKE TWO MORE ADJUSTMENTS OF THE GNP TO GET TO ECO 155 750 LECTURE EIGHTEEN 21 GDP. ONE OF THOSE ADJUSTMENTS IS FACTOR INCOME -- OH, WE HAVE TO SUBTRACT FROM GNP, SUBTRACT INCOME EARNED BY U.S. FACTORS OF PRODUCTION FROM THE REST OF THE WORLD. AND THEN WE NEED TO ADD INCOME EARNED BY FOREIGN FACTORS OF PRODUCTION FROM THE U.S. THESE NUMBERS, THE POSITIVE AND NEGATIVE, THEY'RE ABOUT THE SAME SIZE. NOT EXACTLY, BUT THEY'RE WITHIN -- I WONDER IF I HAVE ANY NUMBERS THAT'LL TELL ME THIS? I STARTED TO SHOOT A NUMBER OUT THERE LIKE FIFTY BILLION DOLLARS, BUT I'D BETTER NOT DO THAT. OH, I JUST DID. WELL, WHAT DO WE HAVE HERE? HERE WE GO. I SHOW THESE NUMBERS AS BEING -- LET ME SEE HERE. JUST ONE SECOND. HUH. TWENTY BILLION DOLLARS APART. SO WHAT I'M SAYING IS, THIS IS A PRETTY BIG NUMBER AND THIS IS A PRETTY BIG NUMBER, BUT ONE'S GOT A NEGATIVE AND ONE'S GOT A POSITIVE. THEY OFFSET EACH OTHER. AND I'M SAYING THEY'RE WITHIN TWENTY BILLION DOLLARS OF EACH OTHER. AND SINCE THESE ARE WITHIN TWENTY BILLION DOLLARS OF EACH OTHER, I'M SAYING GNP AND THEN GDP -- AND THAT'S WHERE WE ARE HERE IS GNP MINUS SOMETHING PLUS SOMETHING IS EQUAL TO GDP. I'M SAYING THERE'S ONLY ABOUT TWENTY TO THIRTY BILLION DOLLARS DIFFERENCE BETWEEN THESE TWO BECAUSE THE UNITED STATES EARNS ABOUT -- THE UNITED STATES FACTORS OF PRODUCTION EARN ABOUT THE SAME AMOUNT OVERSEAS AS FOREIGN FACTORS OF PRODUCTION EARN FROM THE UNITED STATES. ECO 155 750 LECTURE EIGHTEEN 22 NOW, WHY DO WE HAVE TO DO THIS? AND IF YOU'LL REMEMBER WHAT I WAS TELLING YOU, GROSS NATIONAL PRODUCT IS A MEASURE OF THE VALUE OF PRODUCTION BY U.S. OWNED FACTORS OF PRODUCTION, NO MATTER WHERE THEY ARE. SO IF I'M WORKING OVERSEAS, IT WOULD BE DIFFICULT TO BE IN THIS CLASSROOM. BUT IF I WAS WORKING OVERSEAS, I'D HAVE SOME INCOME AND IT WOULD GO INTO GROSS NATIONAL PRODUCT BUT IT WOULD NOT GO INTO GROSS DOMESTIC PRODUCT BECAUSE THAT'S PRODUCTION OF U.S. OWNED -- I'M SORRY -- PRODUCTION WITHIN THE UNITED STATES. SO ANYWAY, WE'RE GOING FROM WHO OWNS THE FACTORS OF PRODUCTION TO A GEOGRAPHIC MEASURE AND SO THEN WE HAVE TO JUST START TALKING ABOUT THE CROSS-BORDER TYPES OF INCOME. AND SO ANYWAY, THAT'S WHAT THESE TWO ADJUSTMENTS ARE, IS THE CROSS- BORDER. I GO OUTSIDE THE COUNTRY AND EARN INCOME, WE SUBTRACT IT OUT. A FOREIGNER COMES INTO THE UNITED STATES AND EARNS INCOME, WE ADD IT IN. AND SO THEN WE GO FROM GNP TO GDP. DON'T MEAN TO CONFUSE YOU WITH THAT. IT IS A SMALL NUMBER. BY THE WAY, IF THIS WERE A SMALL NUMBER FOR EVERYBODY, WE'D PROBABLY JUST IGNORE IT AND SAY, "AH, IT'S SO SMALL. WHO CARES?" BUT -- AND THIS IS -- TWENTY OR THIRTY BILLION DOLLARS IS A LOT FOR ME OR YOU OR SPRINGFIELD, BUT IT'S A TINY AMOUNT FOR THE UNITED STATES. MOST FOREIGN COUNTRIES AREN'T AS BIG AS THE UNITED STATES. IF ECO 155 750 LECTURE EIGHTEEN 25 AND SO LET ME GIVE YOU AN EXAMPLE WHERE THIS IS IMPORTANT: IF WE HAVE INFLATION. LET'S SAY THAT IN THIS YEAR OUR GROSS DOMESTIC PRODUCT -- RIGHT NOW THIS YEAR, LET'S SAY IT WAS EIGHT TRILLION DOLLARS AND LET'S SAY THAT, YOU KNOW, WHATEVER WE PRODUCE THIS YEAR WE PRODUCE EXACTLY THE SAME QUANTITIES OF HAIRCUTS OR CARS OR SUITS OR BASKETBALLS, OR EVERY SINGLE GOOD. JUST HYPOTHETICALLY, EVERY SINGLE GOOD WE PRODUCE EXACTLY THE SAME QUANTITY NEXT YEAR. IF THAT HAPPENED, THEN A REAL GROSS DOMESTIC PRODUCT WOULD NOT CHANGE. FROM ONE YEAR TO THE NEXT, WE'VE PRODUCED THE SAME BASKET OF GOODS AND SERVICES. OUR REAL GROSS DOMESTIC PRODUCT WOULD NOT CHANGE. HOWEVER, LET'S ASSUME SOMETHING ELSE HAPPENS. FROM THIS YEAR TO NEXT YEAR, PRICES GO UP BY TEN PERCENT. NOW WE'RE STILL PRODUCING THE SAME NUMBER OF HAIRCUTS, BUT THE HAIRCUT WHICH WAS FIVE DOLLARS, LET'S SAY, NOW IT'S FIVE DOLLARS AND FIFTY CENTS. THEN WHAT'S HAPPENED IS THIS: EVEN THOUGH OUR REAL GROSS DOMESTIC PRODUCT WOULD BE UNCHANGED 'CAUSE WE'RE PRODUCING THE SAME QUANTITIES OF GOODS AND SERVICES, EVEN THOUGH THAT'S UNCHANGED, OUR NOMINAL GROSS DOMESTIC PRODUCT, JUST THE DOLLAR VALUE OF THAT, IT WOULD GO UP BY TEN PERCENT. NOW, WHICH ONE OF THESE IS IMPORTANT? AND THE ANSWER IS, THEY'RE BOTH IMPORTANT. WE WANT TO KNOW WHAT'S THE TOTAL DOLLAR ECO 155 750 LECTURE EIGHTEEN 26 VALUE OF EVERYTHING PRODUCED AND SOLD. YES, WE DO. BUT WE ALSO WANT TO SAY, YOU KNOW, "IF PRICES HADN'T GONE UP, THEN WHAT WOULD'VE HAPPENED TO THE ECONOMY?" AND THAT'S WHAT IS GONNA TELL US ABOUT -- OR WHAT WE'RE GONNA LEARN ABOUT GDP. LET ME GIVE YOU A PROBLEM HERE -- OR I WON'T GIVE YOU A PROBLEM; I'LL GIVE ME A PROBLEM. BUT LET'S SAY GOODS -- AND WE'LL JUST START OFF WITH GOODS A, B, C, D, E, FIVE GOODS. AND LET'S SAY THE QUANTITY IN YEAR ONE -- WE'LL JUST PUT SOME NUMBERS IN HERE: TEN, TWENTY, THIRTY, TWENTY, TEN. WHERE'D I GET THOSE? MADE 'EM UP. WELL, I DIDN'T ACTUALLY MAKE THOSE UP. I LEARNED 'EM IN GRADE SCHOOL. BUT I WAS THE ONE WHO DECIDED TO USE THEM IN THIS CONTEXT. PRICE IN YEAR ONE. LET'S SAY ONE DOLLAR, TWO DOLLARS -- WELL, ONE DOLLAR, TWO DOLLARS, THREE DOLLARS. P TIMES Q IN YEAR ONE. WE'RE PRETENDING RIGHT NOW -- THIS IS ALL THE GOODS IN THE UNITED STATES, ALL THE GOODS IN THE UNITED STATES, AND THIS IS ALL THE QUANTITIES THAT WE'RE ABLE TO PRODUCE IN YEAR ONE. AND THIS IS THE PRICES OF THOSE GOODS. WELL, LET'S JUST GO THROUGH HERE. TEN DOLLARS -- OR TEN UNITS -- I'M SORRY -- TIMES ONE DOLLAR EACH, THAT'S TEN DOLLARS. TWENTY UNITS TIMES TWO DOLLARS IS FORTY. THIRTY TIMES ONE IS THIRTY. TWENTY TIMES TWO IS FORTY. TEN TIMES THREE IS THIRTY. THIS IS ALL THE GOODS WE PRODUCED TIMES THEIR PRICES. NOW, THINK ABOUT GDP. GDP IS THE MARKET VALUE OF ALL FINAL GOODS AND SERVICES ECO 155 750 LECTURE EIGHTEEN 27 PRODUCED IN THE UNITED STATES WITHIN A YEAR. WELL, THE MARKET VALUE IS -- HERE'S THE MARKET VALUE OF THE PRODUCTION. SO P TIMES Q, THAT'S -- THIS IS GROSS DOMESTIC PRODUCT IF WE ADD IT UP, GROSS DOMESTIC PRODUCT FOR YEAR ONE. TEN, FIFTY, EIGHTY, ONE TWENTY, ONE FIFTY -- I HOPE MY MATH IS RIGHT -- EQUALS GDP FOR YEAR ONE. OKAY. LET'S TALK ABOUT YEAR TWO. QUANTITY, YEAR TWO. AND THEN I'LL SAY PRICES IN YEAR TWO. YES? [STUDENT SPEAKING INAUDIBLE] IS IT REAL OR NOMINAL? RIGHT NOW WE'VE ONLY GOT THE ONE AND I'LL TELL YOU IN A MINUTE. SO -- BUT THERE'S NO WAY TO KNOW RIGHT NOW. WELL, IT'S NOMINAL FOR SURE, BUT I'LL TALK ABOUT REAL HERE IN A MINUTE. OKAY? LET'S MAKE UP SOME DIFFERENT QUANTITIES. WE DON'T WANT EXACTLY THE SAME QUANTITIES. WELL, LET'S SAY HERE'S FIFTEEN UNITS IN GOOD A. LET'S SAY GOOD B WE PRODUCE -- WELL, LET'S PRODUCE FIFTEEN UNITS OF GOOD B. GOOD C, LET'S PRODUCE TWENTY-FIVE UNITS. BOY, I WISH I'D DRAWN THIS ON A STRAIGHT LINE GOING ACROSS. D, LET'S MAKE THAT TWENTY-FIVE UNITS AND E, LET'S MAKE THAT TEN UNITS AGAIN. BY THE WAY, HERE'S WHAT I DID NOT DO. CAN'T DO THIS. WELL, YOU CAN DO IT BUT IT'D BE WRONG. TEN PLUS TWENTY IS THIRTY, SIXTY, EIGHTY, NINETY. I DID NOT ADD THAT UP, THOSE QUANTITIES. THESE ARE DIFFERENT THINGS. WE'VE ALL HEARD THAT WHOLE THING ABOUT YOU -- YOU KNOW, YOU CAN'T ADD APPLES TO ORANGES. AND THAT'S WHAT THAT WOULD BE, IS ADDING THAT UP. DON'T DO THAT. WE HAD TO PUT A MARKET VALUE ON IT. ECO 155 750 LECTURE EIGHTEEN 30 DOMESTIC PRODUCT ACCOUNTS. AND THEY HAVE GROSS DOMESTIC PRODUCT FIGURES, BOTH FOR RIGHT NOW AND THEN GOING BACK FOR MANY YEARS IN THE PAST. AND IT ALSO HAS THE GROSS DOMESTIC PRODUCT NUMBERS BROKEN DOWN BY SMALLER CATEGORY -- CONSUMPTION, INVESTMENT, AND GOVERNMENT SPENDING AND NET EXPORTS, AND SO FORTH. SO THAT'S SOMETHING THAT I'LL MENTION THAT YOU MAY WANT TO LOOK AT EVERY ONCE IN AWHILE. ALL THREE OF THESE ARE MONTHLY MAGAZINES. THE SURVEY OF CURRENT BUSINESS, THE PAGE I JUST OPENED HERE, IT'S GOT GROSS STATE PRODUCTS. SO IT ALSO SHOWS THE CONTRIBUTION OF INDIVIDUAL STATES OR EACH STATE TO THE TOTAL. LET'S SEE IF I CAN SEE THIS NUMBER HERE. MISSOURI'S GROSS STATE PRODUCT -- THE TOTAL FOR THE UNITED STATES, ABOUT SEVEN POINT SIX TRILLION DOLLARS. THAT'D BE GROSS DOMESTIC PRODUCT. BUT THEN FOR MISSOURI, A HUNDRED AND FORTY -- WHAT'S IT SAY -- FIVE BILLION DOLLARS. SO IN GENERAL -- AND THIS IS JUST KIND OF A RULE OF THUMB YOU MAY WANT TO REMEMBER -- MISSOURI IS ABOUT AVERAGE IN TERMS OF THE SIZE OF ITS ECONOMY. AND SO AVERAGE WOULD BE -- SINCE WE HAVE FIFTY STATES, THE AVERAGE STATE WOULD ACCOUNT FOR ABOUT TWO PERCENT OF GDP. AND SO MISSOURI'S GROSS STATE PRODUCT ACCOUNTS FOR ABOUT TWO PERCENT OF THE NATION'S GROSS DOMESTIC PRODUCT. SO ANYWAY, THAT'S WHAT I'M TELLING YOU. ECO 155 750 LECTURE EIGHTEEN 31 CPI DETAILED REPORT. YOU PROBABLY HEARD ME A COUPLE OF DAYS AGO THERE GO THROUGH AND TALK ABOUT ALL THESE DIFFERENT VARIETIES OF MEAT -- GROUND CHUCK, GROUND BEEF, CHUCK ROAST AND, WHAT, ROUND ROAST, RIB ROAST, STEAK T-BONE, AND SO FORTH. IT CERTAINLY HAS THE ENTIRE MARKET BASKET IN HERE AND SHOWS THE PRICES OVER THE YEARS. THE SECOND THING I SEE HERE IS, WHAT, THE HISTORICAL CONSUMER PRICE INDEX. IT SHOWS -- THIS GOES FROM 1960 UP UNTIL THE PRESENT, AND THEN IT JUST SHOWS IT MONTH BY MONTH. LET'S SEE WHAT ELSE I HAVE MARKED HERE. THIS IS JUST A -- WHAT I'M LOOKING AT RIGHT NOW, IT SHOWS CONSUMER PRICE INDEX FOR A PARTICULAR MONTH AND THEN JUST SHOWS THE MAJOR CATEGORIES OF FOOD AND BEVERAGES, HOUSING, APPAREL AND UPKEEP, TRANSPORTATION, MEDICAL CARE, ENTERTAINMENT AND SO FORTH. SO YOU SEE THE BROAD CATEGORIES OF CONSUMER PRICE INDEX. AND, OF COURSE, EACH ONE OF THOSE BROAD CATEGORIES IS BROKEN DOWN INTO MANY SMALLER CATEGORIES. THE THIRD THING I WAS GONNA MENTION IS THE MONTHLY LABOR REVIEW. THE MONTHLY LABOR REVIEW SHOWS -- GUESS WHAT -- LABOR MARKET CONDITIONS. AND I WAS MENTIONING THE OTHER DAY SOME OF THESE NUMBERS ABOUT THE CIVILIAN NONINSTITUTIONAL POPULATION AGE SIXTEEN AND OVER, A LITTLE BIT OVER TWO HUNDRED MILLION PEOPLE -- ABOUT TWO HUNDRED AND TEN MILLION -- CIVILIAN LABOR FORCE, A ECO 155 750 LECTURE EIGHTEEN 32 HUNDRED AND THIRTY-SIX MILLION, AND SO FORTH. WE WERE KIND OF TALKING ABOUT THOSE NUMBERS. THAT'S WHERE I FOUND THAT. HERE'S ANOTHER PAGE THAT SHOWS ME THE UNEMPLOYMENT, TOTAL NUMBER OF PEOPLE UNEMPLOYED AND THEN THE UNEMPLOYMENT RATE, WHAT PERCENT OF THE LABOR FORCE IS UNEMPLOYED. AND THEN WHAT I'M ALSO LOOKING AT HERE IS A TABLE THAT SAYS "UNEMPLOYMENT RATE BY SEX AND AGE." AND SO WHAT WE COULD DO IS WE COULD FIND THE UNEMPLOYMENT RATE FOR MEN, SIXTEEN AND OLDER, OR MEN, AGED SIXTEEN TO TWENTY-FOUR. AND IT BREAKS IT DOWN INTO SOME PRETTY FINE CATEGORIES. LET ME KIND OF READ A COUPLE OF NUMBERS FOR YOU HERE AND YOU CAN DO A COMPARISON. THE UNEMPLOYMENT RATE OF ALL MEN, SIXTEEN AND OLDER -- THIS WAS BACK IN 1997, SO THAT'S AN OLD NUMBER. BUT MEN, SIXTEEN AND OLDER, IT WAS FOUR POINT NINE PERCENT. NOW, THAT'S BASICALLY ALL MEN. LET'S LOOK AT THE UNEMPLOYMENT RATE FOR MEN, SIXTEEN TO SEVENTEEN YEARS OLD. IT'S NINETEEN POINT ONE PERCENT, SAME YEAR. SO THE UNEMPLOYMENT RATE IS ALMOST FOUR TIMES AS HIGH FOR MEN, SIXTEEN AND SEVENTEEN YEARS OLD, AS IT IS FOR ALL MEN. AND SO TEENAGERS HAVE A DIFFICULT TIME FINDING WORK, IT SEEMS, SINCE THE UNEMPLOYMENT RATE IS HIGH. WHY IS THAT? AND THE ANSWER IS, WE HAVE A MINIMUM WAGE AND WE TALKED ABOUT THAT IN CLASS. TEENAGERS, SIXTEEN AND SEVENTEEN YEARS OLD, THEY'RE UNSKILLED