Eco 101, Davis, Handout 12, page 1

Handout Intro to Macroeconomics

I. Gross Domestic Product: “Market value of all final goods and services produced within a
country in a year.”
a. What’s not included:
1. Intermediate goods:
2. Second-hand goods:
3. Household Production:
4. Underground Economy:

II. Measuring GDP:

a. Components of National Spending
Definition Component Description US GDP
Personal Consumption C HH spending on durables, $8.22 trillion
Expenditure non-durables and services
Not: Residential Housing 70% of GDP
Gross Private I Capital Goods, Structures, 1.9 trillion
Domestic Investment Changes in Inventories,
Housing 16% of GDP
Not: Sales of existing
capital, stocks, bonds
Government G State, Federal and Local 2.2 trillion
Expenditures Government. Includes
government consumption 19% of GDP
(public services) and
investment in social capital
(bridges, roads)
Not: Transfer payments:
welfare, social security, etc.
Net Exports NX = (X – M) Exports less Imports - .600 trillion
- 5 % of GDP
National Income Y Y = C + I + G + NX $11.7 trillion

b. Components of National Income:

c. Income = Expenditure:
 Eco 101, Davis, Handout 12, page 2

III. Real vs. Nominal GDP

a. Nominal GDP = output measured at current prices
Year Q Fries P Fries Q Burger P Burger Nominal GDP Real GDP $2000
2000 100 $1.00 100 $4.00
2001 100 $1.50 100 $5.00
2002 120 $1.50 120 $5.00
b. Real GDP = output measured at constant prices

IV. Real per capita income and Material Wellbeing

a. Critique:
1. What’s Counted:
2. What’s Omitted:
b. But: Strongly correlated with good social outcomes (see graphs last page)

V. Economic Growth
Definition: Annual % change in real per capita gdp
Rule of 72: doubling time = 72/growth rate

Country Name Income 1960 growth rate (%) Income 1999 Life Expectancy 1997
Korea, Rep. 904 6.12 10452 72
Bangladesh 952 1.76 1927 58
Swaziland 1248 1.92 2686 60
Taiwan, China 1256 5.81 12845 75
Malaysia 1420 4.00 7039 72
El Salvador 1427 1.12 2235 69
Jamaica 1773 0.64 2293 75
Brazil 1784 2.26 4412 67
Peru 2019 0.80 2783 69
Greece 2093 3.31 7852 78
South Africa 2191 0.88 3120 65
Hong Kong, China 2247 5.18 17845 79
Chile 2885 2.08 6634 75
Japan 2954 4.18 15740 80
Argentina 4462 0.93 6483 73
Italy 4564 2.74 13680 78
 Eco 101, Davis, Handout 12, page 3

IV. Business Cycles –

a. Definition: The rise and fall of economic activity
b. Recession: A period of declining real GDP, lower income and higher unemployment
c. Expansion: A generalized increase in output, income and business activity

V. Unemployment:
a. Labor force: 16 or older, not institutionalized, and working or looking for work.
b. Unemployment rate = unemployed/labor force
i. Under counts:
ii. Over counts:
c. Types of Unemployment:
i. Frictional – people looking for jobs or between jobs
ii. Structural – unemployment due to the mismatch of jobs and skills of workers
iii. Cyclical – unemployment due to recession
d. Full Employment and Potential GDP:
i. Full Employment: cyclical unemployment = 0
ii. Potential GDP = Output at full employment = Y* or YFE
iii. GDP Gap = Actual GDP – Potential GDP = Y – Y*
e. Unemployment Across Countries
Unemployment in OECD Countries 1991-2000
COUNTRY Average Maximum Minimum COUNTRY Average Maximum Minimum
Spain 19.4 23.9 13.9 New Zealand 7.8 10.4 6
 Eco 101, Davis, Handout 12, page 4

Finland 12.6 16.6 6.6 Denmark 7.1 10.7 4.5

Ireland 11.3 15.8 4.3 United States 5.6 7.5 4
France 11.2 12.3 9 Portugal 5.6 7.3 3.9
Italy 11.2 11.8 10 Netherlands 5.5 7 3.3
Greece 9.5 11.7 7.7 Norway 4.6 6 3.2
Canada 9.5 11.4 6.8 Austria 3.8 4.3 3.4
Australia 8.5 10.7 5.9 Iceland 3.7 5.3 2
Belgium 8.4 9.6 6.6 Korea, Rep. 3.4 7 2
Germany 8.1 9.8 5.6 Japan 3.3 4.8 2.1
United Kingdom 7.9 10.3 5.5 Switzerland 3.3 4.1 1.8
Sweden 7.8 10 3.2 Luxembourg 2.6 3.5 1.5
Data From World Development Indicators:
http://devdata.worldbank.org/dataonline/
 Eco 101, Davis, Handout 12, page 5

DAILY CALORIE INTAKE vs. LOG_Y_1990

LIFE EXPECTANCY AT AGE ZERO vs. LOG_Y_1990 4500
80
LIFE EXPECTANCY AT AGE ZERO

4000

DAILY CALORIE INTAKE

70
3500
60
3000

50
2500

40 2000

30 1500
5 6 7 8 9 10 5 6 7 8 9 10
LOG_Y_1990 LOG_Y_1990

Income and Economic Wellbeing, data from Easterly (2001) “Growth and Life”

AVERAGE SCHOOLING YEARS IN THE TOTAL POPULATION OVER AGE 25

% OF POPULATION WITH ACCESS TO SAFE WATER

% OF POPULATION WITH ACCESS TO SAFE WATER vs. LOG_Y_1990

120 AVERAGE SCHOOLING YEARS IN THE TOTAL POPULATION OVER AGE 25 vs. LOG_Y_1990
14

100 12

10
80
8

60 6

4
40
2

20 0
6 7 8 9 10
LOG_Y_1990
0
6.0 6.5 7.0 7.5 8.0 8.5 9.0 9.5 10.0
LOG_Y_1990

HUMAN RIGHTS RATING vs. LOG_Y_1990

100
RATIOOF WOMEN'S LITERACY TOMENS (MEN =100)

90 RATIO OF WOMEN'S LITERACY TO MENS (MEN =100) vs. LOG_Y_1990

HUMAN RIGHTS RATING

110
80
100
70
90
60 80

50 70
60
40
50
30
40
20 30

10 20
5.5 6.0 6.5 7.0 7.5 8.0 8.5 9.0 9.5
6 7 8 9 10
LOG_Y_1990
LOG_Y_1990