Unit 12
The Wealth of the Nation
Class preparation
Pre-read chapter 12. Bring your book to class and be prepared for a discussion of GDP and foreign trade.
Review these GDP and GDP-per-capita stats before class:
Pre-read chapter 12. Bring your book to class and be prepared for a discussion of GDP and foreign trade.
Review these GDP and GDP-per-capita stats before class:
- https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)
- https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)_per_capita
Lecture summary
Microeconomics is the study of how individuals and firms make decisions and how they interact with one another in the markets.
Macroeconomics is the study of the economy as a whole. Since government plays a large role in the economy, macroeconomics spends a lot of time discussing government policies.
Macroeconomics asks these questions....
Microeconomics is the study of how individuals and firms make decisions and how they interact with one another in the markets.
Macroeconomics is the study of the economy as a whole. Since government plays a large role in the economy, macroeconomics spends a lot of time discussing government policies.
Macroeconomics asks these questions....
- Why is the standard of living high in some countries and low in others?
- Why do prices rise rapidly (inflation) in some time periods while not in others?
- Why do production and employment expand in some years and contract in others?
Below: The Circular Flow Model is a common way to depict the whole economy.
Gross Domestic Product (GDP) is the most common measure of the nation's economic output.
GDP = the total dollar value of...
GDP (Y) has four basic components
Therefore we say, Y = C + I + G + NX
GDP does not account for
GDP = the total dollar value of...
- all final goods & services (intermediates are not counted, e.g. circuit boards that will be ultimately sold as a computer)
- produced (mere transfers are not counted, e.g. stocks & bonds, social security, welfare, etc)
- in a given year
- within the nation's borders
GDP (Y) has four basic components
- Household spending or "consumption" (C) - cars, furniture, refrigerators, gasoline, doctor visits, school tuition, etc.
- Business investment (I) - factories, machines, tools, buildings and houses, build-up of inventory, etc.
- Government spending (G) - government buildings, salaries, highway construction, court system.... all the expenditures of local, state, and federal government. But doesn't include transfer payments, because a simple transfer of money doesn't produce any goods & services.
- Net exports (NX) = items exported - items imported
Therefore we say, Y = C + I + G + NX
GDP does not account for
- Household production
- Underground economy
- Economic bads (harmful side effects)
- Quality improvements (modern car vs. a 1970's car)
- Introduction of new & improved goods (PC vs. typewriter)
Inflation:
"Nominal GDP" does not adjust for inflation. Using nominal GDP is fine if you're looking at the current year and a couple years' back. However, if you're comparing nominal GDP from say, 1960 to the present, you'd better use "Real GDP" which values things at constant prices. Real GDP is adjusted for inflation, in other words. You don't want to count "inflation" in a historic comparison of GDP..... this would falsely exaggerate any growth in GDP.
The classic hyperinflation example is Germany in the early 1920's. Do a search on "Weimar Republic hyperinflation" to learn more about it.
A more modern example is Zimbabwe in the 2000's which had it's entire economy ruined by the Communist dictator, Robert Mugabe, who stole the farmers' land and attempted to set up a Marxist Utopia. This is worth studying...
Lesson: printing excessive amounts of paper money to hide your ineptitude is not a good way to run a government. People are harmed.
"Nominal GDP" does not adjust for inflation. Using nominal GDP is fine if you're looking at the current year and a couple years' back. However, if you're comparing nominal GDP from say, 1960 to the present, you'd better use "Real GDP" which values things at constant prices. Real GDP is adjusted for inflation, in other words. You don't want to count "inflation" in a historic comparison of GDP..... this would falsely exaggerate any growth in GDP.
- 'Nominal' GDP is reported in current dollars
- 'Real' GDP is a way of correcting for inflation
- Real GDP = Nominal GDP x (Deflator base period/Deflator current period)
The classic hyperinflation example is Germany in the early 1920's. Do a search on "Weimar Republic hyperinflation" to learn more about it.
A more modern example is Zimbabwe in the 2000's which had it's entire economy ruined by the Communist dictator, Robert Mugabe, who stole the farmers' land and attempted to set up a Marxist Utopia. This is worth studying...
Lesson: printing excessive amounts of paper money to hide your ineptitude is not a good way to run a government. People are harmed.
Foreign Trade:
The U.S. has a large "trade deficit". This means imports outweigh exports.
Reasons for trade deficits:
Protectionism vs. Free Trade
The U.S. has a large "trade deficit". This means imports outweigh exports.
Reasons for trade deficits:
- Unfair trade agreements
- Lower foreign wages
- Less-burdensome foreign regulations
- Foreign government subsidies
- Cheaper foreign materials
- Buyers prefer foreign-made goods
Protectionism vs. Free Trade
- This is an ongoing debate, worthy of your study!
- The current debate in the U.S. centers around "Fair Trade" vs. Global Trade Agreements involving numerous countries.
- There is a feeling that big, sweeping Global Trade Agreements don't benefit the United States or protect U.S. sovereignty. We will talk about this in class.
- Classically, Economists believe free trade between nations benefits consumers.
Activity
Classroom experiment: “Decision Making in a Corporation”.
Now that you have launched and financed a for-profit corporation, you have some important decisions to make as a Board of Directors. What will you do with your profits? – pay dividends, pay down your bank loans, or plough-back earnings into the business for expansion. You also need to figure out your income tax due! Finally, you must decide how much, if any, to renovate your properties to increase revenue!
Refer to your class emails for homework due dates below:
Homework 1
Wealth of the Nations homework questions
Classroom experiment: “Decision Making in a Corporation”.
Now that you have launched and financed a for-profit corporation, you have some important decisions to make as a Board of Directors. What will you do with your profits? – pay dividends, pay down your bank loans, or plough-back earnings into the business for expansion. You also need to figure out your income tax due! Finally, you must decide how much, if any, to renovate your properties to increase revenue!
Refer to your class emails for homework due dates below:
Homework 1
Wealth of the Nations homework questions
| 12._wealth_of_the_nation_homework_questions1.docx |
Homework 2
Cost of College research assignment
Cost of College research assignment
| 12._cost_of_college_assignment.docx |