Current Events:
According to the Calendar, the Make-Up Test is today as well as the Ch. 6 True/False Quiz, since we had to re-schedule from Friday.
Put your name on the Quiz and the Scantron. If you finish the Quiz early just cover up your work; you may take out material to read or study while you are waiting.
We will pick up where we left off: Ch. 15, Introduction to Macroeconomics, PowerPoint presentation and Handout Ch. 15 questions.
Chapter Overview
As an introduction to macroeconomics, this chapter begins with an overview of macroeconomics, discussing its origins and presenting material on the business cycle. The National Income and Product Accounts are then covered, as well as the two approaches to measuring GDP and the connection between GDP and the standard of living. The chapter concludes with a section on the work of Joseph Schumpeter and creative destruction.
Chapter Outline
Gross Domestic Product
Real GDP
The difference between GDP (Gross Domestic Product) and GNP (Gross National Product)
Dr. Richard Ebeling, Clemson capitalism, answers a student question about GDP and its usefulness as a measure of economic health.
How To Calculate GDP
Cf. http://www.informedtrades.com/ A lesson on what traders of the stock, futures, and forex markets look for when the Gross Domestic Product (GDP) Number is released: http://www.informedtrades.com/
A lesson on what traders of the stock, futures, and forex (foreign exchange) markets look for when the Gross Domestic Product (GDP) Number is released.
There are many components of the US Economy which can affect overall economic growth and inflation expectations. Some of the major examples here are how many people are employed in the economy vs. unemployed, how much the housing market is growing in different parts of the country, and at what rate the prices for different products in the economy are seeing increases.
As all of these things are so important to the economy and therefore to the markets, there are no shortage of economic reports which are released to try and help people gauge how things are going with different pieces of the economy. It is important for us as traders to understand the major reports here as even if we are trading off of technicals, understanding what is happening in the market from a fundamental standpoint can help establish a longer term bias for trading. In the short term an understanding of these numbers will also help to assess the erratic and sometimes extreme movements which can occur after economic releases.
The granddaddy of all economic reports is the release of the Gross Domestic Product (GDP) number for the economy. The Gross Domestic Product for the US or any other country is the final value of all the goods and services produced in that economy. Essentially what you get after calculating GDP by adding up the value of all goods and services produced in the economy is a measure of the size of the overall economy. It is for this reason that market participants will watch the GDP number closely as the rate of growth in this number represents the rate of growth in the overall economy.
As a side note here, GDP also allows a comparison to be made of the sizes of different economies from around the world, as well as their growth rates. To give you an idea of just how large the US Economy is, 2007 GDP for the United States was estimated at 13.7 Trillion dollars. This is in comparison to the next largest economy in the world, Japan which has a GDP of under 5 Trillion Dollars.
Quarterly estimates of GDP are released each month with Advance Estimates which are incomplete and subject to further revision being released near the end of the first month after the end of the quarter being reported. In the second month after the end of the quarter being reported preliminary numbers (which basically means more accurate than advanced) normally are released and then finally the final GDP number is released at the end of the 3rd month after the end of the quarter being reported on.
Traders are going to focus heavily on the growth rate released in the Advanced number and markets will also move on any significant revisions made in the preliminary and final GDP numbers.
The Expenditures Approach to Calculating GDP
Personal Consumption Expenditures
Gross Private Domestic Investment
Government Purchases
Net Exports of Goods and Services
Summing Aggregate Expenditures
The Income Approach to Calculating GDP
Compensation of Employees
Proprietor’s Income
Rental Income
Corporate Profits
Net Interest
Taxes, Foreign Income, and Miscellaneous Adjustments
National Income
From National Income to GDP
Net Domestic Product
Personal Income and Disposable Personal Income
GDP and Our Standard of Living
Checkpoint: National Income Accounting
Technology and Schumpeter’s Creative Destruction
We can review:
Chapter Checkpoints
The Scope of Macroeconomics
Question: Do you think the business cycle has a bigger impact on automobile and
capital goods manufacturers or grocery stores? Why or why not?
National Income Accounting
Question: People have individual senses of how the macroeconomy is doing. Is it a
mistake to extrapolate from one’s own experience what may be happening in the
aggregate? How might individual experiences lead one astray in thinking about the
macroeconomy? How might it help?
Extended Examples in the Chapter
Technology and Schumpeter’s Creative Destruction
Were computer technology and the Internet a Schumpeter innovation wave or not?
Schumpeter focused on the power of major innovations to form waves of growth
throughout the macroeconomy. So the real question is whether or not the change in
technology affected most parts of the economy in a very significant way (some definitions of creative destruction use the term “transformation” in its description). The background information provided by Wikipedia also relates creative destruction to layoffs (Cf. Creative destruction).
Examples Used in the End-of-Chapter Questions
Questions 3 and 6 reference the National Income and Product Accounts (NIPA).
Visit the Web site at BEA National Economic Accounts to view the latest press release on GDP. Links to other data are also available.
For Further Analysis
How Can You Tell if It’s a Recession?
The example in the student handout will be used as a small group exercise. It is designed to complement the text’s material on the business cycle and also to provide a lead-in to the measurements of inflation and employment that will be covered in the next chapter. It requires students to find and begin to assess actual data on the economy.
Web-Based Exercise
This example below can be used as an individual or small group research project. It requires students to evaluate “well-being” in terms of GDP and other criteria.
Can GDP Buy You Happiness?
About 35 years ago, the king of Bhutan decided that the well-being of his country
was not best measured by its GDP, but rather by something he called its “Gross
National Happiness.”
1) Learn more about GHI and compare it to GDP.
2) Assess both as measures of “well-being.” To do so, define your own criteria
for well-being. You may agree or disagree with what is included in these
measures and add your own indicators if you wish. In all cases provide a
rationale for your choices.
A very useful source is the article by Andrew C. Revkin in The New York
Times (October 4, 2005) titled “A New Measure of Well-Being from a Happy
Little Kingdom,” available on the Web at: "A New Measure of Well-Being From a Happy Little Kingdom. Cf. http://www.nytimes.com/2005/10/
04/science/04happ.html?ei=5088&en=a4c0250cf8730dca&ex=
1286078400&partner=rssnyt&emc=rss&pagewanted=all
How Can You Tell if It’s a Recession?
Visit the Web site of the National Bureau of Economic Research (NBER) (Cf. http://www.nber.org/) to
answer the following:
1) Does the NBER define a recession as two successive quarters in which there is negative growth in GDP? Why or why not?
2) What problem does the NBER face in using data from the Bureau of Economic Analysis of the U.S. Department of Commerce?
3) Besides GDP, what other important economic data does the NBER review for its reports?
Outlining briefly the people and discoveries relating to economic cycles. Beginning with Sir William Herschel who around 1800 found a connection between the Sunspot cycle and wheat prices, mention is made of Clement Juglar 1860s, William Stanley Jevons 1870s, The Rothschild family 1890s and Rockerfeller family, W D Gann 1900s, Joseph Kitchin 1920, Kondratief (who I accidentally left out of this video) and his 54 year cycle in the 1920s, Alexander Chizhevsky and Raymond Wheeler around the 1930s being interisciplinary cycles researchers, R N Elliott, Joseph Schumpeter and Simon Kuznets (later to receive a Nobel Prize) and the formation of the Foundation for the Study of Cycles by Edward R Dewey and others in 1942. The age of computers arrived in cycles research with J M Hurst about 1970.
For more information about cycles research:
http://www.cyclesresearchinstitute.org/
http://foundationforthestudyofcycles....
http://ray.tomes.biz/
There is an interdisciplinary cycles discussion forum open to all people to search and read, and people can join to participate, at http://tech.groups.yahoo.com/group/cy...
For more on the history of economic cycles:
http://www.datacomm.ch/dbesomi/Links/...
http://www.timesizing.com/1kondrat.htm
1. Technology and Schumpeter’s Creative Destruction
Were computer technology and the Internet a Schumpeter innovation wave or not? Schumpeter focused on the power of major innovations to form waves of growth throughout the macroeconomy. So the real question is whether or not the change in technology affected most parts of the economy in a very significant way (some definitions of creative destruction use the term “transformation” in its description). The background information provided by Wikipedia also relates creative destruction to layoffs (Cf. Creative destruction.)
