This is my Econ HW. More specifically, Econ 104. This is a macroeconomics class. The homework is about GDP

The attachments below is the homework with data and questions and reading material in order to have better understanding of GDP.

\fWhat is Gross Don'reslic Product [GDP]? GDP can be dened as the total value of M and services produced i_n an economy during a given mood of time. The undertine words are tenns that we will discuss in greater detail below. - Total value: we use the price at which the item or service was sold as its value. - Count only the value of goods and services PRODUCED during the specied time period- We do not count the value of good and services purchased, only the value of goods and services produced when they are produced! - Goods and services: Not just items produm but also services {for example health care, baby sitting, banking, consulting, any activity which we pay people to do for us} - In: count only those items or services physically produced in the economy even those produced by foreign companies. - Do not count 'rtems produced by domestic companies in other economies. - An economy can be a counliy, a state, a county, a city, or any other geographically designated area. - We must specify a length of me. Are we measuring the value of goods and services produced in a month, a year, or some other time frame? We must specify a time period. - Gustomality, in the U.S., GDP is measured quarterly but reported at an annual rate- In other words, we measure the value of goods and services produced in a lmonth period {a quarter}, seasonally adjust it {more on that later}, and mutliple by tour so that we have the value of goods and services produced in a year if the level of economic activity remains the same. Seasonal adjustment of the data Before multiplying the quarterly output by four to get an annual rate, we rst adjust the quartelty gure by muttiptying it be a seasonal factor. Over the years, we observe that there are periods of time during the year when there tends to be more economic activity that other time periods- The summer months tend to see more production because of a larger volume of tourism and leisure activities. The winter months latter the holiday season] tend to have less economic activity. Fewer people are taking vacations. In many areas, construction is sharply reduced because of the cold temperatures and snow. Thus, the value of goods and services produced in the rst quarter of the year (January, February, March), for example needs to be mutliplied by a season factorr that is greater than one, thereby causing the seasonally adjusted gdp of the rst quarter to be greater than the nonseasonally adjusted data. Why do we seasonalty adjust the data. Suppose we observed that GDP increased any; in the 2nd quarter of the year versus the rst quarter of the year. We might conclude that the economy is growing and there are no reasons to be concemed about the economy. However, what if, on average, we observe that the second quarter of the year typically sees growth of soot. over the rst quarter. Then, in reality, the 311% growth we observed may actually be an intcator that the economy is slewing down and its health is deteriorating. For a good explanation of why the data is seasonalty adjusted read htt :ttwwiiybea. yffa iridexcfm id2123. JEEHEEJEJEEQEEEEEISEEE Let us start with an example- All production activities for an economy are listed below. Using this information calculate the total value of output produced in this economy. - Miners extract $3 million worth of iron ore from underground mines each year. All of the iron ore is sold to the steel mills. - The steel mills produce $5 million worth of steel each year. All of the steel is sold to the automobile manufacturers. - Rubber plantations harvest $2 million worth of rubber each year. All of the rubber is sold to tire manufacturers. - Tire manufacturers produce 53 million worth of tires each year All of the tires are sold to the automobile manufacturers. - Glass factories produce 31 million worth of automobile windshields each year All of the windshields are sold to the automobile manufacturers. - The automobile manufacturers produce $12 million worth of automobiles each year ' WHAT IS YOUR ANSWER FOR TOTAL GDP? If you are like most perm-l9, you pnltiably answered $26 million which we get by adding up the value of each of the goods produced- I Iron ore = $3 million plus Steel 2 $5 million plus Rubber = $2 million plus Tires 2 $3 million plus Glass 2 $1 million plus Automobiles = $12 million equals Total GDP 2 $26 million! Is this correct? Let us do another example. All production activities for an economy are listed below. Using this infonnaon calculate the total value of output produced in this economy. Automobile manufacturers produce $12 million worth of automobiles each year using steel from the steel mills, tires from the tire manufacturers, and windshields from the glass factories. Miners extracted iron ore that was sold to the steel mills and rubber plantations supplied rubber to the tire manufacturers. In this example, you would probably guess that GDP is only $12 million... and ifyou did you would be correct Why was $25 million incorrect? When we did the rst exercise we ended up double and even hiple counting ttre value of some of the goods and services produced. For example, the value of ttre iron are produced was $3 million. The iron ore was used to make steel, which had a value of $5 million. However, $3 million of the $5 million of the value of steel was the value of the iron ore used to make steel. Same scenario with the value of rubber which also impacts the value of the tires. Same story with the glass which impacts the value of the windshields. Gn top of this, we again count the value of iron ore, steel, rubber, res, glass, and windshields when we include the value of the automobiles. So, how can we measure GDP without counting the value of some goods and services more than once? There are three methods we can use: - 'v'alue Added Method we will countthe value of the good or service produced but subtract otf the value of the inputs needed to produce that good or service. - Final Goods Method we will only measure the value of nal goods and services. We will dene what nal goods are later. - Income Method We can add up all inctxnes {sort of]. 1ttalue Added Method Here we will tclce the value of all goods and services produced by subtract off from the goods or service value the value of its inputs. What inputs do we subtract? We will subtract the value of only nmlabor inputs that are used up in producing that good. Do not subtract the value of labor used to produce the good or service. Also, do not subtract o the value of any of the stmctures, equipment; machinery, ttxrrls, etc. that are used to produce the goods and services because those items are net used up in producing the goods and services. For exa'rrple, a pizzeria produces pizza. If we want to nd the value of the pizza, we need to subtract the value of the ingredients used to produce the pizza {items like cheese, dough, pepperoni, etc.) but not the value of the pizza ovens. the restaurant, the storage shelves, refrigerators, etc. Turning to our example. we can compute GDP using value added. For each good. take the value of the output minus value or the purchased inputs. - Iron ore: $3 million output - U = $3 million. - Steel: $5 million - $3 million [the iron ore] = $2 million. - Rubber: 52 million - $0 = $2 million. - Tires: 33 million - $2 million {rubber} = $1 million. - Glass: 51 million - [l = $1 million. - Automobiles: $12 million - 55 million {steel} - $3 million {tires} - $1 million {glass} = $3 million. - TOTAL . $12 million. Final Goods oured I lntemtadiate Goods are goods that are used up in the production oi other goods and services. For example. dteese is used up in the production of pizza, so cheese is an intermediate good. I- A nal good is a good that is not used up in producing other goods and services. to One form oi nal goods are capital goods. Capital goods are goods sold to producers that are used in the process of producing goods and services but are not used up in the process. An example is a delivery vehicle. The vehicle is used to deliver pizzas. for example. but it can be used manyr times to make deliveries. It is not part of the pizza. Capital goods include vehicles, machines, equipment, tools, computers, livestock, barns, silos, ofce buildings, factories. etc. o Purchases oi capital goods is known as investment! I In our exanmle, the only nal goods were the automobiles. Everything else was used up in making the automobiles. Thus, GDP = $12 millionr the value of the automobiles. a Note that some goods oould be both intermediate and nal goods. For example, suppose $8 million worth of automobiles were sold to consumers and the other 54 million to rental car companies who use the vehicles to provide car rental services. In this case. $3 million worth of automobiles are nal goods but the other $4 million are inten'rrediate goods. Expenditure Approach A subset of the nal goods method is the expenditure approach to counting GDP. In the Expenditure Approach we still count only the value of nal goods and services but we \fIncome Method EVERY PENN'Ir PAID TO PURCHASE GOODS AND SERVICES MUST BE SOMEONE'S INCOME OR INDIRECT TAXES PAID TO 11-IE GOVERNMENT!!! - 'vVages to pay workers- - Prots for the producers of the goods. - Rental payments to owners of buildings- - Interest or dividend payments to those providing funding for the business. - Royalty payments to owners of patents and copyrights. Indirect taxes are taxes that are charged as a percentage of the price of a good. Thus, sales and excise taxes are indirect taxes. Income taxes are Direct taxes. Thus1 GDP equals the sum of everyone's income plus indirect taxes. Disposable Income The term disposable income refers to income + transfer payments received tax paid. Some shortcomings Related to the Measurement of GDP - Does not subtract olfvalue of beds, i.e. goods that people would pay to avoid, like pollution and came. In fact, paying to avoid bads boosts GDP but the existence of bads means a diminished quality of life. - Tough to measure accurately because of unreported transactions. - Tells us nothing about the distribution of income. Measuring the Health of the Eoonor_n1 usir_rg GDP GDP by itself is not a very meaningful number and tells us littie about the health of the economy. A GDP of $8 billion may seem very good but ifthe population of the country is 1 billion people, the average GDP per person is only $8,000. The population of that economy couid be quite poor. Thus, the more meaningful measures of the economy related to GDP are: - GDP per capita or GDP divided by the population. This gure is essential equal to average income. We can compare GDP per capita among different economies and get a sense of which economy's inhabitants enjoy a higher standard of living and which ones may be quite poor. However, this is only an average. The distribution of income may vary. Borne economy's with a high GDP per capita may have a few very very rich residents and the rest are quite poor. - GDP gap. This is the difference between actual GDP and something we call Potential GDP. Potential GDP is the level of GDP the economy can produce it it is at full employment. This will be better understood when we discuss full employment in Lesson Three. o The GDP gap is difference between Actual GDP and Potential GDP expressed as a percent of Potential GDP and is found by the equation below: teoW {WWW} o Wx'lm. o If GDP gap s D. the economy is not in good health and there will be more unemployment and less economic activity than it the economy is healthy. or If GDP gap e D, the economy is booming and unemployment is at its lowest iavels. I Growth rate of real GDP. t I II The term 'reai refers to corrected for inflation. Suppose my income increases 10% but prices also increase 10%. lm I any better off even though my income increased? He, probably not. Thus, to better compare incomes over time, we need to deate the actual level of income by the percent increase in prices during that time. We wiil see how to do that in the next lesson. For now, just lrnow that real means corrected for ination. So if my income increased 10% and prices also increased 10%, my real income remained the same. Thus, real GDP is the ievel of GDP itwe measured GDP keeping prices the same. Remember, we said that we count the value of goods and services produced using the price at which they sold. it an economy produces the exact same quantity of all goods and services as it did in the previous year but prices are 10% higher, GDP will increase 10%. That tilts increase in GDP is misleading. The level of economy activity, the amount produced, is exactly the same at the previous year. Thus, real GDP should be the same as last year. Thus, we are more interested in the growth rate of real GDP, which measures the growi rate of economic activity ignpnng any changes in GDP simply caused by higher prices.