chapter 12 gross domestic product and growth how can we measure economic growth? gross domestic...

Chapter 12

Gross Domestic Product and Growth

How Can We Measure Economic Growth?

• Gross Domestic Product (GDP) – dollar value of all goods and services produced in the country’s borders in a year–Dollar Value is the final selling

price to consumers

Calculating GDP

• Includes cars built in America by a Japanese company

• Does not include cars built in Japan by an American company

Calculating GDP

• Includes cars that are sold to consumers (the final good)

• Does not include rubber, glass, or steel bought by the automaker (intermediate good used to make the final good)– Prevents double counting; the cost

of inputs is already in the price

Two Approaches to Calculating GDP

• The Expenditure Approach

– add together final value of all goods and services

Formula for Expenditure Approach

• C + I + G + NX = GDP

– C is Consumer spending

– I is Business investments

– G is Government spending

– NX is Net Exports

– U.S. current GDP = $13.8 Trillion (#1 in the World)

Two Approaches to Calculating GDP • Income Approach –

add all people’s annual income together– Easier, since IRS

already does this

Nominal vs. Real GDP

• Just because GDP is higher, it does not mean the economy is necessarily better

Nominal GDP

• Nominal means “by name only”

• GDP is usually calculated by using current prices for either expenditure or income approach

• Problem: Inflation would cause GDP to rise, which would indicate economic growth falsely

Real GDP

• Real GDP compares current production to past production using constant prices

Per Capita GDP

• Measures economic output per person (per capita always means per person)

• Shows how changes in GDP are affecting the average person in an economy

Typical High School Boy Questions? This is stupid.

Why do we have to learn

this?

What GDP does not Measure

• Nonmarket Activities–Bartering–Doing Favors

for people–Producing

your own goods

What GDP does not Measure

• Underground Economy–Black markets

–Drug dealing

–Gambling

Cookie Monster want $2Gs on

Cookie!

What GDP does not Measure

• Negative Externalities–Pollution

–Disease

Cookie Monster have Type 2

Diabetes.

What GDP does not Measure

• Quality of Life–Personal

safety

–Leisure time

Other Economic Statistics to Watch• Rate of Inflation

– Measured by the Consumer Price Index (CPI)• Takes a “market basket” of commonly bought

goods, measures changes in price of the market basket from month to month

• Rising CPI = Inflation• Unemployment Rate

– Poll taken by U.S. Bureau of Labor Statistics– Measures what % of people are looking for work

and are not currently employed

GDP, Supply and Demand

• GDP and Price Levels in macroeconomics are graphed similarly to Quantity and Price in microeconomics

GNP

• GNP measures output of Americans, rather than output within the United States

• GDP + $ from U.S. Business overseas - $ from Foreign Business here = GNP

• Doesn’t help measure success of economy… more a measure of national economic power abroad

The Business Cycle

• In any capitalist country, the economy will go up and down as time passes

• This process looks like a roller coaster when graphed

The Business Cycle

Phases of the Business Cycle

• Expansion – real GDP is rising

• Peak – real GDP stops rising, unemployment % is low

• Contraction – falling real GDP, increasing unemployment

• Trough – lowest point, real GDP stops falling

Terms for Describing Contraction and Trough• Recession – contraction

happens for 6 straight months• Depression – no official

definition, just means extremely bad, long contraction

• Stagflation – drop in GDP plus rising inflation

Factors That Cause the Business Cycle

• Interest rates and credit fluctuations– The Fed helps to restrict these effects by

increasing and decreasing rates to slow and speed the business cycle

Factors That Cause the Business Cycle

• Consumer Expectations – they will spend if they believe times are good, they will save if they believe bad times are coming– Spending means banks have

less capital, economy will expand now but contract later

– High savings provides capital for future economic growth

Factors that Cause the Business Cycle

• Savings Rate - % of disposable (spendable) income saved by Americans–Fun Fact! – Savings Rate

generally drops in America during good economic times

–What effect does that have?

Factors That Cause the Business Cycle

• External Shocks – Negatively affect aggregate supply, thus dropping GDP while raising prices

Economic Indicators

• Things to watch to see if the economy is in contraction or expansion

– rate of new home construction

– stock market activity

– manufacturer’s new orders of capital goods