Chapter 12

GDP

Business Cycles

Economic Growth

What were some causes of the Great Depression?

• High stock prices -Lots of speculation (buying on the margin) in the stock market because it was doing so well

• Technology improve farming and price of crops dropped

• Drought• Ordinary people went into debt for the first

time to by consumer goods & stocks• Industries had inventory surpluses

Depression Factoids

• Average wage dropped from 55 cents per hour to 5 cents per hour

• Unemployment shot to 35%• Toledo, Ohio – unemployment was 80%• Wasn’t just a U.S. depression, became

worldwide because of decrease in trade from U.S.

• Poor economic conditions in Germany led to the rise of Adolf Hitler

Until 1945….

• Stock market was the main economic indicator

• Motivated economists to devise ways of measuring and predicting economic performance

• Originally thought economy would regulate itself – Adam Smith

• Great Depression changed that

Laws were passed to prevent another Depression

• Social Security Act of 1935

• Unemployment insurance

• FDIC

• Minimum Wage

• Securities and Exchange Commission

Why do we measure the economy?

• To check-up on the economies vital signs to see if we are meeting our goals

Which measurement means the most to your life?

• Inflation

• Employment

• GDP growth

Government Goals

• Full employment

• Stable prices

• Economic growth– Bill Clinton– George Bush Sr.

How do we check our economy?

• Gross Domestic Product (GDP) – most important (since 1991)

• Monitor Prices – are they rising? – 1%, 2%, 3%, more???

• Also look at other Leading Economic Indicators which measure the financial well being of the public

• Each indicator is not accurate by itself• Look at all, get a good idea of what’s

cookin’

Leading Economic Indicators

• Average weekly hours in manufacturing

• Average weekly initial claims for state unemployment insurance

• New orders for consumer goods and materials

• Prices of 500 common stocks

• Contracts and orders for plant and equipment

More…..

• New building permits

• Vendor performances, companies reporting less deliveries

• Net change in inventories on hand/or order

• Index of consumer expectations

• Interest rate change US Treasury less federal funds

• Money supply

Most Important today…

• Gross Domestic Product – real output– The dollar value of all final goods and services

produced within a country’s borders in a given year

– Dollar value – total of the selling prices of all goods and services produced in a country in one calendar year

– Final goods and services – products in forms sold to customers

• Not those used in the production of the final good

– Better measure of American economic activity as it directly affects Americans in terms of labor, goods, and services consumption

Examples

• House constructed in 1982 – counted in 1982, not when it is resold years later

• Lumber, nails, sheet rock would not be counted in 1982 – only the final price of the house

• Real estate fees would be counted

• Cars assembles in Ohio by Toyota

• Not cars assembled in Brazil by GM

GDP Formula

• GDP = C + I + G + EX –IM– C = Personal Consumption (Household

Spending)– I = Business Investment or spending– G = Government expenditures (purchases)– EX = net export spending– IM = net import spending

(Note import spending is subtracted when calculating GDP.)

Reported three times for each fiscal quarter.

Called first, second, and third

Consumption

• Sector of the economy – Household

• Definition– Expenditures made by the household sector

on goods for personal use

• Examples– TV sets, telephones, clothes, lamps, cars

Investment

• Sector of the economy – Business

• Definition– Expenditures made by the business sector on

goods used in producing other goods; also includes business goods

• Examples– Tools, machines, factories

Government

• Sector of the economy – Government purchases

• Definition– Expenditures made by federal, state, and

local governments

• Examples– Paper, pens, tanks, planes

Exports

• Sector of the economy – Foreign

• Definition– Expenditures made by foreigners for

American-made goods

• Examples– Cars, wheat, computers

Imports

• Sector of the economy – Foreign

• Definition– Expenditures made by Americans for foreign-

made goods

• Examples– Cars, radios, computers

How can you Increase GDP?

• Increase our productivity• Get the most out of our scarce resources• Technology

Limits to GDP• Can’t measure things you do by yourself

– Lawn mowing, babysitting, cooking dinner

• Black Market Activities– Illegal drugs, weapons, stolen cars

• Trades with friends – Pokemon cards

• Externalities– Clean environment

• Does not measure quality of life– Divorce, health, crime, personal safety

GDP Per Capita

• A.K.A. – standard of living – The dollar value of all finished goods and

services available per person

• GDP/population• This is not how much a person makes in a

year• Have to look beyond the numbers – just

because the economy is doing well does not mean the society is

Business Cycles

• Methods to predict business cycles– Statistical Series

• Leading economic indicators – statistical series that turns down before the economy turns down, and turns up before the economy turns up

• LEI = composite index

– Macroeconomic Modeling• Econometric modeling – mathematical expression

used to describe how the economy is expected to perform in the future

Causes of Business Cycles

• Changes in the money supply

• Changes in business investments, residential construction, and government spending

• Politics

• Innovation

• Dramatic changes to supply

Business Cycle Terms• Peak

– Height of an economic expansion when real GDP stops rising– Marked by a booming economy, full employment, inflation

• Contraction– Period of economic decline marked by falling real GDP

• Trough – The lowest point in an economic contraction, when real GDP

stops falling

• Expansion– Period of economic growth, measured by a rise in real GDP

• Recession – Two consecutive economic quarters where GDP decreases– Human Costs – purchase less, political instability, increase

crime

Depression

– Very severe recession where there are large numbers of people out of work, acute shortages, and excess capacity in manufacturing plants

– 1929 - 1939– 1837 - 1849 - Jackson kills the bank– After WW II we have had short recession

periods and longer expansion periods

Total Net Worth

Top 1% Next 19% Bottom 80%

1983 33.8% 47.5% 18.7%

1898 37.4% 46.2% 16.4%

1992 37.2% 46.6% 16.3%

1995 38.5% 45.4% 16.1%

1998 38.1% 45.3% 16.6%

2001 33.4% 51.0% 15.5%

2008

Financial Wealth

Top 1% Next 19% Bottom 80%

1983 42.9% 48.4% 8.7%

1989 46.9% 46.5% 6.6%

1992 45.6% 46.7% 7.7%

1995 47.2% 45.9% 7.0%

1998 47.3% 43.6% 9.1%

2001 39.7% 51.5% 8.8%

2008