Standard SSEMA1- Students will explain how economic activity is measured SSEMA1b – Define GDP, economic growth, unemployment, CPI, inflation, stagflation, AS and AD.

Think about it… When you go to the doctor, how do they measure your health? Why is it important to do all these measures? What does it show them? Why might it be important to measure a nation’s economic health?

Macroeconomics A look at the operation of a nation’s economy as a whole Aggregate = “whole” Macroeconomics uses analysis to measure the health of a nation’s economy.

Why do we measure? It is important to see if our economy is growing (expansion) or getting sick (recession) Economic growth occurs when the nation’s output of goods and services increases over time

Economic Health Economists have several measures they use to determine economic health. 1. GDP and Real GDP 2. Unemployment 3. Consumer Price Index (CPI) 4. Inflation 5. Aggregate supply and demand

How we measure the health of our economy

GDP Measures: “The total market value of all final goods and services produced within a nation’s borders during a one year period.” ** You must memorize this definition! ** YOU WILL HAVE A QUIZ ON THIS NEXT CLASS

GDP – “The total market value of all final goods and services produced within a nation’s borders during a one year period.” Market Value – GDP uses the market price of goods and services Issue: Many purchases often buy at discounted prices Issue: GDP is often “over stated” or valued too high

GDP – “The total market value of all final goods and services produced within a nation’s borders during a one year period.” Final goods and services – A good or service purchased directly by the final consumer is part of GDP. Intermediate goods – materials (g&s) purchased by a business that become part of making the final good or service.

GDP – “The total market value of all final goods and services produced within a nation’s borders during a one year period.” Produced within a nation’s borders – only final goods made in the USA are part of our nation’s GDP. Example 1: Kia’s made in Georgia are part of our GDP Example 2: iPhones made in China are not a part of our GDP.

GDP – “The total market value of all final goods and services produced within a nation’s borders during a one year period.” During a one year period – Any good produced in the USA between January 1 st 12:00 a.m. – December 31 st 11:59 p.m. are calculated in the years GDP

Two ways to measure GDP Nominal GDP – measured in current prices Real GDP – adjusted in take out the affects of inflation (price changes over time).

Parts of the GDP Memorize these components!

Parts of the GDP Consumption – Durable goods – products that are expected to last a long time. (eg – washing machine, television, etc.) Non-durable goods – products with a shorter shelf life (food, clothing, etc.) Services – doing work for someone else (lawn care, hair cuts, etc.)

Parts of the GDP Investment – Business Investment –purchases of capital. (eg office furniture, machines, etc.) Residential Construction - The actual construction purchases of housing, not the sale of homes. Changes in inventories - Goods held in storage in anticipation of later sales.

Parts of the GDP Government Spending – Government purchases of goods and services Examples: stealth bombers, government- funded research, space shuttles, salaries, and toasters.

Parts of the GDP Net Exports - The difference between exports of goods and services and imports of goods and services. Exports are produced in this country and purchased by foreigners Imports are produced abroad and are purchased by persons in this country.

NOT included in GDP GDP does not include Transfer Payments Non-market or Illegal transactions Purely financial transactions

Economic Growth Achieved through an increase in real GDP compared to a prior period Example: Growth in December 2014 compared to December 2013 “Real” GDP is adjusted for inflation Economics growth is shown by an outward shift of the PPC. New technology New resources

Calculating GDP Two approaches: Income Approach Transactions in the factor market (rent, wages/salaries, interest to borrow money, purchases of FOP’s) Changes shift the aggregate supply curve Expenditure Approach Transactions in the product market (household purchases, business & government spending on final g & s) Changes shift the aggregate demand curve

Calculating Economic Growth (Real GDP in Year 2 – Real GDP in Year 1) * 100 Real GDP in year 1 Example: Year 1 GDP = $15.03 trillion Year 2 GDP = $15.29 trillion ($ $15.03) * 100 $15.03

Is GDP the best measure?