For all countries there are three major economic goals: Promote Economic Growth Limit Unemployment Keep Prices Stable (Limit Inflation) 1

How do we know how well the economy is doing? Economists collect statistics on production, income, investment, and savings. *National income accounting. The most widely used measure of growth is GDP. Gross Domestic Product (GDP) is the dollar value of all final goods and services produced within a country’s borders in one year. 3

Sum of wages, interest, rent and profit arising from production. CALCULATING GDP Expenditure Approach C+I+G+(X-M) = GDP Income Approach Sum of wages, interest, rent and profit arising from production.

Consumption Expenditure Approach 1. Purchases by consumers of goods and services. 2. Durable v. Non-Durable 3. ~ 66 - 70% of GDP 4. Spend 90-93% of DPI 5. Result of fluctuations in the economy.

In the U.S., Consumer Spending Continues Steady Climb

Investment 1. Business spending on new equipment 2. New housing 3. Inventory

Government Purchases for goods and services by all levels of government.

Net Exports (X-M) Net exports = exports-imports Net exports > 0 = trade surplus Net exports < 0 = trade deficit

Trade by the numbers… The Nation's international trade deficit in goods and services increased to $48.3 billion in August from $41.8 billion in July (revised), as exports decreased and imports increased.

What is NOT included in GDP? Intermediate Goods No Multiple Counting, Only Final Goods EX: Price of finished car, not the radio, tire, etc. 2. Nonproduction Transactions Financial Transactions (nothing produced) Ex: Stocks, bonds, Real estate Used Goods Ex: Old cars, used clothes 3. Non-Market (Illegal) Activities Ex: Illegal drugs, unpaid work

Included or not Included in GDP? For each situation, identify if it is included in GDP the identify the category C, I, G, or Xn $10.00 for movie tickets $5M Increase in defense expenditures $45 for used economics textbook Ford makes new $2M factory $20K Toyota made in Mexico $10K Profit from selling stocks $15K car made in US, sold in Canada $10K Tuition to attend college $120 Social Security payment to Bob Farmer purchases new $100K tractor

Included or not Included in GDP? $10.00 for movie tickets $5M Increase in defense expenditures X $45 for used economics textbook Ford makes new $2M factory X $20K Toyota made in Mexico X $10K Profit from selling stocks $15K car made in US, sold in Canada $10K Tuition to attend college X $120 Social Security payment to Bob Farmer purchases new $100K tractor

Compare to previous years (Is there growth?) How do you use GDP? Compare to previous years (Is there growth?) Compare policy changes (Did a new policy work?) Compare to other countries (Are we better off?)

How can you measure growth from year to year? % Change in GDP = Year 2 - Year 1 Year 1 X 100 Mordor’s GDP in 2013 was $4000 Mordor’s GDP in 2014 was $5000 What is the % Change in GDP? Transylvania’s GDP in 2013 was $2,000 Transylvania’s GDP in 2014 was $2,100 18

GDP -- the market value of the production of goods and services in the United States -- increased ______ percent, or _____ billion, between 2014 and 2015. 2014 17,348 2015 17,947

Real GDP Nominal/Deflator x 100 GDP Deflator ($ of selected goods this year) x 100 $ of selected goods in base year *Measures the average price of all goods & services in the economy.*

If real GDP is $200 billion and the deflator is 120, what is the nominal GDP? If nominal GDP is 300 billion and the deflator is 150, what is the real GDP?

What are the limitations of GDP?

Does GDP accurately measure standard of living? Real GDP per capita (per person) Real GDP per capita = Real GDP/Total Population 27

Most populated countries

GDP Per Capita