GDP Business Cycles Economic Growth 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 Definition Examples Household Expenditures made by the household sector on goods for personal use Examples TV sets, telephones, clothes, lamps, cars

Investment Sector of the economy Definition Examples Business 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 Definition Examples Government purchases Definition Expenditures made by federal, state, and local governments Examples Paper, pens, tanks, planes

Exports Sector of the economy Definition Examples Foreign Expenditures made by foreigners for American-made goods Examples Cars, wheat, computers

Imports Sector of the economy Definition Examples Foreign 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 GDP/population 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

GDP: types of goods Intermediate goods Durable goods Nondurable goods Goods used in production of final goods Durable goods Goods that last for a relatively long time such as refrigerators, cars, and DVD players Nondurable goods Goods that last a short period of time, such as food, light bulbs, and sneakers

Different GDP’s Nominal GDP Real GDP GDP measured in current prices GDP expressed in constant, or unchanging, prices

Not gdp….. Gross National Product Depreciation The annual income earned by U.S. owned firms and U.S. citizens Depreciation The loss of capital equipment that results form normal wear and tear

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 Contraction Trough Expansion Recession 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

Economic Growth Measuring Economic Growth We can use GDP to measure standard of living, which relates to material goods. We cannot use it, however as a complete measure of people’s quality of life.

Section 3: Economic Growth Saving and Investment Income that is not used for consumption is called saving. The proportion of disposable income that is saved is called the savings rate.

Section 3: Economic Growth Technological Progress Technological Progress is an increase in efficiency gained by producing more output without using more inputs. Causes of Technological Progress Scientific Research Innovation Scale of the Market Education and Experience Natural Resource Use

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