GDP, Spending, and Economic Growth

Review: GDP the market value of all final goods and services produced within a country in a given period of time. GDP = consumption + investment + government spending + (exports − imports) GDP = C + G + I + NX

GDP and the Economy The Business Cycle shows us that if GDP declines or grows too slowly, then the economy could go into recession.

Why? Because the # of workers retiring is lower than the # of workers being born. Because if producers do not continually expand, then people will not have jobs. The Unemployment Rate is tied directly to Consumer Spending. If people stop buying, companies will stop producing and people will lose their jobs. GDP shows us how much consumers are demanding.

Spending The economy grows when spending increases: Consumer Spending Business Spending (Capital Investment) Government Spending (Public Goods) Foreigners Spending on US Goods (Exports) This spending increases GDP. GDP = C+I+G+NX

Aggregate Supply is the total supply of goods and services produced by a national economy during a specific time period.

Aggregate Demand is the total demand for final goods and services in the economy during a specific time period.

Fiscal Policy

Fiscal Policy tools that governments have at their disposal to manage the economy. Tools Include: Taxing Spending

Taxing The government can increase taxes to slow down the economy. The government can decrease taxes to stimulate the economy and create economic growth. How does it work? An increase in taxes will reduce consumer spending. A decrease in taxes will increase consumer spending.

Spending If the government increases spending, then GDP will increase and companies will hire new workers. If the government decreases spending, then GDP will decrease and companies will slow down hiring new workers.

Using Fiscal Policy If the economy is in recession, then Keynesian economics states the gov’t should: Increase spending Cut/Decrease Taxes If the economy has high inflation, then Keynesian economics states the gov’t should: Decrease spending Raise/Increase Taxes

Be able to answer: How should the government respond to an increase in the unemployment rate? How should the government respond to a decline in GDP? How should the government respond to a strong increase in the CPI? What should the government do during a recession? Or if there is an increase in inflation?

Questions?