The Strength of the National Economy GDP The Strength of the National Economy

GDP GDP—Gross Domestic Product… The GDP is the total dollar value of all final goods and services produced within a country during one calendar year. Is used to compare the US’ economy with that of other nations… And to compare our economic strength year-to year. Per Capita GDP—the average amount produced by each citizen in a year.

US GDP in 2012: $15,090,000,000,000 Per Capita GDP: $48,112

China GDP in 2012: $7,203,784,000,000 Per Capita GDP: $8,400

Calculating the GDP Measures “final output” ONLY. Which of these would be counted in the GDP? A. A tree cut by a woodcutter who sells it to a lumber yard. B. The lumber bought by the lumber yard who then sells it to a furniture manufacturer. C. A table made by the manufacturer now sold to a couple in Detroit, Michigan.

Calculating the GDP Only products produced in the current year are measured. Which of the following was used in the calculation of the GDP in 1999? A computer manufactured in 1998 but sold in 1999. A used 1993 Toyota that was sold to Ms. Simpson in Memphis in 1999. A Ford F150 produced in 1999 but sold in 2000.

Limits of the GDP It counts produced within national borders only. Would this include or exclude Coca-Cola (a U.S. company) produced at a plant in Russia? How about a Toyota Tundra made at a factory in Kentucky?

The GDP Formula GDP= C+I +G+ (X-M) C= Consumer goods. This includes all durable goods (a lifetime of more than one year)… Non-durable goods (a lifetime of less than one year), and… Services.

GDP= C+I +G+(X-M) I= Gross Investment. This is the total value of all capital goods produced during one year. Gross investment includes: Physical capital (tools, factories, etc.)…and… Human capital (hiring workers, paying for workers to be trained, etc.)

GDP= C+I +G+(X-M) G=Government purchases. Government spending… Schools, highways, national defense, etc. X=Net Exports. Goods and services PRODUCED HERE but sold in other countries. M=Net Imports. Goods and services produced in other countries, but bought HERE.

Nominal vs.Real GDP Nominal GDP-GDP measured in current prices. Real GDP-GDP expressed in constant prices after inflation (price increases) have been removed.

Business Cycles Business cycles are fluctuations (up and down changes) in a market’s activity. These changes are measured by increases and decreases in the real GDP. These ups and downs can last a few weeks, months, or years. When was the most famous “down” cycle in American history? The Great Depression.

Phases of the Business Cycle Expansion—a period of economic growth (rising GDP)… Peak—when real GDP stops rising… Contraction—a period of falling GDP… Trough—bottoming out. When GDP stops falling.

Types of Contraction Recession—when GDP falls for two consecutive quarters… Depression—a long & severe recession… …with high unemployment & low production. Stagflation—a decline in GDP combined with a rise in prices (inflation).

Influencing the Business Cycle: Public Perception If people think the economy is STRONG… They will spend more money… Businesses will grow and hire more workers… GDP will rise and the economy will GET STRONGER (expansion). If they think the economy is in TROUBLE… They will cut their spending… Businesses will shrink and lay people off… GDP will CONTRACT and the economy will WEAKEN. “Perception Is Reality”

Interest Rates Interest is the cost of “borrowing” money… If interest rates are high, money is EXPENSIVE. When money is expensive, businesses borrow less and grow more slowly…And hire fewer workers. And people buy fewer cars, houses, vacations, etc…. During times of RECESSION, the government will often lower interest rates…To encourage borrowing, lending, and growth.

The Importance of Economic Growth If the real GDP rises, but not as fast as population, then individuals’ standard of living may actually decrease. Economic growth is critical for a nation to maintain its… Standard of living: The economic well being of a nation’s people.