Measures of Growth: GDP, the business cycle, and inflation Unit 6

No Warm-up Finish the worksheet from yesterday.

GDP Gross Domestic Product: measure of the size of the economy. It is the total value, in dollars, of all final goods and services produced in the country during a single year. GDP is expressed in terms of money, not the number of products. This enables us to compare the relative worth of goods and services. Any true reckoning of real incomes must somehow account for the vast changes in the quality of things we consume. It is skewed by inflation. This is tricky enough to do for an economy of farms, production lines and mass markets—the setting in which GDP was first introduced. For today’s rich economies, dominated by made-to-order services and increasingly geared to the quality of experience rather than the production of ever more stuff, the trickiness is raised to a higher level. No wonder GDP statistics are still so prone to constant and substantial revision  hard to make these calculations about services.

Categories of spending to calculate GDP Consumption- private citizens purchasing goods, and services Investment- All final purchases of machinery, equipment, and tools by businesses; all construction. Government- purchase of goods and services by all levels of government Net Exports- exports minus imports Fiscal policy and GDP: Congress and the president enact fiscal policy in an effort to try to reduce high unemployment that occurs when GDP falls or to combat inflation when GDP rises quickly. Fiscal policy was proposed during the Great Depression by an English economist named John Maynard Keynes. There are two general fiscal policy options depending on how the economy is doing: Expansionary- Congress and the President would enact a fiscal stimulus policy when the GDP falls and the unemployment rate increases Cut taxes - gives people more money to spend and thus increase purchases, hopefully prompting businesses to hire more workers and increase production. Increase govt spending - - buy more goods and services, increasing employment/ incomes and hopefully convincing businesses to hire more workers and boost production. 2. Contractionary- Congress and the President would enact a fiscal constraint policy when GDP is rising very quickly meaning there is high inflation. Raise taxes - - gives people less money to spend and thus decreases purchases, hopefully prompting businesses to reduce prices. Decrease govt spending - - buy less goods and services, decreasing employment/ incomes and hopefully convincing businesses to decrease prices.

Measuring Economic Growth Gross Domestic Product Nominal GDP ‐ Measured in inflation‐distorted dollars. Real GDP ‐ Converts nationʹs annual output into constant dollars by taking out inflationary increases in prices. GDP is expressed in terms of money. This enables us to compare the relative worth of goods and services, which is more meaningful than simply numbers of products. When prices increase, GDP would go up even if the economy was not growing. To avoid this false impression, economists use real GDP.

3. Inflation: is an increase in the general price level. Consumer Price Index (CPI)‐ To track inflation, the government samples prices every month for about 400 products commonly used by consumers. The rate of inflation is the change in the average level of prices as measured by the CPI

Business Cycles The business cycle (or economic cycle) refers to the short‐term fluctuations of economic activity along its long term growth trend. 1. Expansion‐ Real GDP (production) growing and unemployment rate usually falls. 2. Peaks‐ Highest point of expansion. 3. Recession‐ Real GDP (production) decreases for 6 consecutive months; unemployment rate usually increases. 4. Troughs‐ Lowest point of the recession. An extended recession is called a depression.

2. Unemployment Rate‐ The percentage of people in the labor force who are not working but are looking for jobs. The labor force includes all people 16 years or older who are either working or looking for work. 4 Types of unemployment 1. frictional: people who are temporarily between jobs 2. structural: a mismatch between job seekers and job openings (Examples: decline in manufacturing jobs; increase in service jobs) 3. seasonal: temporary unemployment due to conditions that prevail during certain seasons of the year (Example: construction in winter) 4. cyclical: unemployment caused by lack of overall demand in the economy (Example: due to the recession)

Inflation calculator https://www.bls.gov/data/inflation_calculator.htm

Measures of Growth One-Page Infographic (ch. 12 pg. 301-311, ch. 13 pg Title: Measures of Economic Growth Section I: GDP Include (1) the definition, (2) the components of the expenditure approach, (3) the difference b/w nominal and real GDP, and (4) the limitations of GDP. Section II: the Business Cycle Include (1) a visual with expansion, peak, contraction, and trough labelled and (2) defined, (3) what can cause a business cycle to contract and expand, and (4) the business cycle today Section III: Inflation Include (1) the definition of CPI, (2) the effects of inflation, (3) the definition of deflation, and (4) causes of inflation