GDP www.moneycrashers.com

3 Economic Goals of a Government Stable prices Low unemployment High and sustained growth

How do we get #3? How do we measure high and sustained growth? Need to see growth of a country’s income What does a country generate? What goods and services do they produce and sell?

What is GDP? Gross Domestic Product GDP is the total market value of all final goods and services produced in a given time period, within a country’s borders

What it does and does not include Does not include = a Canadian company operating in another country Does include = a foreign company producing products in Canada

Final goods and services? Only items purchased by the ultimate final consumer are counted, not intermediate consumers The Wheat example – counting the value of wheat three times Wheat -> value of wheat and then value of flour; and then value of loaf of bread – you’ve counted value of wheat three times

Expenditure approach to GDP What happens to all the goods and services we produce? Somebody has to buy them. Purchased by 4 sectors: 1) Household sector (70%) 2) Business sector (machinery, equipment) 3) Government sector (provides services) 4) Foreign sector (exports)

GDP Cont’d GDP is the sum of expenditures by the 4 sectors: consumption; investment; spending; net exports (exports – imports) GDP = Consumption + investment + government spending + net exports GDP = C + I + G + X

Business Cycle Theory

Business Cycle

Read 105-107. Define business cycle Take a brief note on the four stages of the cycle (105) Draw out the chart in your notes (105) How can the government intervene, according to your text? (107)

Test Information Economic and Political Systems Traditional/Market/Centrally Controlled/Mixed Democracy and Autocracy Classification of Economic Development Underdeveloped/Developing/Developed GDP and Business Cycle Definition/Calculation Different Stages/Indicators/Government Actions

Test Information Production Possibilities Frontier (PPF) Describe what it means to be under/on/over the curve Opportunity Cost Absolute and Comparative Advantage definition and calculation

Real vs Nominal GDP Nominal GDP = current value of goods and services produced at this time The problem Yr 1 – nominal GDP is $10 Yr 2 – nominal GDP is $40 Why did GDP increase in yr 2? ? Ideally, bc output of good and services quadrupled? But … it could go up because prices quadrupled … or bc there was an increase in output and prices

Real vs Nominal GDP Real GDP = today’s output at base year prices Nominal GDP = today’s output at today’s prices Using the CPI or GDP deflator GDP deflator = – it’s a price index, like CPI, but it includes all goods and services, rather than just consumer goods and services

Calculating Real GDP How would I calculate my real income? Real income = (Nominal income / CPI) x 100 (Nominal GDP / GDP deflator) x 100

Nominal vs Real GDP Why nominal GDP is insufficient Rising prices vs. rising output or productivity

Growth vs. Recession The calculation If the % change is > 0, the economy is growing If % change is < 0, the economy is shrinking If real GDP is < 0 for 2 consecutive quarters, there’s a recession If real GDP is < 0 for 8 consecutive quarters (2 years), there’s a depression %changeGDP = (real gdp new – real gdp old / real gdp old) * 100