GDP and Economic Challenges Unit 6 Macroeconomics: GDP and Economic Challenges Chapters 12.1 Economics Mr. Biggs

Gross Domestic Product and Growth National Income and Products Accounts Economists monitor important macroeconomic data using national income accounting. National income accounting - A system that collects macroeconomic statistics on production, income, investment, and savings. The data are compiled in the form of National Income and Product Accounts (NIPA) which is maintained by the Department of Commerce.

Gross Domestic Product Gross Domestic Product (GDP) - The dollar value of all final goods and services produced within a country’s borders within a year. This would include a Toyota manufacturing plant in Kentucky. Lumber, nails, shingles, windows, and other items used to produce a house are intermediate goods and not included in GDP. Intermediate goods - Goods used in the production of final goods and services. Only the price of the completed house is included in GDP.

Expenditure Approach One way that the government calculates GDP is the expenditure approach. Economists add together the annual expenditures on four categories of final goods and services: Consumer goods and services Business goods and services Government goods and services Net exports or imports of goods and services Consumer goods include durable and nondurable goods. Durable goods - Goods that last for a relatively long time, like a house. Nondurable goods - Goods that last a short period of time, like food and gasoline.

Income Approach The second and generally more accurate way to measure GDP is the income approach. This approach adds up all the incomes earned in an economy. In theory, we can calculate GDP by either the income approach or expenditure approach and we should arrive at the same GDP total.

Nominal Verses Real GDP Economists use the expenditure and income approaches to measure GDP to find out how well the economy is performing. To develop additional information, they distinguish between two measures of GDP - nominal and real. Nominal GDP Nominal GDP - GDP measured in current prices. The total number of what an economy produces times the price equals nominal GDP. Real GDP Real GDP - GDP expressed in constant or unchanging prices. To correct for an increase in prices each year, economists establish a set of constant prices by choosing one year as the base year.

Limitations Of GDP GDP is not perfect because it does not take into account certain activities: Nonmarket activities are things that people make or do for themselves. The underground economy includes the sale of illegal and legal goods “under the table”. Negative externalities, or unintended economic side effects are often not included in GDP. For example, the cost of cleaning up a river is included, but not the social and environmental value of the cleanup. Quality of life is not necessarily increased by a rising GDP. GDP measures output and income within an economy, not individual’s quality of life.

Other Income and Output Measurements Gross national product (GNP) - The annual income earned by U.S. owned firms and U.S. citizens. Net national product (NNP) - Is GNP minus depreciation of capital equipment. Depreciation - The loss of the value of capital equipment that results from normal wear and tear. National income (NI) - Is NNP minus sales and excise taxes. Personal income (PI) - Is NI minus firms’ reinvested profits, income taxes, and Social Security taxes plus other household income. Disposable personal income (DPI) – Is PI minus individual income taxes.

Influences on GDP Aggregate Supply Large-scale changes in supply and demand can affect GDP. Aggregate Supply Economists determine GDP, calculate the price level, and then they can determine aggregate supply. Price level - The average of all prices in the economy. Aggregate supply - The total amount of goods and services available in the economy at all possible price levels. As price levels rise, real GDP or aggregate supply rises.

Aggregate Supply/Aggregate Demand Equilibrium Aggregate demand - The amount of goods and services in the economy that will be purchased at all possible price levels. As price levels go up, real GDP or aggregate demand decreases. Falling prices increase wealth and demand (wealth effect). Aggregate Supply/Aggregate Demand Equilibrium Any shift in aggregate supply or aggregate demand will have an impact on real GDP and on the price level.

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