HOW DO WE MEASURE ECONOMIC GROWTH? GDP Calculation and the Business Cycle
Gross Domestic Product (GDP) GDP is the market value of all final goods and services produced within a nation’s borders “Intermediate” does not include intermediate goods “Finisher” = YES GDP MEASURES : AGGREGATE SPENDING INCOME OUTPUT
What’s the difference? Good or service produced for its final user Good or service produced by one firm, bought by another firm, and used as an input into a final good or service. Raw materials FINAL GOOD: YES! INTERMEDIATE GOOD: NO!
GDP DOES NOT INCLUDE… ANYTHING WITHOUT A MARKET TRANSACTION Intermediate goods Nonmarket transactions Household chores Underground economy: Babysitting Black market Drugs, etc.
How DO YOU CALCULATE AGGREGATE SPENDING? THIS IS HOW YOU DO IT: GDP = C + I + G+ X-M (NX)
CONSUMPTION : 70% Household spending on Durable goods Cars and appliances Nondurable goods food Services College degree Haircuts
I and G New capital machinery New trucks for UPS New construction ZARA building a new store Unsold inventory 2008 Porsche Carrera Law enforcement policemen Infrastructure Highways, airports *Does not include transfer payments because no dollars are spent Investment: spending in order to increase output Government Spending: purchase of final goods
X – M (Net Exports) Sold to other countries Money flows to the United States Bought from other countries Money flows away from the U.S. in exchange for foreign production X = Exports M = Imports
Nominal vs. Real GDP Nominal: Value of current production at current prices Overvalued due to inflation Ex: Price of movie 1930: $.05 Price of movie 2010: $9 *Real * Value of current production using fixed prices Takes out inflation Does not overvalue Used to compare GDP between different time periods
WHICH OF THE FOLLOWING ARE CALCULATED IN GDP? QUICK GAME OF GDPARDY
The Expenditure/Aggregate Approach: (C+I+G+X-M) The Income Approach: (R:W+I+P) Two ways to calculate GDP
THE INCOME APPROACH Resource SuppliedIncome Received LandRent LaborWages CapitalInterest EntrepreneurshipProfit R + W+ I + P = Y + Indirect Income Taxes + Consumption of Fixed Capital+ Net foreign factor income = GDP
EXPENDITURE = INCOME
How can we use real GDP?
1. To compare GDP/Capita across the world
BUSINESS CYCLES TIME 2. To Compare GDP through Time
REAL GDP GROWTH The shaded areas show recessions during our economy which is a period of 6 months with limited growth.
THE BUSINESS CYCLE DEFINED Peak: The top of the cycle where Real GDP is at a maximum Unemployment is low Inflation may be high Contraction: Real GDP is falling for two consecutive quarters Unemployment rate is increasing Inflation falls, might have deflation
THE BUSINESS CYCLE DEFINED Trough: The bottom of the Cycle where a contraction has stopped Unemployment is very high Expansion: A period where real GDP is growing and returning to Full Employment Unemployment is decreasing Inflation is increasing
Business Cycles in the U.S.
US Recession Status: 2009
US Recession Status: 2010, from the Dismal Scientist
Global Economy Map Click on the link below to see how the global economy is doing. The Dismal Scientist, Global Economy The Dismal Scientist, Global Economy