Gross Domestic Product and Growth Chapter 12

Why Measure Growth? After the Great Depression, economists felt it was important to measure macroeconomic status to predict and prevent future economic downturns. Established NIPA

NIPA National Income and Product Accounts –Collects data on production, income, investment, and savings –Maintained by the Department of Commerce –This data is reported and used to influence government policy

GDP (Gross Domestic Product) Most important measure in NIPA is Gross Domestic Product GDP is the dollar value of all FINAL goods and services produced within a country’s borders in a given year. –Final goods are those sold to consumers –Intermediate goods are those used in the production process (not calculated)

“Within a Country’s Borders” GDP does not include products made by a US company overseas GDP does include a car made in the US by Toyota (Japanese company)

What do you think? (Included in GDP or no) A new house? A used house? The realtor's fee on the used house? All the products used to produce the new house? (nails, shingles, siding etc...)

What is included... A new house?...Yes A used house?...No The realtor's fee on the used house?...Yes All the products used to produce the new house (nails, shingles, siding etc...)?...No (secondary goods)

Approaches of Measuring GDP Expenditure Approach –Economists estimate the annual expenditures in four categories Consumer goods and service –Durable (long lasting...cars) and non durable (short lasting...food) Business goods and services Government goods and services Net exports or imports of goods and services –All of these added together calculates GDP

Income Approach Measures GDP by adding up all incomes. –When a product is sold, the selling price is given to those who produce it –The income approach gives a better assessment of activity in the economy Shows the activity for everyone Both income and expenditure approaches should be =

Nominal vs. Real GDP Nominal GDP is GDP measured in current prices (figure 12.3) –Does not always measure an increase in output To measure growth from year to year, economists measure Real GDP –Real GDP is measured by calculating GDP with constant prices Try exercise on figure 12.3

Limitations of GDP

Is it Accurate? Many things to calculate in GDP and much is missed or overlooked However, it does provide us with a baseline of stats and over time, shows important trends

Review 1. Real GDP takes which of the following into account? (a) changes in supply (b) changes in prices (c) changes in demand (d) changes in aggregate demand 2. Which of the following is an example of a durable good? (a) a refrigerator (b) a hair cut (c) a pair of jeans (d) a pizza

GNP GNP (Gross National Product)... measures all goods and services produced by Americans in one year (includes overseas production)

Influences on GDP Aggregate Supply –The total amount of goods and services available in an economy at all price levels Aggregate Demand –The total amount of goods and services demanded in an economy at all price levels What happens to GDP if aggregate demand increases?

Business Cycles Chapter 12, Section 2

Business Cycles Period of macroeconomic expansion followed by contraction Phases of Business Cycles –Expansion…period of economic growth measured by a rise in real GDP Growth being a steady, long term rise in GDP Plentiful jobs, falling unemployment

Phases of Business Cycles (cont.) Peak…height of economic expansion Contraction…economic decline marked by falling real GDP Trough…bottom of contraction

Contractions with Different Characteristics Recession…real GDP falls for two straight quarters –Prolonged period of economic contraction –Usually a rise in unemployment Depression…a severe recession Stagflation…decline in real GDP, combined with a rise in price level

Keeping the Cycle Typically, a sharp rise or fall in a key indicator sparks a series of events 4 main indicators –Business investment –Interest rates and credit –Consumer expectations –External shocks

Business Investment Spending by business or non spending will change the cycle

Interest Rates and Credit Low interest rates will lead to spending High interest rates will lead to savings

Consumer Expectations Consumers may spend or save Like other things, consumer’s choices drive the economy

External Shocks Unpredictable and disrupt aggregate supply –Wars –Floods –Natural disasters –Oil shortage Can be positive –Discoveries –Good weather

Forecasting Business Cycles Not easy to predict…have to predict a change in real GDP Use leading indicators (economic variables) –Stock market –Interest rates –Orders of capital goods –Housing starts

American History Great Depression was the economies most severe recession –Strengthened the need for government intervention –WW II marked the end (government spending lead to rise in GDP) Other recessions –70’s oil embargo –80’s unemployment (9%) –90’s turn-around and rise in GDP –2000’s downturn with 9/11

Review 1. A business cycle is (a) a period of economic expansion followed by a period of contraction. (b) a period of great economic expansion. (c) the length of time needed to produce a product. (d) a period of recession followed by depression and expansion. 2. A recession is (a) a period of steady economic growth. (b) a prolonged economic expansion. (c) an especially long or severe economic contraction. (d) a prolonged economic contraction.

Economic Growth Chapter 12, Section 3

Economic Growth A change in GDP over time illustrates growth For growth to occur, it should change with population Real GDP per capita measures such growth and the standard of living

Quality of Life GDP measures standard of living but not quality of life –Pollution –Stress –Nutrition Also does not tell how GDP is distributed –Poor sections of the country –Poor bulk of population

Capital Deepening The process of increasing capital per worker Goal is to increase productivity Savings and investing lead to capital deepening

Population Increased population without capital deepening will lower the standard of living Increased population without increase in production will lower the standard of living

Government Taxes can increase or decrease capital deepening –It is dependant upon what the taxes are spent on

Foreign Trade Foreign trade and running a trade deficit can actually be good in some ways –If the goods being trading enhance capital deepening –In the long run…this capital deepening can increase productivity and help to pay back debt that results from a trade deficit

Technological Progress An increase in efficiency gained by producing more output from more inputs –Technology –Realignment –Knowledge Technological progress is measured by looking at the amount of GDP that increases from technology and not labor

Review 1. Capital deepening is the process of (a) increasing consumer spending. (b) selling off obsolete equipment. (c) decreasing the amount of capital per worker. (d) increasing the amount of capital per worker. 2. Taxes and trade deficits can contribute to economic growth if the money involved is spent on (a) consumer goods. (b) investment goods. (c) additional services. (d) farming.