Economic Performance

Gross Domestic Product (GDP) dollar value of all final goods/ services produced w/in a country in a given year. What GDP Measures Final output—to avoid double counties goods Current year—no used or old goods Output produced within national borders—doesn’t matter who makes it Create a list of 5 things counted and 5 things not counted in 2010 GDP.

GDP: How it is measured. Consumptive spending—purchase of consumer goods/services 63% of GDP (largest component) Investment-in the economy for capital goods availability of investment opportunities consumer demand, gov’t tax policies, cost of new capital goods cost & availability of investment funds availability of loans and interest rates Government spending accounts for 20% of GDP Fastest one to increase during hard times (think Great Depression) Net exports difference between imports & exports Always a negative number for U.S. these days. Why? Give an example for each component that would increase AND decrease GDP.

GDP: What it excludes. do-it yourself activities housework underground economy bartering or trading getting paid “under the table” illegal activities; robbers & drug dealers social costs $100 million in cancer research v. $100 million in pornography Worthless and/or polluting products still count irony is that the pollution creates jobs in the clean-up which are also counted in the GDP doesn’t measure quality of life or exhaustion of natural resources lumber mill near a beautiful river. doesn’t measure the value of leisure time work less =more leisure=less money=decrease in GDP

GDP: Adjusting for Inflation Nominal GDP- output measured in current dollars this is when you compare the GDP over certain years by using current dollar values Real GDP- output measured in constant dollars constant dollars- is a measure used to adjust for inflation When comparing GDPs across years, put all dollar figures into 1987 dollars after adjusting for inflation/deflation.

An American businessman & a Mexican Fisherman An American businessman was at the pier of a small coastal Mexican village when a small boat with just one fisherman docked. Inside the small boat were several large yellowfin tuna. The American complimented the Mexican on the quality of his fish and asked how long it took to catch them. The Mexican replied only a little while. The American then asked why didn't he stay out longer and catch more fish? The Mexican said he had enough to support his family's immediate needs. The American then asked, but what do you do with the rest of your time? The Mexican fisherman said, "I sleep late, fish a little, play with my children, take siesta with my wife Maria, stroll into the village each evening where I sip wine and play guitar with my amigos. I have a full and busy life, senor."

The American scoffed, "I am a Harvard MBA and could help you. You should spend more time fishing and with the proceeds, buy a bigger boat. With the proceeds from the bigger boat you could buy several boats. Eventually you would have a fleet of fishing boats. Instead of selling your catch to a middleman you would sell directly to the processor, eventually opening your own cannery. You would control the product, processing and distribution. You would need to leave this small coastal fishing village and move to Mexico City, then LA and eventually NYC where you will run your expanding enterprise."

The Mexican fisherman asked, "But senor, how long will this all take?" To which the American replied, "15-20 years." "But what then, senor?" The American laughed and said, That's the best part. When the time is right you would announce an IPO and sell your company stock to the public and become very rich, you would make millions." "Millions, senor? Then what?" The American said, "Then you would retire. Move to a small coastal fishing village where you would sleep late, fish a little, play with your kids, take siesta with your wife, stroll to the village in the evenings where you could sip wine and play your guitar with your amigos."

Quiz Questions What is GDP a measure of? What is the largest component of GDP? What is something that GDP does not include? Does GDP really measure the health of an economy? Why or why not? If the U.S. government lowers taxes, what effect does this have on GDP?

GDP: Uses for it Comparisons over time—GDP is calculated quarterly measures the performance of a nation’s economy economy is doing well; the GDP is growing rate of growth determines the economic policies  raise or lower taxes  increase or decrease transfer payments GDP grows slowly or declines means that unemployment will increase Comparisons between countries problems with this the available statistics are not easy to compare cultural differences and life-styles leisure now v. later Positives you can compare like socio-economic systems

GDP: What it doesn’t tell us. Income distribution external costs Types of goods/ services produced Value of leisure Population must use GDP per capita GDP/population

Importance for Economic Growth Economic growth is an increase in real GDP real GDP per capita is designed to account for population increase 1. Increasing the Standard of Living 2. Competing in the Global Market 3. Increasing Domestic Resources

Questions: Calculate the Gross Domestic Product for Cullentopia for the year personal consumption-----$50,000,000 investment spending------$10,000,000 government spending-----$20,000,000 imports $5,000,000 exports $2,000,000 GDP= What part(s) of a business cycle best represent a period of recession?