1 Unit 3 Measurement and Fiscal Policy

2 Table of Contents

3 Unit Three Warm Ups

4 GDP Measuring the Economy Federal Reserve Bank of San Francisco Economic Education Group Date last updated: September 10, 2012

5 GDP Reading and circle key terms and underline important information.

6 FRBSF Economic Education Group Measuring the Economy Measure a line you use=Ruler Measure your temperature – Use a = Thermometer Measure your weight=Bathroom scales Measure the U.S. Economy=(GDP) – Gross Domestic Product

7 FRBSF Economic Education Group Gross Domestic Product Gross Domestic Product Gross Domestic Product (GDP)-The total dollar value of all final goods and services produced within a country during one calendar year.

8 FRBSF Economic Education Group Gross Domestic Product Final Output—This is used to avoid counting products more than once; – Ex. Woodcutter cuts down a tree ($100) – Sawmill processes into lumber ($200) – Furniture maker turns into table ($450) – Furniture dealer sells table for $750 – Consumer purchases the table and the value of the finished product is counted. What is the final value counted for GDP?? – $1450 – $750

9 GDP – Did You Know? Real GDP (adjusted for inflation) nearly doubled in value between 1980 and In 2010, real GDP reached $13.1 trillion. Known As Gross Domestic Product National Output Measure of the Economy’s Health Calculation Three ways to measure national output: Expenditure Approach: sum of goods and services sold to final users (this is the most common approach) Income Approach: sum of income payments and other costs incurred in the production of goods and services Value-Added Approach: sum of the value added at each stage of production Data Reports The Bureau of Economic Analysis (BEA) is responsible for calculating values of GDP The BEA publishes estimates on an annual and quarterly basis The “advanced” estimates of GDP are released roughly four weeks after the end of each quarter (January, April, July, and October) “Revised” estimates incorporate more complete and accurate source data Source: Bureau of Economic Analysis FRBSF Economic Education Group DataPost

10 Components of GDP (Expenditure Approach) 13% [I] = $1.72 Consumption e.g., durables and nondurables Consumption e.g., durables and nondurables [C] Investment e.g., business investment in equipment and factories Investment e.g., business investment in equipment and factories [I] Government Spending e.g., government purchases of goods and services Government Spending e.g., government purchases of goods and services [G] Net Exports e.g., U.S. exports to other countries, less imports Net Exports e.g., U.S. exports to other countries, less imports [X] -3% [X] = $ % [G] = $2.56 Sources: Bureau of Economic Analysis & FRBSF Calculations DataPost FRBSF Economic Education Group

11 FRBSF Economic Education Group Gross Domestic Product Current Year—GDP does not count products such as used cars, second hand clothing, (already been counted). Output Produced within our national borders. – Ex. Coca Cola produced in Russia not included – Does include foreign products made in this country.

12 Adjusting GDP for Price Increases Adjusting GDP for Price Increases As prices increase, so does GDP. Therefore, economists must calculate GDP in terms of nominal and real prices – Nominal GDP—Expressed in current prices of the period being measured. – Real GDP—Adjusted for price changes. – Price Index—set of statistics that allows economists to compare prices over time.

13 U.S. Real GDP by major spending category Source: Bureau of Economic Analysis DataPost FRBSF Economic Education Group

14 U.S. Real GDP by Quarter Source: Bureau of Economic Analysis DataPost FRBSF Economic Education Group

15 Source: Bureau of Economic Analysis DataPost FRBSF Economic Education Group 2012:Q2 $ :Q2 $13.56 Grey bars indicate periods of economic recession according to the NBER Business Cycle Dating Committee Seasonally adjusted annual rate An inflation-adjustment method using 2005 dollars as the base year of comparison Annotated Chart Notes U.S. Real GDP by Quarter (Trillions of chained 2005 dollars, SAAR) 2009:Q2 $ :Q2 $12.70

16 Measuring Changes in GDP: Yearly % Change DataPost FRBSF Economic Education Group Source: Bureau of Economic Analysis & FRBSF Calculations Note: Values are percent change using trillions of chained 2005 dollars (SAAR) Real Gross Domestic Product (GDP) Q4/Q4 Percent Change

17 DataPost FRBSF Economic Education Group Source: Bureau of Economic Analysis & FRBSF Calculations Note: Values are percent change using trillions of chained 2005 dollars (SAAR) % change from 2001:Q4 to 2002:Q4 Real GDP dropped more than 3% between 2007:Q4 and 2008:Q4 The “Great Recession” is the 18-month period between Dec 2007 to June 2009, according to the NBER Annotated Chart Notes Measuring Changes in GDP: Yearly % Change Real Gross Domestic Product (GDP) Q4/Q4 Percent Change

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19 World GDP Leaders 2006 United States $_ Trillion Japan $ 4.3 Trillion Germany $ 2.9 Trillion China $ 2.6 Trillion UK $ 2.3 Trillion Canada $ 1.2 Trillion Mexico $ 839 Billion

20 What do you think? 1.How has consumer spending changed since 1950? How have net exports changed since 1980? (See slide 4) 2.What was the lowest level of real GDP during the Great Recession? (See slide 5) 3.How does real GDP growth in the Great Recession compare to early 2000s recession? (See slide 6) 4.Why is GDP considered a good measure of the “health” of the economy? DataPost FRBSF Economic Education Group