1. Chapter 12SectionMain Menu Chapter 12 National income accounting: a system that collects macroeconomic statistics on production, income, investment, and savings

2. Chapter 12SectionMain Menu What Is Gross Domestic Product? $ value of all final goods and services produced within a country’s borders in a given year.

3. Chapter 12SectionMain Menu Calculating GDP The Expenditure Approach Calculates GDP by adding up amounts spent on final goods and services. Durable, Non-Durable and Services C= Consumer Spending I= Business Investment G=Government X=Net Exports M= Imports GDP = C + I + G + (X-M) The Income Approach Calculates GDP by adding up all the incomes in the economy. Incomes that firms pay households for the factors of production they hire- wages for labor, interest for capital, rent for land and profits for entrepreneurship.

4. Chapter 12SectionMain Menu GDP Does not include the value of the following: Intermediate goods (components of the final good). Ford buys batteries/tires for their cars Second Hand Sales – boots produced in 1998 are bought in a thrift in 2012 Purely Financial Transactions – stocks, bonds, CD’s (no contribution to final production) Transfer Payments – welfare, unemployment, social security Unreported Legal Business Activity – I’m a waitress, and don’t report my tips, self- employed. Approx. 600 billion Illegal Business Activity – murder for hire, prostitution, drugs, gambling. Approx. 300 billion

5. Chapter 12SectionMain Menu Limitations of GDP GDP fails to measure or express changes in the following: Income Distribution Negative Externalities Quality of Life

6. Chapter 12SectionMain Menu Real and Nominal GDP Nominal GDP is GDP measured in current prices. It does not account for price level increases from year to year. Real GDP is GDP expressed in constant dollars. It accounts for inflation. – More accurate depiction of GDP

7. Chapter 12SectionMain Menu Nominal vs. Real GDP Example 1.Avatar (2008)$742,721,000 2.TitanicTitanic (1997)$600,779,824 3.Star WarsStar Wars (1977)$460,935,665 4.Shrek 2Shrek 2 (2004)$436,471,036 5.E.T.: The Extra-TerrestrialE.T.: The Extra-Terrestrial (1982)$434,949,459 6.Star Wars: Episode I - The Phantom MenaceStar Wars: Episode I - The Phantom Menace (1999)$431,065,444 7.Pirates of the Caribbean: Dead Man's ChestPirates of the Caribbean: Dead Man's Chest (2006)$423,032,628 8.Spider-ManSpider-Man (2002)$403,706,375 9.Star Wars: Episode III - Revenge of the SithStar Wars: Episode III - Revenge of the Sith (2005)$380,262,555 10.The Lord of the Rings: The Return of the KingThe Lord of the Rings: The Return of the King (2003)$377,019,252 11.Spider-Man 2Spider-Man 2 (2004)$373,377,893

8. Chapter 12SectionMain Menu 1.Gone With the Wind 283,100,000 2.Snow White & the Seven Dwarfs 225,300,000 3.Star Wars 176,900,000 4.E.T.: The Extra-Terrestrial 158,000,000 5.101 Dalmations 143,100,000 6.Bambi 140,800,000 7.Titanic 130,900,000 8.Jaws 128,600,000 9.The Sound of Music 119,300,000 10.The Ten Commandments 2 117,800,000 Tickets Sold

9. Chapter 12SectionMain Menu Nominal vs. Real GDP Example DOMESTIC GROSSES Adjusted for Ticket Price Inflation * RankTitle (click to view)StudioAdjusted GrossUnadjusted GrossYear^ 1Gone with the WindMGM$1,390,067,000$198,676,4591939^ 2Star WarsFox$1,225,462,800$460,998,0071977^ 3The Sound of MusicFox$979,817,800$158,671,3681965 4E.T.: The Extra-TerrestrialUni.$975,957,800$435,110,5541982^ 5The Ten CommandmentsPar.$901,280,000$65,500,0001956 6TitanicPar.$883,019,700$600,788,1881997 7JawsUni.$881,182,300$260,000,0001975 8Doctor ZhivagoMGM$854,051,900$111,721,9101965 9The ExorcistWB$760,712,400$232,671,0111973^ 10Snow White and the Seven DwarfsDis.$749,920,000$184,925,4861937^ 11101 DalmatiansDis.$687,430,700$144,880,0141961^ 12The Empire Strikes BackFox$675,482,800$290,475,0671980^

10. Chapter 12SectionMain Menu Measuring Economic Growth Real GDP per capita Real GDP / total population. Considered the best measure of a nation’s standard of living. Current GDP per capita in US is about 49,601 in China it is about 5,000. Why? Current US GDP per capita: 49,601 Current US GDP:$15.685 trillion (2012) Current US Population: 311,591,917

11. Chapter 12SectionMain Menu GDP vs. GDP Per Capita http://en.wikipedia.org/wiki/List_of_countries_by_GDP_ (nominal)_per_capitahttp://en.wikipedia.org/wiki/List_of_countries_by_GDP_ (nominal)_per_capita http://en.wikipedia.org/wiki/List_of_countries_by_GDP_ (nominal)http://en.wikipedia.org/wiki/List_of_countries_by_GDP_ (nominal)

12. Chapter 12SectionMain Menu Other Income and Output Measures Gross National Product (GNP) Market value of all goods and services produced by Americans in one year.

13. Chapter 12SectionMain Menu A macroeconomic period of expansion followed by a period of contraction. What Is a Business Cycle?

14. Chapter 12SectionMain Menu Phases of the Business Cycle Expansion Period of economic growth as measured by a rise in real GDP. 1990’s – Longest period of growth in American history Peak When real GDP stops rising; the height of its economic expansion. Contraction An economic decline marked by a fall in real GDP. –Recession (real GDP falls 6 consecutive months) – must also take into account unemployment, interest rates, etc… –Depression Trough Lowest point of economic decline, when real GDP stops falling.

15. Chapter 12SectionMain Menu Business Cycle – Last 40 years

16. Chapter 12SectionMain Menu What Keeps the Business Cycle Going? Four main economic variables: Business Investment Interest Rates and Credit Consumer Expectations External Shocks

17. Chapter 12SectionMain Menu Chapter 12 Depreciation-The loss of the value of capital equipment that results from normal wear and tear Price Level- the average of all prices in the economy Aggregate supply- the total amount of goods and services in the economy available at all possible price levels Aggregate demand- the amount of goods and services in the economy that will be purchased at all possible price levels

18. Chapter 12SectionMain Menu Chapter 12 Trough- the lowest point in an economic contraction, when real GDP stops falling Recession- a prolonged economic contraction Depression- a recession that is especially long and severe Stagflation- a decline in the real GDP combined with a rise in the price level Leading indicators- key economic variables that economists use to predict a new phase of a business cycle

19. Chapter 12SectionMain Menu Chapter 12 Real GDP per capita- real GDP divided by the total population Capital deepening- process of increasing the amount of capital per worker Saving-income not used for consumption Savings rate- the proportion of disposable income that is saved Technological process- an increase in efficiency gathered by producing more output without using more inputs

20. Chapter 12SectionMain Menu Forecasting Business Cycles Leading indicators are key economic variables economists use to predict a new phase of a business cycle. - Stock Market - Interest Rates

21. Chapter 12SectionMain Menu Business Cycle Fluctuations The Great Depression 1929-1932 - Industrial Production -46% - Unemployment 25% - 1 out of 4 didn’t have a job Later Recessions

22. Chapter 12SectionMain Menu Measuring Economic Growth Real GDP per capita It is a measure of real GDP divided by the total population. Real GDP per capita is considered the best measure of a nation’s standard of living. Current US GDP per capita: 46,859 Current US GDP: 14.2 trillion Current US Population: 307,212,123

23. Chapter 12SectionMain Menu Capital Deepening The process of increasing the amount of capital per worker is called capital deepening. Capital deepening is one of the most important sources of growth in modern economies. Firms increase physical capital by purchasing more equipment. Firms and employees increase human capital through additional training and education.

24. Chapter 12SectionMain Menu How Saving Leads to Capital Deepening Shawna’s income: $30,000 $25,000 spent$5,000 saved Mutual-fund firm makes Shawna’s $3,000 available to firms Bank lends Shawna’s money to firms in forms such as loans and mortgages $3,000 in a mutual fund (stocks and corporate bonds) $2,000 in “rainy day” bank account Firms spend money on business capital investment The Effects of Savings and Investing The proportion of disposable income spent to income saved is called the savings rate. When consumers save or invest, money in banks, their money becomes available for firms to borrow or use. This allows firms to deepen capital. In the long run, more savings will lead to higher output and income for the population, raising GDP and living standards.

25. Chapter 12SectionMain Menu The Effects of Technological Progress Besides capital deepening, the other key source of economic growth is technological progress. Technological progress is an increase in efficiency gained by producing more output without using more inputs. A variety of factors contribute to technological progress: –Innovation When new products and ideas are successfully brought to market, output goes up, boosting GDP and business profits. –Scale of the Market Larger markets provide more incentives for innovation since the potential profits are greater. –Education and Experience Increased human capital makes workers more productive. Educated workers may also have the necessary skills needed to use new technology.

26. Chapter 12SectionMain Menu Other Factors Affecting Growth Population Growth If population grows while the supply of capital remains constant, the amount of capital per worker will actually shrink. Government Government can affect the process of economic growth by raising or lowering taxes. Government use of tax revenues also affects growth: funds spent on public goods increase investment, while funds spent on consumption decrease net investment. Foreign Trade Trade deficits, the result of importing more goods than exporting goods, can sometimes increase investment and capital deepening if the imports consist of investment goods rather than consumer goods.