1. Gross Domestic Product and Growth Chapter 12

2. Why Measure Growth? After the Great Depression, economists felt it was important to measure macroeconomic status to predict and prevent future economic downturns. –Length & depth of GD convinced economists to study growth Established NIPA  Nat’l Income & Products Account

3. NIPA National Income and Product Accounts –Monitors macroeconomic data –Collects info on production, income, investment, and savings –Maintained by the Department of Commerce –This data is reported and used to influence and determine gov’t policy

4. 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)

5. “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) You will see why this is the case soon

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

7. 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 (intermediate goods)

8. Approaches of Measuring GDP Expenditure Approach (output expend.) –Economists estimate the annual expenditures in four categories Consumer goods and services (we buy) –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 bec the amount totaled equals all expenses produced in a given year

9. Income Approach Measures GDP by adding up all incomes of people in a country –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 = NEW HOUSE EXAMPLE

10. Nominal vs. Real GDP Nominal GDP is GDP measured in current prices (AKA current GDP) –Does not always measure an increase in output –This can be misleading To measure growth from year to year, economists measure Real GDP –Real GDP is measured by calculating GDP with constant prices (unchanging)

11. Limitations of GDP

12. 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 Over time, it does help reveal economic growth rates –GDP is watched closely by economists

13. 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

14. Other Income and Output Measures GNP (Gross National Product)... measures all goods and services produced by Americans in one year (includes overseas production) GNP-depreciation=NNP (net national product) measures net output for 1 year NNP-sales and excise taxes= NI (national Income) NI-social security, firm’s taxes=PI (personal income) PI-income tax=DPI (disposable personal income)

15. Influences on GDP Aggregate Supply –The total amount of goods and services available in an economy at all price levels (supply curve for entire economy) Aggregate Demand –The total amount of goods and services demanded in an economy at all price levels (demand curve for economy) What happens to GDP if aggregate demand increases?

16. Business Cycles Chapter 12, Section 2

17. 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 “Business is good”

18. Phases of Business Cycles Peak…height of economic expansion –Read GDP has stopped rising Contraction…economic decline marked by falling real GDP –Unemployment will rise –GDP is always falling Trough…bottom of contraction –GDP has stopped falling

19. Contractions with Different Characteristics Recession…real GDP falls for two straight quarters (6 months) –Prolonged period of economic contraction –Usually a rise in unemployment: 6-10% Depression…a severe recession –High unemployment, low factory output Stagflation…decline in real GDP, combined with a rise in price level

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

21. Business Investment Spending by business or non spending will change the cycle During expansion  firms expect sales & profits to increase –They will create more jobs If firms see lower demand, they will stop expanding and create less jobs

22. Interest Rates and Credit Low interest rates will lead to spending (big purchases are made) High interest rates will lead to savings (no big purchases for people) Business perspective of interest rates –Low  firms will expand (high output) –High  firms will contract (low output)

23. Consumer Expectations Consumers may spend or save Like other things, consumer’s choices drive the economy Fear of weak economy will cause consumers confidence to fall (save $) People will expect more jobs created during a growing or expanding economy (spend $)

24. External Shocks Unpredictable and disrupt aggregate supply (negative shocks) –Wars – prices go up –Floods – prices go up –Natural disasters – prices go up –Oil shortage – prices go up Can be positive –Discoveries – new oil – prices go down –Good weather

25. Forecasting Business Cycles Not easy to predict…have to predict a change in real GDP (several factors) Use leading indicators (economic variables used by economists) –Stock market-drop before recession –Interest rates –Orders of capital goods –Housing prices/markets Sometimes these factors predict false contractions

26. American History Great Depression was the economies most severe recession –Strengthened the need for government intervention (unemployment – 25%) –WW II marked the end (government spending lead to rise in GDP…FDR’s New Deal) Other recessions –70’s oil embargo by OPEC – oil price increases –80’s unemployment (9%) –90’s turn-around and rise in GDP –2000’s economic downturn blamed on 9/11

27. 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.

28. Economic Growth Chapter 12, Section 3

29. 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 –This is divided by the total population –This is the best measure of our nation’s standard of living

30. Quality of Life GDP measures standard of living but not quality of life, does not include - –Pollution –Stress –Nutrition Also does not tell how GDP is distributed –Poor sections of the country –Poor bulk of population –Who has the money??

31. Capital Deepening The process of increasing capital per worker Goal is to increase productivity Savings and investing lead to capital deepening –Firms will deepen human capital by trainings, experience, college courses –Better trained and more experienced workers increase output

32. Population Increased population without capital deepening will lower the standard of living Increased population without increase in production will lower the standard of living –Ex: A nation with low population growth & expanding capital stock will see significant capital deepening

33. Government Taxes can increase or decrease capital deepening –It is dependent upon what the taxes are spent on –Increase taxes  capital deepening will decrease (lower income, lower savings) –If gov’t invest taxes in public goods, roads, telecommunication, etc. investment will increase

34. Foreign Trade Foreign trade and running a trade deficit can actually be good in some ways –If the goods being trading enhance capital deepening (goods used by firms) –In the long run…this capital deepening can increase productivity and help to pay back debt that results from a trade deficit (similar to tax rate relationship)

35. 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 –Ex: From 1929-1982, real GDP grew at 2.92% per year. Technology increased this by 1.02%

36. Causes of Technological Progress Scientific Research…new techniques Innovation…Gov’t can help this Scale of the market…larger markets provide more incentive & technology Education and Experience…more educated workers can handle change Natural Resource Use...using more resources and using them efficiently

37. 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.