1. Macroeconomics Indicators GDP AND WHAT IT REALLY MEANS

2. Today’s Objective  After today’s lesson, students will be able to…  Explain GDP, what it includes, and what it does not include.  Essential Skill:  Explicitly assess information and draw conclusions.

3. Consider  What does GDP measure?  How accurate of a picture does this provide us?  What other information would you like to know when considering a countries success?  Happy Planet Index?

4. The World Economy  Total GDP (2013): $87T  Population (2013):7.1B  GDP per Capita (2013): $13,100  Population Growth (2013): 1.0%  GDP Growth (2013): 2.9% GDP per capita is probably the best measure of a country’s overall well being

5. Figure 39.2: P. 454

6. Figure 39.4: P. 456

7. Understanding GDP  http://www.npr.org/sections/money/2011/10/26 /141741360/video-what-is-gdp http://www.npr.org/sections/money/2011/10/26 /141741360/video-what-is-gdp

8. National Income Accounting  Measures econ. performance of the entire nation  Bureau of Economic Analysis  Assess three key Macroeconomic Goals:  Economic Growth  Full Employment  Price Stability

10. Gross Domestic Product  The total market value of all final goods and services produced within a country in a given time period.  What are the essential parts of this definition?  GDP vs. GNP (Gross National Product)

11. Final vs. Intermediate  Final good or service  A good or service that is produced for its final user and not as a component of another good or service.  Intermediate good or service  A good or service that is produced by one firm, bought by another firm, and used as a component of a final good or service.  GDP includes only those items that are traded in markets.

12. What’s in GDP?  Included  Final goods and services only!  Not Included  Private transfer payments  Cash gifts from one person to another  Stock Market Transactions  Public transfer payments  Ex. Social Security, Welfare, Vet payments  Secondhand sales  Ex. Used clothes, used cars

14. Calculating GDP Two Ways:  Expenditure Method- adds up all of the spending on goods and services from these four categories  Households- Consumption  Firms- Investment  Government- Government purchases  Rest of the World-Spending on US exports  Income method- wages + rent + interest + profit

15. Personal Consumption- “C”  Three categories:  Durable Goods  Nondurable Goods  Services

16. Investment “I”  Gross Private Domestic Investment  All final purchases of machinery, tools, and equipment, factories, etc.  Investment=purchasing physical capital goods, NOT financial investment  All construction  Including residential  Changes in Inventories  We include ALL items produced even if NOT sold  The change in inventory is included in GDP.

17. Government Purchases “G”  Expenditures for goods and services  US Defense Dept buys weapons  State Dep’t buys travel services  Local gov’t buys cars for police  Expenditures for social capital  Roads, bridges, etc.  Post office

18. Net Exports “Xn”  Difference between Exports and Imports included in GDP(Exports minus imports)  Exports (X)-  Imports (M)-  Why don’t we include Imports?

19. Income Method  Wages: money paid to workers who supply their labor  Rent: money paid to property owners who supply land, buildings, or equipment  Interest: money paid to individuals who supply their personal savings for loans  Profit: money earned by business owners who provide entrepreneurship

20. Practice:  For the following slides, decide whether the scenario would be counted in GDP

21. GDP?  Shami earns $7.50/hr working a the local grocery store  Yes, wage

22. GDP?  The US armed forces invade a small island and in the process spend $5 billion on machines, arms, and ammunition  Yes, Gov’t purchases

23. GDP?  A rancher receives a monthly check for the oil pumped off of his property  Yes, rent

24. GDP?  Intel spends $300 million building a semiconductor factory in San Jose, Costa Rica  No, Not included- outside US

25. GDP?  Lindsey buys a new John Deere tractor for her organic farming business in New Hampshire  Yes, investment

26. GDP?  Jim and Frank decide to start a boy band and purchase a used Volkswagon Euro Van in which to tour  No, Not counted, used van

27. What goes into GDP?  Complete the worksheet  Identify whether the transaction listed would fall under C, I, G, or Xn  Or would it not be considered part of GDP at all?

29. GDP per Capita  Means GDP per person  Most meaningful measure  Why more meaningful than just using Total GDP?  Divide Real GDP by population  Compare the Total GDP and the GDP per capita.

30. GDP per Capita 2013 Does NOT mean that income is evenly distributed!

31. How well does GDP measure the welfare of a society?  What items are not included?  Non-market transactions  Housework, Self-repairs, Bartering  Quality of products  Composition of Products  Ex. If country only produces tanks, GDP doesn’t care  Underground economy  Informal Economy  Tips, babysitting, golf caddying  Black market economy

32. Calculating GDP NOMINAL V. REAL

33. Calculating GDP FFormula = CC +I +G +Xn (X- M) WWhich of these components accounts for the greatest portion of GDP?  In 2005 for the US  C=$8,742  +I=$2,057  +G=$2,373  +Xn=-$717  =$12.456 trillion ($12,456,000,000,000)

34. Real v. Nominal GDP  http://www.econedlink.org/interactives/index.p hp?iid=207&type=student http://www.econedlink.org/interactives/index.p hp?iid=207&type=student

35. Nominal GDP  A gross domestic product (GDP) figure that has not been adjusted for inflation.  Also known as "current dollar GDP"

36. Real GDP  An inflation-adjusted measure that reflects the value of all goods and services produced in a given year, expressed in base-year prices.  Often referred to as "constant-price," "inflation- corrected" GDP or "constant dollar GDP".

37. GDP Year Production of X Price X 2000 20 $5 2001 20$10 2002 20$20 Nominal GDP (P x Q) Real GDP (current year Q x base yr P) 2000 $1002000 $100 2001 $2002001 $100 2002 $4002002 $100

38. Economic Growth?  What does it tell us when NGDP increases?  Could be increase in production  Could be increase in price  Could be combination of production and price  What does it tell us when RGDP increases?  …b/c P is held constant to base year  ….increase is due only to increase in Q  ….= ECONOMIC GROWTH

39. Year Production of X Price X 2000 20 $5 2001 20$10 2002 20$20 Nominal GDP (P x Q) Real GDP (current year Q x base yr P) 2000 $1002000 $100 2001 $2002001 $100 2002 $4002002 $100 Conclusions??? Economic growth? Price Levels? There was no economic growth. There was only an increase in price level

40. Complete the Back of the Worksheet Then Complete the Next Worksheet