1. GDP Business Cycles Economic Growth
Chapter 12
GDP
Business Cycles
Economic Growth

2. What were some causes of the Great Depression?
High stock prices -Lots of speculation (buying on the margin) in the stock market because it was doing so well
Technology improve farming and price of crops dropped
Drought
Ordinary people went into debt for the first time to by consumer goods & stocks
Industries had inventory surpluses

3. Depression Factoids
Average wage dropped from 55 cents per hour to 5 cents per hour
Unemployment shot to 35%
Toledo, Ohio – unemployment was 80%
Wasn’t just a U.S. depression, became worldwide because of decrease in trade from U.S.
Poor economic conditions in Germany led to the rise of Adolf Hitler

4. Until 1945…. Stock market was the main economic indicator
Motivated economists to devise ways of measuring and predicting economic performance
Originally thought economy would regulate itself – Adam Smith
Great Depression changed that

5. Laws were passed to prevent another Depression
Social Security Act of 1935
Unemployment insurance
FDIC
Minimum Wage
Securities and Exchange Commission

6. Why do we measure the economy?
To check-up
on the economies vital signs to see if we are meeting our goals

7. Which measurement means the most to your life?
Inflation
Employment
GDP growth

8. Government Goals Full employment Stable prices Economic growth
Bill Clinton
George Bush Sr.

9. How do we check our economy?
Gross Domestic Product (GDP) – most important (since 1991)
Monitor Prices – are they rising?
1%, 2%, 3%, more???
Also look at other Leading Economic Indicators which measure the financial well being of the public
Each indicator is not accurate by itself
Look at all, get a good idea of what’s cookin’

10. Leading Economic Indicators
Average weekly hours in manufacturing
Average weekly initial claims for state unemployment insurance
New orders for consumer goods and materials
Prices of 500 common stocks
Contracts and orders for plant and equipment

11. More….. New building permits
Vendor performances, companies reporting less deliveries
Net change in inventories on hand/or order
Index of consumer expectations
Interest rate change US Treasury less federal funds
Money supply

12. Most Important today… Gross Domestic Product – real output
The dollar value of all final goods and services produced within a country’s borders in a given year
Dollar value – total of the selling prices of all goods and services produced in a country in one calendar year
Final goods and services – products in forms sold to customers
Not those used in the production of the final good
Better measure of American economic activity as it directly affects Americans in terms of labor, goods, and services consumption

13. Examples
House constructed in 1982 – counted in 1982, not when it is resold years later
Lumber, nails, sheet rock would not be counted in 1982 – only the final price of the house
Real estate fees would be counted
Cars assembles in Ohio by Toyota
Not cars assembled in Brazil by GM

14. GDP Formula GDP = C + I + G + EX –IM
C = Personal Consumption (Household Spending)
I = Business Investment or spending
G = Government expenditures (purchases)
EX = net export spending
IM = net import spending
(Note import spending is subtracted when calculating GDP.)
Reported three times for each fiscal quarter.
Called first, second, and third

15. Consumption Sector of the economy Definition Examples Household
Expenditures made by the household sector on goods for personal use
Examples
TV sets, telephones, clothes, lamps, cars

16. Investment Sector of the economy Definition Examples Business
Expenditures made by the business sector on goods used in producing other goods; also includes business goods
Examples
Tools, machines, factories

17. Government Sector of the economy Definition Examples
Government purchases
Definition
Expenditures made by federal, state, and local governments
Examples
Paper, pens, tanks, planes

18. Exports Sector of the economy Definition Examples Foreign
Expenditures made by foreigners for American-made goods
Examples
Cars, wheat, computers

19. Imports Sector of the economy Definition Examples Foreign
Expenditures made by Americans for foreign-made goods
Examples
Cars, radios, computers

20. How can you Increase GDP?
Increase our productivity
Get the most out of our scarce resources
Technology

21. Limits to GDP Can’t measure things you do by yourself
Lawn mowing, babysitting, cooking dinner
Black Market Activities
Illegal drugs, weapons, stolen cars
Trades with friends
Pokemon cards
Externalities
Clean environment
Does not measure quality of life
Divorce, health, crime, personal safety

22. GDP Per Capita A.K.A. – standard of living GDP/population
The dollar value of all finished goods and services available per person
GDP/population
This is not how much a person makes in a year
Have to look beyond the numbers – just because the economy is doing well does not mean the society is

23. GDP: types of goods Intermediate goods Durable goods Nondurable goods
Goods used in production of final goods
Durable goods
Goods that last for a relatively long time such as refrigerators, cars, and DVD players
Nondurable goods
Goods that last a short period of time, such as food, light bulbs, and sneakers

24. Different GDP’s Nominal GDP Real GDP GDP measured in current prices
GDP expressed in constant, or unchanging, prices

25. Not gdp….. Gross National Product Depreciation
The annual income earned by U.S. owned firms and U.S. citizens
Depreciation
The loss of capital equipment that results form normal wear and tear

26. Business Cycles Methods to predict business cycles Statistical Series
Leading economic indicators – statistical series that turns down before the economy turns down, and turns up before the economy turns up
LEI = composite index
Macroeconomic Modeling
Econometric modeling – mathematical expression used to describe how the economy is expected to perform in the future

28. Causes of Business Cycles
Changes in the money supply
Changes in business investments, residential construction, and government spending
Politics
Innovation
Dramatic changes to supply

29. Business Cycle Terms Peak Contraction Trough Expansion Recession
Height of an economic expansion when real GDP stops rising
Marked by a booming economy, full employment, inflation
Contraction
Period of economic decline marked by falling real GDP
Trough
The lowest point in an economic contraction, when real GDP stops falling
Expansion
Period of economic growth, measured by a rise in real GDP
Recession
Two consecutive economic quarters where GDP decreases
Human Costs – purchase less, political instability, increase crime

30. Depression
Very severe recession where there are large numbers of people out of work, acute shortages, and excess capacity in manufacturing plants
Jackson kills the bank
After WW II we have had short recession periods and longer expansion periods

31. Economic Growth Measuring Economic Growth
We can use GDP to measure standard of living, which relates to material goods.
We cannot use it, however as a complete measure of people’s quality of life.

32. Section 3: Economic Growth
Saving and Investment
Income that is not used for consumption is called saving.
The proportion of disposable income that is saved is called the savings rate.

33. Section 3: Economic Growth
Technological Progress
Technological Progress is an increase in efficiency gained by producing more output without using more inputs.
Causes of Technological Progress
Scientific Research
Innovation
Scale of the Market
Education and Experience
Natural Resource Use

34. Total Net Worth Top 1% Next 19% Bottom 80% 1983 33.8% 47.5% 18.7% 1898
37.4%
46.2%
16.4%
1992
37.2%
46.6%
16.3%
1995
38.5%
45.4%
16.1%
1998
38.1%
45.3%
16.6%
2001
33.4%
51.0%
15.5%
2008

35. Financial Wealth Top 1% Next 19% Bottom 80% 1983 42.9% 48.4% 8.7% 1989
46.9%
46.5%
6.6%
1992
45.6%
46.7%
7.7%
1995
47.2%
45.9%
7.0%
1998
47.3%
43.6%
9.1%
2001
39.7%
51.5%
8.8%
2008