1. Gross Domestic Product and Growth
Chapter 12

2. What makes a nation wealthy?
Rank the countries based on what you perceive makes the nations wealthy according to the decsriptions.

3. Why Measure Growth?
After the Great Depression, economists felt it was important to measure macroeconomic status to predict and prevent future economic downturns.
Established NIPA

4. NIPA National Income and Product Accounts
Collects data on production, income, investment, and savings
Maintained by the Department of Commerce
This data is reported and used to influence government policy

5. GDP (Gross Domestic Product)
Most important measure of wealth
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)

6. “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)

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

8. 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 (secondary goods)

9. Nominal vs. Real GDP Nominal GDP is GDP measured in current prices
Does not always measure an increase in output
To measure growth from year to year, economists measure Real GDP
Real GDP is measured by calculating GDP with constant price (accounts for inflation).

10. Limitations of GDP

11. Influences on GDP Aggregate Supply Aggregate Demand
The total amount of goods and services available in an economy at all price levels
Aggregate Demand
The total amount of goods and services demanded in an economy at all price levels

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
The meausrment may not be accurate but t is constant

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 reflected in GDP?
(a) The underground economy
(b) Non-market activities
(c) Mr. Klein’s extraordinary teaching at WHS
(d) Negative externalities

14. Business Cycles
Chapter 12, Section 2

15. 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

16. Phases of Business Cycles (cont.)
Peak…height of economic expansion
Contraction…economic decline marked by falling real GDP
Trough…bottom of contraction

17. Contractions with Different Characteristics
Recession…real GDP falls for two straight quarters
Prolonged period of economic contraction
Usually a rise in unemployment
Depression…a severe recession
Stagflation…decline in real GDP, combined with a rise in price level

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

19. Business Investment
Spending by business or non spending will change the cycle

20. Interest Rates and Credit
Low interest rates will lead to spending
High interest rates will lead to savings

21. Consumer Expectations
Consumers may spend or save
Like other things, consumer’s choices drive the economy

22. External Shocks Unpredictable and disrupt aggregate supply
Wars
Floods
Natural disasters
Oil shortage
Can be positive
Discoveries
Good weather

23. Review 1. A business cycle is 2. A recession 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.

24. Economic Growth
Chapter 12, Section 3

25. Economic Growth A change in GDP over time illustrates growth
For economic growth to occur, it should change with population
Real GDP per capita measures such growth and the standard of living

26. Quality of Life
GDP measures standard of living but not quality of life
Pollution
Stress
Nutrition
Also does not tell how GDP is distributed
Poor sections of the country
Poor percentage of population

27. Capital Deepening The process of increasing capital per worker
Goal is to increase productivity
Savings and investing lead to capital deepening

28. Population
Increased population without capital deepening will lower the standard of living
Increased population without increase in production will lower the standard of living

29. Government Taxes can increase or decrease capital deepening
It is dependent upon what the taxes are spent on

30. Foreign Trade
Foreign trade and running a trade deficit can actually be good in some ways
If the goods being traded enhance capital deepening
In the long run…this capital deepening can increase productivity and help to pay back debt that results from a trade deficit

31. 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

32. 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.