1. Gross Domestic Product
EQ: how are gross domestic product and gross national product influenced by business cycles?
In this lesson, students will be able to identify characteristics of the Gross Domestic Product.
Students will be able to identify and/or define the following terms:
Gross Domestic Product (GDP)
Real GDP
Inflation
Durable Goods
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2. Do you remember the Invisible Hand? It was the idea that the
economy would
always fix
itself.
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3. But when the Great Depression happened, the
economy didn’t seem to fix itself.
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4. The Effects of the Great Depression on Economists:
The Great Depression taught economists that they needed some way of tracking the nation’s economy.
By tracking the nation’s economy, economists could determine if the economy was in danger of a recession or a depression and could try to apply economic policies to prevent such hardships from occurring.
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5. The Gross Domestic Product (GDP) is a tool
for tracking macroeconomic progress.
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6. Gross Domestic Product (GDP)
The Gross Domestic Product is the dollar value of all final goods and services produced within a country’s borders in a given year.
In order for a good to be included in a nation’s GDP, it must be made in that country.
It doesn’t matter if the factory is owned by a foreign company as long as the factory is located in the country where GDP will be calculated.
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7. By tracking GDP, economists can tell whether
an economy is growing (expanding) or
shrinking (contracting).
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8. Real GDP
While nominal GDP is expressed in current prices, real GDP is adjusted for inflation.
Inflation means rising prices. The problem with GDP is it could appear to rise when in reality only prices rose.
In other words, one million in1970 dollars is not the same as one million in 2006 dollars. The dollars must be adjusted to 1970 dollars in order to effectively compare the two amounts.
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9. Real GDP is GDP that has been adjusted
for inflation.
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10. Durable and Nondurable Goods
The goods included in GDP are durable and nondurable goods.
Durable goods are goods that last for a relatively long time, such as refrigerators and cars.
Nondurable goods last for a short period of time like food and paperback books.
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11. A refrigerator is a durable good. It lasts
a long time.
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12. Food is a
nondurable good.
It does not
last a long time.
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13. Just like going for your yearly physical allows you to track your
health and prevent
more serious problems
from occurring, GDP
tracks the economy’s
health.
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14. Questions for Reflection:
What did economists believe about the economy before the Great Depression?
What is Gross Domestic Product or GDP and why is it important?
Why do economists adjust GDP for inflation and what is this adjusted GDP called?
What is the primary difference between durable and nondurable goods?
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15. Business Cycle
In this lesson, students will be able to identify characteristics of the business cycle.
Students will be able to identify and/or define the following terms:
Business Cycle
Expansion
Peak
Contraction
Trough
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16. A business cycle is a period of macroeconomic
expansion followed by a period of contraction.
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17. The Four Phases of a Business Cycle
There are four phases in a business cycle:
Expansion: a period of economic growth
Peak: the height of the expansion
Contraction: a period of economic decline
Trough: the lowest point of the contraction
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18. Gross Domestic Product
When an economy
is expanding or
growing, many people
have jobs and many
goods and services
are being produced
and sold. At the peak
of the expansion,
Gross Domestic Product
is as high as it will
go for that particular
business cycle.
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19. During a period of contraction, more people are unemployed
and fewer goods
and services are
being produced
and sold. Not
all contractions
are equally
severe.
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20. Recessions and Depressions
Each phase of the business cycle is determined by monitoring Gross Domestic Product.
A contraction that lasts for at least six months is called a recession.
A particularly severe and long contraction is called a depression.
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21. The Great Depression was the most severe economic contraction in the
history of the
world. It
permanently
changed the way
economists think.
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22. Factors Which Affect the Business Cycle
The following four factors can affect the business cycle:
Investment in Businesses
Interest Rates
Consumer Expectations
External Shocks
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23. The more money people invest in businesses,
the more money businesses have to grow.
Investment affects the business cycle.
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24. Interest is the price of borrowed money. When
interest rates are high, people borrow less.
Businesses borrow less too.
Interest rates affect the business cycle.
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25. When people are optimistic about the future,
they spend more money. Optimism affects
the business cycle.
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26. External shocks can be positive or negative.
An earthquake is a negative external shock.
It affects the business cycle.
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27. Throughout American history, there have been
many business cycles.
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28. Questions for Reflection:
Define the business cycle.
What are the four phases of the business cycle and explain each phase?
What are the four factors that affect the business cycle and how does each factor affect the business cycle?
What is the relationship between Gross Domestic Product and the four phases of the business cycle?
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29. Technological Progress
Economic Growth
In this lesson, students will be able to identify factors which lead to macroeconomic growth.
Students will be able to identify and/or define the following terms:
Real GDP per capita
Capital Deepening
Savings Rate
Technological Progress
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30. Our world’s population has increased greatly in
the last 200 years.
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31. Population and the Economy
A nation’s population tends to grow.
Gross Domestic Product must keep up with the population growth rate.
If the economy does not continue to grow as population grows, unemployment and hunger will increase.
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32. The economy is like a pie. The bigger the
pie, the more people can be fed.
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33. Real GDP Per Capita
It is important to remember that real GDP is GDP that has been adjusted for inflation.
Per capita means per person.
Therefore, real GDP per capita is a way of determining how much money each person in a society would receive if wealth from GDP was divided equally among the people of that nation.
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34. A country with a high standard of living has
a high real GDP per capita.
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35. Capital Deepening
One way to increase economic productivity is through capital deepening.
Capital deepening is the process of increasing the amount of capital per worker.
Better educated workers can produce more output per hour of work.
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36. Better educated workers are more productive
workers. Education helps the economy to grow.
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37. Savings Rate Money that is saved is available for investment.
The savings rate is the portion of disposable income spent to the portion of disposable income saved.
A country with a higher savings rate will be more likely to experience economic growth because more money will be available to invest in businesses.
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38. The more money citizens of a country save, the more money is available
for businesses to expand.
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39. When education rates and savings rates
increase, the economy grows. And
when the economy grows, people have
jobs, shelter, food, and the comforts of life.
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40. Technological Progress
Another key source of economic growth is technological progress.
This is an increase in efficiency gained by producing more output.
replacing slower “snail mail” is an example of technological progress.
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41. Technological progress like email greatly
increases business efficiency. Greater
efficiency means greater profits.
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42. Questions for Reflection:
Why must the economy continue to grow as population increases?
Why is it important for economists to calculate real GDP per capita?
What is capital deepening and how does it affect economic growth?
How does the savings rate help the economy to grow?
Why is technological progress important?
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