1. Taking the Nation’s Economic Pulse
Macro Chapter 7
Taking the Nation’s
Economic Pulse

3. 4 Learning Goals
Define gross domestic product and describe the key phrases of the definition (on your own)
List the ways to measure gross domestic product and identify the source of higher income levels
Differentiate between real and nominal GDP
Examine the limitations of using GDP as a measure of output and income(on your own)

4. GDP – A Measure of Output

5. Define gross domestic product and describe the key phrases of the definition (on your own)

6. GDP as a Measure of Both Output and Income

7. First way to measure GDP: expenditure approach
GDP = sum of purchases
GDP = Y = C + I + G + X
C = consumption; purchases for goods and services by consumers
I = investment
G = government purchases
X = net exports (exports – imports)

8. Investment ≠ buying stocks and bonds
Investment = businesses buying final goods and services to use in their production of another good
AND
consumers buying houses

9. Transmitter question next

10. Q7.1 Y = C+I+G+X. Which of the four is the largest component of GDP?
Consumption
Investment
Government purchases
Net Exports 30

11. Class Activity: What government agency calculates GDP
Class Activity: What government agency calculates GDP? How often is GDP calculated? How big is US GDP?
See bea.gov

12. Some GDP facts: 2nd quarter, 2014
GDP = $17,311.3 billion
That’s $17,311,300,000,000
C = 69%
I = 16%
G = 19%
X = -3%
(exports = 14%; imports = 17%)

13. Class Activity: The US is the world’s largest economy
Class Activity: The US is the world’s largest economy. Name the next four largest economies in order.
Let’s see them
Let’s see them differently

17. Video:

19. Second way to measure GDP: income approach
Add up income generated in the production of goods and services

20. The two methods of calculating GDP are summarized below:
Expenditure Approach
Resource Cost-Income Approach
Personal consumption expenditures
Aggregate income:
Employee Compensation
Income of self-employed
Rents
Profits
Interest +
Gross private domestic investment +
Government consumption
and gross investment +
Non-income cost items:
Indirect business taxes and depreciation +
Net exports of goods and services
= GDP
Net income of foreigners +
= GDP

21. Key Point: Higher income levels come from (are caused by) more output
That is, more output comes first, then higher income comes second
Two Transmitter questions next

22. Q7.2 If a used car dealer purchases a used car for $3,000, makes repairs and refurbishes it, then sells it for $8,000, the
dealer contributes value added equal to $5,000, but nothing is added to GDP.
dealer contributes value added equal to $5,000, and consequently $5,000 is added to GDP.
dealer contributes nothing to production because only existing goods are involved.
dealer contributes value added equal to $8,000, but only $5,000 is added to GDP. 60

23. GNP would remain unchanged GDP would rise GDP would fall
Q7.3 (PMA) An American-owned McDonald's opens in Russia. How would the net revenue earned by this restaurant affect the GDP and GNP of the United States?
GNP would rise
GNP would fall
GNP would remain unchanged
GDP would rise
GDP would fall
GDP would remain unchanged 60

24. Adjusting for Price Changes and Deriving Real GDP

26. Transmitter Question Next

27. Q7.4 Gasoline prices are lower right now than they were in 1980.
True
False 60

30. Video:

32. Nominal (money) _________ = current year data only
Real __________ = adjusted for inflation
Use a price index to adjust nominal data into real data

33. These two indexes are used to adjust nominal data to real data.
CPI: representative sample of goods bought by households, “market basket”
GDP deflator: accounts for almost all goods bought (broader measure than CPI)
Inflation = the percentage change in an index

34. The simplest example
Suppose all prices doubled between 1950 and Then $1 in 1950 would be equal to $2 in Or, $1 in 2000 would be equal to $0.50 in 1950.

35. See “Applications in Economics” on p. 142 of text.
See also fueleconomy.gov

36. Activity: What is the highest revenue-generating film ever made?
Let’s do the calculations

39. Transmitter question next

40. the inflation rate during 2006 was 30 percent.
Q7.5 If the GDP deflator in 2006 was 130 compared to a value of 100 during the 1996 base year, this would indicate that
the inflation rate during 2006 was 30 percent.
the general level of prices during 2006 was 30 percent higher than during 1996.
the inflation rate during 2006 was 130 percent.
nominal GDP grew by 30 percent during 2006.
real GDP was 130 percent higher in 2006 than 1996. 60

41. FYI
The real price of gas in 1980 was $3.23

42. Problems with GDP as a Measuring Rod

43. Examine the limitations of using GDP as a measure of output and income(on your own)

44. 4 Learning Goals
Define gross domestic product and describe the key phrases of the definition (on your own)
List the ways to measure gross domestic product and identify the source of higher income levels
Differentiate between real and nominal GDP
Examine the limitations of using GDP as a measure of output and income(on your own)