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HOW DO WE MEASURE ECONOMIC GROWTH? GDP Calculation and the Business Cycle
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Gross Domestic Product (GDP) GDP is the market value of all final goods and services produced within a nation’s borders “Intermediate” does not include intermediate goods “Finisher” = YES GDP MEASURES : AGGREGATE SPENDING INCOME OUTPUT
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What’s the difference? Good or service produced for its final user Good or service produced by one firm, bought by another firm, and used as an input into a final good or service. Raw materials FINAL GOOD: YES! INTERMEDIATE GOOD: NO!
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GDP DOES NOT INCLUDE… ANYTHING WITHOUT A MARKET TRANSACTION Intermediate goods Nonmarket transactions Household chores Underground economy: Babysitting Black market Drugs, etc.
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How DO YOU CALCULATE AGGREGATE SPENDING? THIS IS HOW YOU DO IT: GDP = C + I + G+ X-M (NX)
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CONSUMPTION : 70% Household spending on Durable goods Cars and appliances Nondurable goods food Services College degree Haircuts
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I and G New capital machinery New trucks for UPS New construction ZARA building a new store Unsold inventory 2008 Porsche Carrera Law enforcement policemen Infrastructure Highways, airports *Does not include transfer payments because no dollars are spent Investment: spending in order to increase output Government Spending: purchase of final goods
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X – M (Net Exports) Sold to other countries Money flows to the United States Bought from other countries Money flows away from the U.S. in exchange for foreign production X = Exports M = Imports
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Nominal vs. Real GDP Nominal: Value of current production at current prices Overvalued due to inflation Ex: Price of movie 1930: $.05 Price of movie 2010: $9 *Real * Value of current production using fixed prices Takes out inflation Does not overvalue Used to compare GDP between different time periods
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WHICH OF THE FOLLOWING ARE CALCULATED IN GDP? QUICK GAME OF GDPARDY
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The Expenditure/Aggregate Approach: (C+I+G+X-M) The Income Approach: (R:W+I+P) Two ways to calculate GDP
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THE INCOME APPROACH Resource SuppliedIncome Received LandRent LaborWages CapitalInterest EntrepreneurshipProfit R + W+ I + P = Y + Indirect Income Taxes + Consumption of Fixed Capital+ Net foreign factor income = GDP
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EXPENDITURE = INCOME
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How can we use real GDP?
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1. To compare GDP/Capita across the world
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http://www.nber.org/cycles.html BUSINESS CYCLES TIME 2. To Compare GDP through Time
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REAL GDP GROWTH The shaded areas show recessions during our economy which is a period of 6 months with limited growth.
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THE BUSINESS CYCLE DEFINED Peak: The top of the cycle where Real GDP is at a maximum Unemployment is low Inflation may be high Contraction: Real GDP is falling for two consecutive quarters Unemployment rate is increasing Inflation falls, might have deflation
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THE BUSINESS CYCLE DEFINED Trough: The bottom of the Cycle where a contraction has stopped Unemployment is very high Expansion: A period where real GDP is growing and returning to Full Employment Unemployment is decreasing Inflation is increasing
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Business Cycles in the U.S.
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US Recession Status: 2009 http://www.economy.com/dismal/map/default.asp?src=nav http://www.economy.com/dismal/map/default.asp?src=nav
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US Recession Status: 2010, from the Dismal Scientist
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Global Economy Map Click on the link below to see how the global economy is doing. The Dismal Scientist, Global Economy The Dismal Scientist, Global Economy
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