1. Gross Domestic Product
GDP

2. SSEMA1 The student will illustrate the means by which economic activity is measured.
Explain that overall levels of income, employment, and prices are determined by the spending and production decisions of households, businesses, government, and net exports.
Define Gross Domestic Product (GDP), economic growth, unemployment, Consumer Price Index (CPI), inflation, stagflation, and aggregate supply and aggregate demand.
Explain how economic growth, inflation, and unemployment are calculated.

3. Gross Domestic Product
GDP = the total market value of all final goods and services produced in a country in a year.
Two ways to measure GDP:
Expenditure approach
Income approach

4. Measuring GDP Expenditure
Expenditure Approach counts: (think expenses)
Consumption spending by households
Investment spending by businesses
Government spending
Net exports =
Exports – imports
Only final goods count to avoid double counting.
A car counts, but not individual tires, steering wheel, seats, nuts, bolts, etc used to make the car.

5. Reasoning I spend money on your goods/services You earn income Issues:
Goods bought include:
Responses to terrorism, pollution, natural disaster
Left out:
Leisure time activities, time spent w/family

6. Mixed bag Who contributes to the GDP? Divorcee Retiree Heart surgery
Wars, hurricanes, disease, crime = contribute

7. Y = C + I + G + X -M National GDP Is composed of
Consumption by households
Investment purchases of business and households
Government Spending
Total Exports minus
Total Imports

8. Recap - GDP The expenditure approach
transactions made in the product market.
product market =
households use incomes to purchase goods/services from firms.
household expenditures (consumption), business expenditures on capital (investment), military contracts (government spending), and foreign expenditures on U.S. goods and services (net exports).
Note: Changes in these expenditures shift the aggregate demand curve

9. Value approach (Income approach)
Examines output values.
Has different way of avoiding double counting
$1 worth cotton bought =
$5 fabric =
$30 dress
30= 1(price of the cotton) + (5 – 1)(the fabric – the price of the cotton) + 30 – 5 (the dress – the price of the fabric)

10. Income Approach Transactions on factor market
Factor Market = firms pay households for resources
i.e. land, labor, capital w/specific income payment
Firms pay: rent, wages, interest (borrow $)
Note: Changes in these costs of production shift the short-run aggregate supply curve

11. GDP = Media Darling Government + media = GDP Growth = Best thing ever!
Is it really?
Signals societal failures
Bad stuff is happening
Bad habits growing
war started,
more fast food instead of home cooked,
nannies instead of parents,
social media instead of friends

12. Bad Stuff Defensive Goods and services Corruption Natural disasters
Disease
War
Pollution
Congestion
Work related stress

13. Not Counted Spending on: Raw materials Intermediate goods
Car parts, etc
Anything for resale
Purchase of stocks and bonds (transfer of money nothing is bought)
Money put in savings
Leisure activities
reading, listening to music, etc.
Household activities:
cleaning, cooking, mowing lawn, etc.

14. Not included Retirement Days off Vacations Child care Housework
Gardening
DIY

15. Economic Growth Real GDP = GDP adjusted for inflation.
achieved through an increase in real GDP
Economic growth can be shown by an outward shift of the production possibilities curve.
economic growth = gains in new technology used to improve production or gains in new factors of production.

16. Vocabulary
Gross Domestic Product = the total market value of all final goods and services produced within a country in a given time period.
“market value” – GDP uses market prices of goods and services for calculations.
“final goods” = The Finished product.
Intermediate goods = Materials purchased by companies that become part of the final good.
“produced within a country” – All final goods produced within the United States are counted in U.S. GDP, foreign or domestic.

17. Inflation
Inflation = occurs in an economy when the average price level of goods and services rise over time.
An index number, i.e. consumer price index, is used to calculate the inflation rate between two specified years or periods
Base year = basis of comparison for all other periods
Calculating:

18. Real GDP https://sp1.yimg.com/ib/th?id=H.4717241166463561&pid=15.1
Nominal GDP = GDP not adjusted for inflation
Implicit price deflator = an index of average levels of prices for all goods and services in the economy.
Real GDP = GDP that is adjusted for inflation, a/k/a GDP in constant dollars
Calculating real GDP:

19. Stagflation Stagflation = economic condition
rising average price level (inflation)
decrease in Real GDP (recession)
usually accompanied by a rising unemployment rate.
Usually real GDP declines w/falling price level.
stagflation = stimulating economic growth = rising prices.
Causes: The most common causes of stagflation include
negative supply shocks i.e. large increase in the price of oil or major increases in regulation and/or corporate tax rates by the government.

20. Aggregate Supply
Aggregate Supply = total of all goods and services firms are willing/able to supply at each price level in a given period of time.
Short run = aggregate supply curve (SRAS) is upward-sloping showing a direct relationship between price level and real GDP.
It is upward because wages/prices slow to change due to contracts. a/k/a sticky wages/prices
Long run = prices completely flexible
supply curve (LRAS) is vertical at the full employment level of real GDP (real output or real national income).

21. Aggregate Demand
Aggregate Demand = total quantity of all goods and services consumers are willing and able to purchase at each price level in a given period of time.
The aggregate demand curve (AD) is downward-sloping showing an inverse relationship between price level and real GDP.

22. Three Effects
The interest rate effect = downward slope of the aggregate demand curve because
price level rises
interest rates (the price of borrowing money) rises
consumers and businesses spend less on interest sensitive purchases i.e. cars, new homes, and physical capital.
The wealth effect occurs = rising price level reduces the purchasing power of consumers = lowers consumption
foreign purchases = higher price level in a country = country’s exports higher = reducing demand for the country’s exports in other countries.

23. Economic Growth
Economic growth = calculated by finding the percentage change in real GDP from one time period to the next.
If the real GDP growth rate = positive, then economic growth has occurred.
Real GDP Trill
Real GDP Trill
/ X 100 = 1.72% positive growth rate.

24. Inflation Rate
The inflation rate = calculated by finding the % change in the price index from one period to another.
Example
June 2011 the CPI as reported by the Bureau of Labor statistics was
In June 2012, the CPI was
Inflation Rate = June June 2011 divided by June 2011 multiplied by 100 =
– = / = X 100 = 1.66 % inflation rate, OR 1.7% rounded.