1. Introduction to Economics: Social Issues and Economic Thinking Wendy A. Stock PowerPoint Prepared by Z. Pan CHAPTER 6 MEASURING ECONOMIC ACTIVITY Copyright © 2013 John Wiley & Sons, Inc. / Photo Credit: Fuse/Getty Images, Inc

2.  Explain the circular flow model  Define gross domestic product  Describe differences in GDP across countries and time  Describe what business cycles are and how they occur  Illustrate the workings of the aggregate demand/aggregate supply model Copyright © 2013 John Wiley & Sons, Inc. 2 AFTER STUDYING THIS CHAPTER, YOU SHOULD BE ABLE TO:

3.  The Circular Flow Model shows the movement of income and spending between households and businesses in the economy. Copyright © 2013 John Wiley & Sons, Inc. 3 THE CIRCULAR FLOW MODEL

4. Copyright © 2013 John Wiley & Sons, Inc. 4 THE CIRCULAR FLOW MODEL WITH GOVERNMENT AND FOREIGN SECTOR

5.  Exports are the sale of goods and services to foreign buyers.  Imports are the purchases of goods and services from foreign producers. Copyright © 2013 John Wiley & Sons, Inc. 5 FOREIGN SECTOR

6.  Gross Domestic Product (GDP) measures the dollar value of all final goods and services produced in an economy in a given time period.  “dollar value”  “final goods”  “in an economy”  “in a given time period” Copyright © 2013 John Wiley & Sons, Inc. 6 GROSS DOMESTIC PRODUCT

7.  The income approach uses incomes earned by producers to measure GDP.  The value-added approach uses total sales minus the value of inputs to measure GDP.  The expenditures approach uses total expenditures on final goods and services to measure GDP. Copyright © 2013 John Wiley & Sons, Inc. 7 MEASURING GDP

8.  Income approach GDP = farmer’s income + miller’s income + baker’s income GDP = $2 + $3 + $4 = $9 per period  Value-added GDP = (farmer’s sale revenue - farmer’s input cost) + (miller’s revenue - miller’s cost) + (baker’s revenue - baker’s cost) GDP = ($2 - $0) + ($5 - $2) + ($9 - $5) = $9 per period  The expenditures approach GDP = total expenditures on final goods and service = $9 Copyright © 2013 John Wiley & Sons, Inc. 8 MEASURING GDP: AN EXAMPLE

9.  Consumption Expenditure (C) by households  Private Investment (I) by businesses  Government Expenditure (G) by government  Net Exports (X – M) GDP = C + I + G + (X – M) Copyright © 2013 John Wiley & Sons, Inc. 9 FOUR COMPONENTS OF EXPENDITURE

10. Copyright © 2013 John Wiley & Sons, Inc. 10 U.S. GROSS DOMESTIC PRODUCT IN 2011

11. Consumption (C) is household spending on final goods and services. Purchases of items like TVs, groceries, restaurant meals, and doctor and lawyer services are counted in consumption. Copyright © 2013 John Wiley & Sons, Inc. 11 FOUR COMPONENTS OF EXPENDITURE

12. Private Investment (I) is a measure of business spending on equipment used in production, spending on construction, and changes in business inventories. Copyright © 2013 John Wiley & Sons, Inc. 12 FOUR COMPONENTS OF EXPENDITURE

13. Government Expenditure (G) includes government spending on wages for government employees, government purchases of services, government purchases of final goods, and government investment in buildings and other capital.  Public transfer payments not included ( social security, debt service, unemployment insurance, etc.) Copyright © 2013 John Wiley & Sons, Inc. 13 FOUR COMPONENTS OF EXPENDITURE

14. Net Exports (X – M) is a measure of the difference between exports and imports.  Because C, I and G include spending on imported goods, we subtract off the value of imports (M) from total expenditure to ensure that it only includes domestic production. Copyright © 2013 John Wiley & Sons, Inc. 14 FOUR COMPONENTS OF EXPENDITURE

15. Copyright © 2013 John Wiley & Sons, Inc. 15 U.S. GDP (1929 – 2009)

16. Copyright © 2013 John Wiley & Sons, Inc. 16 INTERNATIONAL GDP COMPARISONS, 2010

17. Copyright © 2013 John Wiley & Sons, Inc. 17 INTERNATIONAL GDP PER CAPITA COMPARISONS, 2010

18.  Aggregate Demand (AD) is the demand for all goods and services in an economy, ceteris paribus.  Aggregate Supply (AS) is the supply of all goods and services in an economy, ceteris paribus. Copyright © 2013 John Wiley & Sons, Inc. 18 AD/AS MODEL

19. Copyright © 2013 John Wiley & Sons, Inc. 19 AD/AS MODEL

20. Copyright © 2013 John Wiley & Sons, Inc. 20 SHIFTS IN AD AND AS

21.  Factors that change any of the components in AD will shift AD curve.  C  I  G  X - M Copyright © 2013 John Wiley & Sons, Inc. 21 FACTORS THAT SHIFT AD CURVE

22.  Prices of inputs  Productivity of inputs  Changes in technology  Cost of financing business activities  Interest rate Copyright © 2013 John Wiley & Sons, Inc. 22 FACTORS THAT SHIFT AS CURVE

23.  Business Cycles are recurring expansions and contractions in the level of aggregate economic activity.  Business Cycle Expansions are periods of increasing economic activity, rising production, and increasing employment. Copyright © 2013 John Wiley & Sons, Inc. 23 BUSINESS CYCLES

24.  Business Cycles are recurring expansions and contractions in the level of aggregate economic activity.  Business Cycle Expansions are periods of increasing economic activity, rising production, and increasing employment.  Business Cycle Contractions or Recessions are periods of decreasing economic activity, falling production, and falling employment. Copyright © 2013 John Wiley & Sons, Inc. 24 BUSINESS CYCLES

25. Copyright © 2013 John Wiley & Sons, Inc. 25 BUSINESS CYCLES

26. Copyright © 2013 John Wiley & Sons, Inc. 26 BUSINESS CYCLES IN AD/AS MODEL

27. QUESTIONS/DISCUSSIONS Copyright © 2013 John Wiley & Sons, Inc. 27 How will each of the following affect the GDP and the price level of the U.S. economy? a)The government drastically cuts its spending on goods and services. b)The UK bans all U.S. imports. c)The United States expands its military operations after the bombing of Pearl Harbor in 1941. d)A large group of oil-producing countries band together to restrict output and raise oil prices. e)The United States bans all imports from Canada.

28. Copyright © 2013 John Wiley & Sons, Inc. 28 KEY CONCEPTS Exports Imports Gross domestic product Aggregate demand Aggregate supply Price level Business cycles Business cycle expansions Business cycle contractions Recessions