1. Gross Domestic Product and Growth
Chapter 12
Gross Domestic Product and Growth

2. How Can We Measure Economic Growth?
Gross Domestic Product (GDP) – dollar value of all goods and services produced in the country’s borders in a year
Dollar Value is the final selling price to consumers

3. Calculating GDP
Includes cars built in America by a Japanese company
Does not include cars built in Japan by an American company

4. Calculating GDP
Includes cars that are sold to consumers (the final good)
Does not include rubber, glass, or steel bought by the automaker (intermediate good used to make the final good)
Prevents double counting; the cost of inputs is already in the price

5. Two Approaches to Calculating GDP
The Expenditure Approach
add together final value of all goods and services

6. Formula for Expenditure Approach
C + I + G + NX = GDP
C is Consumer spending
I is Business investments
G is Government spending
NX is Net Exports
U.S. current GDP = $13.8 Trillion (#1 in the World)

7. Two Approaches to Calculating GDP
Income Approach – add all people’s annual income together
Easier, since IRS already does this

8. Nominal vs. Real GDP
Just because GDP is higher, it does not mean the economy is necessarily better

9. Nominal GDP Nominal means “by name only”
GDP is usually calculated by using current prices for either expenditure or income approach
Problem: Inflation would cause GDP to rise, which would indicate economic growth falsely

10. Real GDP
Real GDP compares current production to past production using constant prices

11. Per Capita GDP
Measures economic output per person (per capita always means per person)
Shows how changes in GDP are affecting the average person in an economy

12. Typical High School Boy Questions?
This is stupid. Why do we have to learn this?

13. What GDP does not Measure
Nonmarket Activities
Bartering
Doing Favors for people
Producing your own goods

14. What GDP does not Measure
Cookie Monster want $2Gs on Cookie!
Underground Economy
Black markets
Drug dealing
Gambling

15. What GDP does not Measure
Cookie Monster have Type 2 Diabetes.
Negative Externalities
Pollution
Disease

16. What GDP does not Measure
Quality of Life
Personal safety
Leisure time

17. Other Economic Statistics to Watch
Rate of Inflation
Measured by the Consumer Price Index (CPI)
Takes a “market basket” of commonly bought goods, measures changes in price of the market basket from month to month
Rising CPI = Inflation
Unemployment Rate
Poll taken by U.S. Bureau of Labor Statistics
Measures what % of people are looking for work and are not currently employed

18. GDP, Supply and Demand
GDP and Price Levels in macroeconomics are graphed similarly to Quantity and Price in microeconomics

19. GNP
GNP measures output of Americans, rather than output within the United States
GDP + $ from U.S. Business overseas - $ from Foreign Business here = GNP
Doesn’t help measure success of economy… more a measure of national economic power abroad

20. The Business Cycle
In any capitalist country, the economy will go up and down as time passes
This process looks like a roller coaster when graphed

21. The Business Cycle

22. Phases of the Business Cycle
Expansion – real GDP is rising
Peak – real GDP stops rising, unemployment % is low
Contraction – falling real GDP, increasing unemployment
Trough – lowest point, real GDP stops falling

23. Terms for Describing Contraction and Trough
Recession – contraction happens for 6 straight months
Depression – no official definition, just means extremely bad, long contraction
Stagflation – drop in GDP plus rising inflation

24. Stephen Colbert Explains:
Recessions

26. Factors That Cause the Business Cycle
Interest rates and credit fluctuations
The Fed helps to restrict these effects by increasing and decreasing rates to slow and speed the business cycle

27. Factors That Cause the Business Cycle
Consumer Expectations – they will spend if they believe times are good, they will save if they believe bad times are coming
Spending means banks have less capital, economy will expand now but contract later
High savings provides capital for future economic growth

28. Factors that Cause the Business Cycle
Savings Rate - % of disposable (spendable) income saved by Americans
Fun Fact! – Savings Rate generally drops in America during good economic times
What effect does that have?

29. Factors That Cause the Business Cycle
External Shocks – Negatively affect aggregate supply, thus dropping GDP while raising prices

30. Economic Indicators
Things to watch to see if the economy is in contraction or expansion
rate of new home construction
stock market activity
manufacturer’s new orders of capital goods