1. Macroeconomics Gross Domestic Product

2. Categories of GDP C - Personal Consumption Expenditure Consumer purchases- includes durable & nondurable goods I- Gross Investment Total value of all capital goods produced in a nation during one year and also, changes in the dollar value of business inventories. G- Government Purchases of goods and services Includes highways, national defense, public education spending. Not included: SS and aid payments (X-M) – Net export of goods and services Exports minus imports. Includes value of goods and services made in US but sold elsewhere, but not the valued of goods made in other countries but consumed here. Can be a positive or negative number depending on whether one has a trade surplus (exporting more than importing) or a trade deficit (importing more than exporting)

3. Limitations of GDP (What doesn’t it count?) 1. Nonmarket Activities G & S that people make or do themselves Ex. Caring for own children, mowing own lawn, or cooking own dinner. GDP ignores: Household work, financial transactions (buying stock) & transfer payments (Social Security). 2. Negative Externalities Unintended economic side effects, such as pollution, have a monetary value that is often not reflected in GDP.

4. 3. Quality of Life Q o L measurements are not included: leisure time, pleasant surroundings, and personal safety. Even though rising GDP is an indicator of well-being. 4. Underground economy Illegal activities (Black Market) & informal, legal transactions (Selling car to friend, mowing lawns) Limitations of GDP (What doesn’t it count?)

5. 5. Secondhand sales Reselling a good from one person to another - no new wealth is created. Only the original sale is included in GDP. 6. Intermediate Products Products used to make other products Example: A farmer sells tomatoes to a wholesaler. Wholesaler to restaurant. Restaurant to consumers. If we counted sold, we would count them three times. Instead, their value will be counted at the price you pay for them as they go into your hamburger. Limitations of GDP (What doesn’t it count?)

6. Nominal and Real GDP Year 1 Nominal GDP Suppose an economy‘s entire output is cars and trucks. This year the economy produces: 10 cars at $15,000 each = $150,000 + 10 trucks at $20,000 each = $200,000 Total = $350,000 Since we have used the current year’s prices to express the current year’s output, the result is a nominal GDP of $350,000. In the second year, the economy’s output does not increase, but the prices of the cars and trucks do: This new GDP figure of $370,000 is misleading. GDP rises because of an increase in prices. Economists prefer to have a measure of GDP that is not affected by changes in prices. So they calculate real GDP. 10 cars at $16,000 each = $160,000 + 10 trucks at $21,000 each = $210,000 Total = $370,000 Year 2 Nominal GDP 10 cars at $15,000 each = $150,000 + 10 trucks at $20,000 each = $200,000 Total = $350,000 To correct for an increase in prices, economists establish a set of constant prices by choosing one year as a base year. When they calculate real GDP for other years, they use the prices from the base year. So we calculate the real GDP for Year 2 using the prices from Year 1: Year 3 Real GDP Real GDP for Year 2, therefore, is $350,000 Types of GDP Nominal GDP Measured in current prices. It does not account for price level increases from year to year. Real GDP Expressed in constant, or unchanging, dollars.

7. What is Gross National Product? GDP + Income earned outside U.S. (U.S. firms & citizens) – Income earned by foreign firms & citizens in the U.S.

8. Factors Influencing GDP Aggregate Supply Total amount of G & S in the economy available at all possible price levels. As price levels rise, aggregate supply rises and real GDP increases. Aggregate Demand Amount of G & S that will be purchased at all possible price levels. Lower price levels will increase aggregate demand as consumers’ purchasing power increases. Aggregate Supply/Aggregate Demand Equilibrium Combining AS & AD curves, equilibrium for the macro economy can be determined.

9. Percentage of GDP

10. What Is a Business Cycle? Industrial economies experience cycles of good times, then bad times, then good times again. Four Main Phases -Expansion (Rising), peak (high point), contraction (Falling), and trough (low point).

11. What Keeps the Business Cycle Going ? Four main economic variables: Business Investment Investment creates new jobs and furthers expansion. Expanding economy = more investment in plants & equipment. In a recession, the opposite occurs. Interest Rates and Credit Low interest rates = new investments (Often adding jobs to the economy.) Higher interest rates = less investments (Less jobs) Consumer Expectations Forecasts of an expanding economy often fuel more spending. Fears of recession tighten consumers' spending. External Shocks External shocks, such as disruptions of the oil supply, wars, or natural disasters, greatly influence the output of an economy.

12. Business Cycles ExpansionContraction Real GDPGrowingNegative UnemploymentDecreasingIncreasing BusinessesExpandingClosing ProductionIncreasingDecreasing Interest RatesLowHigh Consumer Spending IncreasingDecreasing

13. Forecasting Business Cycles Economists try to predict changes in the business cycle. Use Leading indicators key economic like the stock market performance & interest rates.

15. Rank Order GDP 2006 RankCountryGDP 1World$65,000,000,000,000 2United States$12,980,000,000,000 3European Union$12,820,000,000,000 4China$10,000,000,000,000 5Japan$4,220,000,000,000 6India$4,042,000,000,000 7Germany$2,585,000,000,000 8United Kingdom$1,903,000,000,000 9France$1,871,000,000,000 10Italy$1,727,000,000,000

16. GDP 2010 1 European Union $ 14,890,000,000,000European Union 2 United States $ 14,720,000,000,000United States 3 China $ 9,872,000,000,000China 4 Japan $ 4,338,000,000,000Japan 5 India $ 4,046,000,000,000India 6 Germany $ 2,951,000,000,000Germany 7 Russia $ 2,229,000,000,000Russia 8 Brazil $ 2,194,000,000,000Brazil 9 United Kingdom $ 2,189,000,000,000United Kingdom 10 France $ 2,160,000,000,000France

18. The basic measure of a nation’s economic growth rate is the percentage change of real GDP over a given period of time. Measuring Economic Growth GDP and Population Growth Real GDP per capita -measure of real GDP divided by the total population. Real GDP per capita is considered the best measure of a nation’s standard of living. GDP and Quality of Life Measurement of real GDP per capita excludes many factors that affect the quality of life.

21. Sources of Economic Growth 1.Capital Deepening 2.Savings & Investing 3.Technological Progress -Increase in efficiency gained by producing more output without using more inputs. -Innovation, scale (size) of the market, & education/experience.

22. Other Factors Affecting Growth Population Growth If population grows while the supply of capital remains constant, the amount of capital per worker will actually shrink. Government Government can affect the process of economic growth by raising or lowering taxes. Government use of tax revenues also affects growth: funds spent on public goods increase investment, while funds spent on consumption decrease net investment. Foreign Trade Trade deficits, the result of importing more goods than exporting goods, can sometimes increase investment and capital deepening if the imports consist of investment goods rather than consumer goods.

23. What is the business cycle? With your group members design a poster that explains the business cycle. You need to draw the business cycle and include the following: Trough, Peak, Expansion, Contraction. Include a brief description of each.