1. Gross Domestic Product (GDP) and Growth Chapter 12

2. National Income and Product Accounts  National income accounting  A system that collects macroeconomic statistics on production, income, investment and savings  Department of Commerce  Began with Great Depression (1929)  Samuel Kuznets  Expanded with WWII  National income accounting  A system that collects macroeconomic statistics on production, income, investment and savings  Department of Commerce  Began with Great Depression (1929)  Samuel Kuznets  Expanded with WWII

3. Gross Domestic Product (GDP)  The dollar value of all final goods and services produced within a country’s borders in a given year  Dollar value: selling price of g/s  Final g/s: sold to consumers (not intermediary goods or services)  Within a country: geographic area, even if foreign owned  The dollar value of all final goods and services produced within a country’s borders in a given year  Dollar value: selling price of g/s  Final g/s: sold to consumers (not intermediary goods or services)  Within a country: geographic area, even if foreign owned

4. Two Approaches  Expenditure or Output - Expenditure  Consumer g/s ( C )  Durable + nondurable  Business g/s (I)  Government g/s (G)  Exports - imports (Ex - Im)  Income  Rent  Interest  Wages  Expenditure or Output - Expenditure  Consumer g/s ( C )  Durable + nondurable  Business g/s (I)  Government g/s (G)  Exports - imports (Ex - Im)  Income  Rent  Interest  Wages

5. Circular Flow of Output and Income  Output = Expenditure  Aggregate Output = Aggregate Expenditure  AO = AE  Output = Expenditure  Aggregate Output = Aggregate Expenditure  AO = AE

6. Nominal v. Real GDP  Nominal GDP: in current dollars  Real GDP: correct for inflation/deflation in prices  Nominal GDP: in current dollars  Real GDP: correct for inflation/deflation in prices

7. Limits of GDP  Non-market activities not counted  House work  Underground economy  Black market  Illegal activities  Under the table payments  barter  Negative externalities  Quality of life  Non-market activities not counted  House work  Underground economy  Black market  Illegal activities  Under the table payments  barter  Negative externalities  Quality of life

8. Influences on GDP  AS = AD - equilibrium = Real GDP  Aggregate Supply = AS  GDP increases = AS increases  GDP decreases = AS decreases  Price level increase AS decreases  Price level decreases AS increases  Aggregate Demand = AD  Price level decreases = AD increases  Prices level increases = AD decreases  AS = AD - equilibrium = Real GDP  Aggregate Supply = AS  GDP increases = AS increases  GDP decreases = AS decreases  Price level increase AS decreases  Price level decreases AS increases  Aggregate Demand = AD  Price level decreases = AD increases  Prices level increases = AD decreases

9. AD/AS AS Aggregate Supply AD Aggregate Demand Real GDP or Aggregate Output (AO) Price Level

10. Business Cycle  Phases  Expansion  upswing  Peak  Contraction  Trough  Recession  Depression  stagflation  Slowdown / down turn  Phases  Expansion  upswing  Peak  Contraction  Trough  Recession  Depression  stagflation  Slowdown / down turn

11. Business Cycle Graph

12. What keeps the Business Cycle Changing?  Business investment  Interest rates  Consumer spending - expectations  External shocks  Creative destruction (Joseph Schumpater)  Business investment  Interest rates  Consumer spending - expectations  External shocks  Creative destruction (Joseph Schumpater)

13. Forecasting Changes in the Business Cycle  Government watches and responds to changes  Fiscal policy  Monetary policy  Limits degree of flexuations  Leading indicators (variables)  Unemployment  Inventory changes  Stock market  Confidence indexes  Interest rates  Government watches and responds to changes  Fiscal policy  Monetary policy  Limits degree of flexuations  Leading indicators (variables)  Unemployment  Inventory changes  Stock market  Confidence indexes  Interest rates

14. Economic Growth  Increased productivity that allows each generation to be better off then the previous generation  Nominal v. real  Increased productivity that allows each generation to be better off then the previous generation  Nominal v. real

15. Measuring Economic Growth  GDP / population = per capita GDP  Quality of life  Environment  Family time  nutrition  GDP / population = per capita GDP  Quality of life  Environment  Family time  nutrition

16. Economic Growth & Productivity  Capital deepening: increasing the amount of capital per worker  Human capital  Physical capital  Savings  Capital deepening: increasing the amount of capital per worker  Human capital  Physical capital  Savings

17. Saving & Investment  Saving: income not consumed is saved (Y - C = Saving)  Saving rate  Saving: income not consumed is saved (Y - C = Saving)  Saving rate

18. Population, Government, and Trade  Population growth  Technology  Innovation  invention  Government  Taxes = public savings  Trade  Exports = increases aggregate demand  Imports = increases aggregate supply  Population growth  Technology  Innovation  invention  Government  Taxes = public savings  Trade  Exports = increases aggregate demand  Imports = increases aggregate supply

19. Technology  Scientific research  Innovation  Scale of the market  Education and experience  Natural resources  Scientific research  Innovation  Scale of the market  Education and experience  Natural resources