2. WHAT’S IN GDP? )

3. 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

4. What is gross domestic product (GDP)?  Currency value (such as U.S. dollar) of all final goods and services produced within a country in a given period  Total income of a nation  Measure of nation’s economic well-being  Measure of a nation’s economic growth from one period to the next

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

6. 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

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

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

9. 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)

10. What’s included in GDP?  Consumption by households  Goods: groceries, clothes, iPods  Services: haircuts, oil changes

11. What’s included in GDP?  Investment by businesses and households  Fixed assets for production  New homes  Inventories

12. What’s included in GDP?  Government expenditures by local, state, and federal government  Roads and schools

13. What’s included in GDP?  Net exports  Value of a country’s exports to other nations, less its imports from other nations

14. What’s included in GDP?  GDP = Consumption + Investment + Government spending + Net exports

15. What’s not included in GDP?  Intermediate goods  Used goods  Underground production (black market)  Financial transactions  Household production  Transfer payments

16. Investment (I) Personal Consumption Expenditures (C) Government (G) Net Exports (NX) Fixed Investment Inventories ExportsImports Nonresidential Residential GDP What are the components of GDP? GDP = C + I + G + NX

17. How much of GDP is each component? Consumption (PCE) 70 % Investment 16% Government 19% Net Exports -5% Component % of GDP GDP 100% Average Percent of GDP since 2003 Source: Bureau of Economic Analysis

18. What is a good rate of growth?

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

20. 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

21. Real GDP  Real GDP compares current production to past production using constant prices

22. Real and nominal GDP  When GDP is computed in the current year’s prices, rising prices (inflation) can make it difficult to determine if a change in GDP from one year to the next is due to the country’s production of more goods and services or to increases in the price level.  Nominal GDP: GDP that is not adjusted for inflation. The value of goods and services in current prices.  Real GDP: The dollar price of GDP in a base year’s price, used to compare changes in GDP from one year to the next. An increase in real GDP is an increase in economic growth.

23. What GDP does not tell us  Does not measure income distribution  Does not measure non-monetary output or transactions (e.g., barter, household activities)  Does not take into account desirable externalities, such as leisure or environment  Does not measure social well-being  Correlates to standard of living but is not a measure of standard of living

24. Time out  GDP Practice  Which component does each scenario match up with C :: Consumption I :: Investment G :: Government X-M :: Net exports and imports NC:: Not counted

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

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

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

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

29. What GDP does not Measure  Quality of Life  Personal safety  Leisure time

30. 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

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

32. 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

33. 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

34. The Business Cycle

35. 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

36. 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

38. 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

39. 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

40. 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?

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

42. 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