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Title: Pump Primer


1
Pump Primer
  • Using your textbook
  • Define Gross Domestic Product.
  • List at least three categories that are not
    listed in GDP.

2
By Alan J. CarperBob Jones University Press. 1998
ECONOMICS for Christian Schools
  • Unit V Economics of the Government

3
Measuring the Wealth of the Nation
  • Chapter 12

4
Objectives
  • Define gross domestic product
  • Differentiate between final and intermediate
    goods
  • Identify the four categories of expenditures used
    to tabulate the GDP
  • Explain why the nominal GDP figure is not
    entirely accurate and needs adjustment to become
    more useful

5
Objectives
  • Define trade deficit and trade surplus
  • List the reasons that a nation might experience a
    trade deficit
  • Explain the positions of the protectionists and
    the supporters of free trade

6
MACROECONOMIC APPROACHES AND PATHWAYS
  • The Two Main Schools of Thought
  • The two main approaches to macroeconomics are
    based on two schools of thought
  • Classical macroeconomics
  • Keynesian macroeconomics

(Bade slide 4)
7
MACROECONOMIC APPROACHES AND PATHWAYS
  • Classical macroeconomics is a body of theory
    about how a market economy works and why it
    experiences economic growth and fluctuations.
  • The economy will fluctuate, and growth will slow
    down from time to time.
  • But no government remedy can improve the
    performance of the market.
  • The classical view markets work well and
    deliver the best available macroeconomic
    performance.

(Bade slide 5)
8
MACROECONOMIC APPROACHES AND PATHWAYS
  • Classical macroeconomic fell into disrepute
    during the 1930s, which was a decade of high
    unemployment and stagnant production throughout
    the world. (i.e., Great Depression)
  • Classical macroeconomics predicted that the Great
    Depression would end, but gave no method for
    ending it more quickly.

(Bade slide 6)
9
MACROECONOMIC APPROACHES AND PATHWAYS
  • Keynesian macroeconomics is a body of theory
    about how a market economy works that stresses it
    inherent instability and the need for active
    government intervention to achieve full
    employment and sustained economic growth.
  • John Maynard Keynes, in his book The General
    Theory of Employment, Interest, and Money, began
    this school of thought.
  • Keynes theory was that too little consumer
    spending and investment lead to the Great
    Depression.

(Bade slide 7)
10
MACROECONOMIC APPROACHES AND PATHWAYS
  • Keynes solution to depression and high
    unemployment was increased government spending.
  • But Keynes predicted that his policy aimed at
    curing unemployment in the short term might
    increase it in the long term.
  • This prediction became reality during the 1960s
    and 1970s, when inflation exploded, growth
    slowed, and unemployment increased.
  • It was time for another challenge to the
    mainstream new macroeconomics

(Bade slide 8)
11
MACROECONOMIC APPROACHES AND PATHWAYS
  • The New Macroeconomics
  • New macroeconomics is a body of theory about how
    a market economy works based on the view that
    macro outcomes depend on micro choicesthe
    choices of rational individuals and firms
    interacting in markets.
  • New classical macroeconomics incorporates the
    ideas of classical economists that markets work
    and new Keynesian macroeconomics that markets
    adjust slowly.

(Bade slide 9)
12
MACROECONOMIC APPROACHES AND PATHWAYS
  • The key difference between the two new schools is
    in their view of how quickly price and wages
    adjust in the face of excess demand or excess
    supply.
  • But this difference is tiny, and a consensus is
    emerging.
  • The Road Ahead
  • We follow the new consensus and begin with an
    explanation of what determines real GDP and
    employment and the pace of economic growth.

(Bade slide 10)
13
Gross Domestic Product
One persons spending is another persons
income.
14
Gross Domestic Product
  • The gross domestic product, or GDP, is commonly
    used to measure economic growth.
  • The GDP in the dollar value at market prices of
    all final goods and services produced in the
    economy during a stated period.
  • Final goods are goods intended for the final
    user.
  • For example, gasoline is a final good but crude
    oil, from which gasoline and other products are
    derived, is not.

(NCEE slide 26)
15
Gross Domestic Product
  • GDP also aims to be a full count of the value of
    everything that is produced.
  • Includes only those items that are traded in U.S.
    markets.
  • GDP does not include
  • sale of used goods (used cars)
  • sale of intermediate goods
  • illegal transactions
  • purely financial transactions (A financial
    transaction does not involve production of a good
    or service. It is a transfer of assets.)
  • do-it-yourself activities
  • imports (goods made outside of U.S.)

16
How GDP is Measured
  • Business Investment
  • a. Gross private domestic investment (GPDI), or
    business investment
  • - sum of all business spending on capital
    investment and unplanned inventories.
  • Government Spending
  • - Federal, state and local governments
    purchase approx. 1 of every 5 worth of
    products and services

(Carper, 170-171)
17
How GDP is Measured
  • Net Exports
  • a. Exports (products sold to other countries)
  • b. Imports
  • products purchased from other countries
  • includes net income from assets abroad

(Carper, 172)
18
The Output Market
Rest of World
Government borrows crowding out both
consumption and Investment.
The Financial Market
Government
Firms
Households
The Input Market
19
Macroeconomic Goals
  • Activity 11

by Advanced Placement Economics Teacher Resource
Manual. National Council on Economic Education,
New York, N.Y.
20
Part C Measuring Short-Run Economic Growth
  • Before using GDP to measure output growth, we
    must first adjust GDP for price changes.
  • Lets say GDP in Year 1 is 1,000 and in Year 2
    it is 1,100. Does this mean the economy has
    grown 10 percent between Year 1 and Year 2?
  • Not necessarily. If prices have risen, part of
    the increase in GDP in Year 2 will merely
    represent the increase in prices.
  • We call GDP that has been adjusted for price
    changes real GDP. If it isnt adjusted for price
    changes, we call it nominal GDP.
  • To compute real GDP in a given year, use the
    following formula

Real GDP in Year 1 (nominal GDP x 100) / price
index
21
  • To computer real output growth in GDP from one
    year to another
  • Subtract real GDP from one year to another
  • Subtract real GDP for Year 2 from real GDP in
    Year 1.
  • Divide the answer (the change in real GDP from
    the previous year) by real GDP in Year 1.
  • The result, multiplied by 100, is the percentage
    growth in real GDP from year 1 to Year 2.
  • (If real GDP declines from Year 1 to Year 2, the
    answer will be a negative percentage.)
  • Heres the formula

(real GDP in Year 2 real GDP in Year 1)
Output growth
x 100
real GDP in Year 1
Example If real GDP in Year 1 1,000 and in
Year 2 1,028, then the output growth rate from
Year 1 to Year 2 is 2.8 (1,028 1,000)/1,000
.028, which we multiply by 100 in order to
express the result as a percentage (2.8).
22
  • To understand the impact of output changes, we
    usually look at real GDP per capita.
  • To do so, we divide the real GDP of any period by
    a countrys average population during the same
    period.
  • This procedure enables us to determine how much
    of the output growth of a country simply went to
    supply the increase in population and how much of
    the growth represented improvements in the stand
    of living of the entire population.

23
Example, lets say the population in Year 1 was
100 and in Year 2 it was 110. What was the real
GDP per capita in Years 1 and 2?
Year 1 Real GDP per capita
Year 1 real GDP
1,000

10
Population in Year 1
100
Year 2 Real GDP per capita
1,028
9.30
110
  • In this example, the average standard of living
    fell even though output growth was positive.
    Developing countries with positive output growth
    but high rates of population growth often
    experience this condition.

24
  • Nominal and Real GDP
  • Nominal GDP Price Index Population

Year 3 5,000 125 11 Year
4 6,600 150 12
  • What is the real GDP in Year 3?
    _____________________________
  • What is the real GDP in Year 4?
    _____________________________
  • What is the real GDP per capita in Year 3?
    ____________________
  • What is the real GDP per capita in Year 4?
    ____________________
  • What is the rate of real output growth between
    Years 3 and 4?
  • __________________________________________
  • 13. What is the rate of real output growth per
    capita between Years 3 and 4?
  • __________________________________________
  • (Hint Use per-capita data in the output growth
    rate formula.)

4,000 (100 x 5,000) / 125
4,400 (100 x 6,600) / 150
364 (4,000 / 11)
367 (4,400 / 12)
10 (4,400 4,000) / 4,000 x 100
0.82 (367 364) / 364 x 100
25
Foreign Trade
  • Reasons for Trade Deficits
  • 1. Domestic Inability to Produce
  • 2. Better Quality of Foreign Goods
  • 3. Cheaper Foreign Materials
  • 4. Lower Foreign Wages
  • 5. Lower Foreign Capital Costs
  • 6. Foreign Government Subsidies

(Carper, 176-178)
26
Foreign Trade
  • Trade Policy, Protectionism, and Free Trade
  • 1. Protectionists
  • 2. Free Trade

(Carper, 180)
27
John Stuart Mill (1806-1873)
  • Economic Philosopher
  • Analyzed contemporary economic thought
  • Advanced the idea that society did not have the
    ability to alter its economic production
    capabilities, but did have the ability to alter
    the way it distributed its economic products.
  • Major work, The Principles of Political Economy
  • Government should control the distribution of
    wealth
  • Individual freedom
  • Social reforms
  • Shorter work hours
  • Tax reform
  • Laid foundation for advancements in economics

(Carper, 180)
28
GNP Activity
  • With a partner complete the GNP Activity.

29
Works Cited
  • Bade, Robin and Michael Parkin. Foundations of
    Economics. Pearson Education, Inc. Boston, 2004.
  • Bade, Robin and Michael Parkin. Essential
    Foundations of Economics. Power Point
    presentation.
  • Carper, Alan. Economics for Christian Schools.
    Greenville Bob Jones University Press, 1998.
  • "The New King James Version." Logos Bible
    Software. CD_ROM. ed. 2004.
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