Gross Domestic Product

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Gross Domestic Product

• What is gross domestic product (GDP)?
• How is GDP calculated?
• What is the difference between nominal and real
  GDP?

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What Is Gross Domestic Product?

• Economists monitor the macroeconomy using
  national income accounting, a system that
  collects statistics on production, income,
  investment, and savings.

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• Gross domestic product (GDP) is the dollar value
  of all final goods and services produced within a
  countrys borders in a given year.
• GDP does not include the value of intermediate
  goods. Intermediate goods are goods used in the
  production of final goods and services.

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Intermediate vs. Final Goods
Intermediate Goods Not included in GDP
Final Good 500,000 Included in GDP
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Calculating GDP
Consumer goods include durable goods, goods that
last for a relatively long time like
refrigerators, and nondurable goods, or goods
that last a short period of time, like food and
light bulbs.
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Durable Goods vs. Nondurable Goods

• Durable Goods Nondurable Goods

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• GDP - Handout

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Formula to Calculate GDP

• C I G (X-M) GDP
• Where
• C Consumer Goods (Consumption)
• I Investment Spending (Business Goods)
• G Government Spending
• X Exports
• M - Imports

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C I G (X-M) GDP Where C 4,390.6 I
892.0 G 1157.1 X 660.1 M
- - 725.8 GDP 6374.0
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United States GDP (in billions of dollars)
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• Per Capita GDP (GDP Divided by the Population) is
  often used to compare the economies of countries
  and the well-being of their citizens. This is the
  best measure of how well people live in a given
  country.

Real GDP per capita is the best measure of a
nations standard of living.
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List the top 5 most populated countries
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GDP Per Capita
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• Video
• Virtual Economics - GDP

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How can you figure out which is the most popular
movie of all time?
What is the problem with this method?
Nominal Box Office Receipts
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How can you figure out which is the most popular
movie of all time?
Real Box Office Receipts (adjusted for inflation)
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• Video Virtual Economics
• Real vs. Nominal GDP

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• Nominal GDP is GDP measured in current prices.
  It does not account for price level increases
  from year to year.

Real GDP is GDP expressed in constant, or
unchanging, dollars. (Inflation adjusted
dollars)
Real GDP is best measure of Economic Growth!
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Gross Domestic Product-How to Measure It

• Activity
• Choropleth Map Comparing Per Capita GDP in South
  America
• On the back answer the following question
• What assumptions can you make about how well the
  people live in Guyana versus how well people live
  in Suriname?

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Real vs. Nominal GDP Example
2008 10 cars at 15,000 each 150,000 10 trucks
at 20,000 each 200,000 Nominal GDP 350,000
The GDP in year 20048 shows the dollar value of
all final goods produced.
The nominal GDP in year 2009 is higher which
suggests that the economy is improving. But how
much is the REAL GDP? How do you get it?
2009 10 cars at 16,000 each 160,000 10 trucks
at 21,000 each 210,000 Nominal GDP 370,000
Use 2008 Prices. The Real GDP for 2009 is the
same as 2008 after we adjust for inflation.
2009 10 cars at 15,000 each 150,000 10 trucks
at 20,000 each 200,000 REAL GDP 350,000
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Influences on GDP

• Aggregate Supply the total amount of goods and
  services in the economy available at all possible
  price levels
• Aggregate Demand the amount of goods and
  services in the economy that will be purchased at
  all possible price levels
• Price level the average of all prices in the
  economy

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Section 1 Assessment

• 1. Real GDP takes which of the following into
  account?
• (a) changes in supply
• (b) changes in prices
• (c) changes in demand
• (d) changes in aggregate demand
• 2. Which of the following is an example of a
  durable good?
• (a) a refrigerator
• (b) a hair cut
• (c) a pair of jeans
• (d) a pizza

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Section 1 Assessment

• 1. Real GDP takes which of the following into
  account?
• (a) changes in supply
• (b) changes in prices
• (c) changes in demand
• (d) changes in aggregate demand
• 2. Which of the following is an example of a
  durable good?
• (a) a refrigerator
• (b) a hair cut
• (c) a pair of jeans
• (d) a pizza

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25
QUIZ

1. Define Macroeconomics
2. What are the 3 economic goals that all countries
   have
3. Identify the 3 key parts of the definition of GDP
4. How do we use GDP
5. Identify what is NOT included in GDP
6. List the 4 components of GDP
7. Define Inflation
8. Explain the difference between Nominal and Real
   GDP
9. Explain the usefulness of Real GDP per Capita
10. Name 10 Disney Movies

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Business Cycles

• What is a business cycle?
• What keeps the business cycle going?
• How do economists forecast business cycles?
• How have business cycles fluctuated in the United
  States?

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Virtual Economics

• Video Business Cycles

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What Is a Business Cycle?

• A modern industrial economy experiences cycles of
  goods times, then bad times, then good times
  again.
• Business cycles are of major interest to
  macroeconomists, who study their causes and
  effects.

A business cycle is a macroeconomic period of
expansion followed by a period of contraction.
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Four Phases of the Business Cycle

• Expansion
• An expansion is a period of economic growth as
  measured by a rise in real GDP. Economic growth
  is a steady, long-term rise in real GDP.
• Peak
• When real GDP stops rising, the economy has
  reached its peak, the height of its economic
  expansion.
• Contraction
• Following its peak, the economy enters a period
  of contraction, an economic decline marked by a
  fall in real GDP. A recession is a prolonged
  economic contraction. ( Two consecutive quarters
  or 6 month of a decline in GDP) An especially
  long or severe recession may be called a
  depression.
• Trough
• The trough is the lowest point of economic
  decline, when real GDP stops falling.

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What Keeps the Business Cycle Going?

• Business cycles are affected by four main
  economic variables

• 1 Business Investment
• Interest Rates and Credit
• Consumer Expectations
• 4. External Shocks

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Forecasting Business Cycles

• Economists try to forecast, or predict, changes
  in the business cycle.
• Leading indicators are key economic variables
  economists use to predict a new phase of a
  business cycle.
• Examples of leading indicators are stock market
  performance, interest rates, new home sales, and
  manufacturers new orders of capital goods.

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Lagging Indicator

• A lagging indicator follows the performance of
  the economy an example would be the
  unemployment rate.

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Economy
Leading Indicators
Lagging Indicators
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200 Years of the Business Cycle

1. Why is the business cycle like a roller coaster?
2. How do wars affect the economy?

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Section 2 Assessment

• 1. A business cycle is
• (a) a period of economic expansion followed by a
  period of contraction.
• (b) a period of great economic expansion.
• (c) the length of time needed to produce a
  product.
• (d) a period of recession followed by depression
  and expansion.
• 2. A recession is
• (a) a period of steady economic growth.
• (b) a prolonged economic expansion (6 month
  decline in GDP).
• (c) an especially long or severe economic
  contraction.
• (d) a prolonged economic contraction.

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37
Section 2 Assessment

• 1. A business cycle is
• (a) a period of economic expansion followed by a
  period of contraction.
• (b) a period of great economic expansion.
• (c) the length of time needed to produce a
  product.
• (d) a period of recession followed by depression
  and expansion.
• 2. A recession is
• (a) a period of steady economic growth.
• (b) a prolonged economic expansion.
• (c) an especially long or severe economic
  contraction.
• (d) a prolonged economic contraction.

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38
Economic Growth

• How do economists measure economic growth?
• What is capital deepening?
• How are saving and investing related to economic
  growth?
• How does technological progress affect economic
  growth?
• What other factors can affect economic growth?

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Vocabulary

• Real GDP Per Capita
• Capital Deepening
• Saving
• Savings Rate
• Technological Progress

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Measuring Economic Growth

• GDP and Population Growth
• In order to account for population increases in
  an economy, economists use a measurement of real
  GDP per capita. It is a measure of real GDP
  divided by the total population.
• Real GDP per capita is considered the best
  measure of a nations standard of living.

The basic measure of a nations economic growth
rate is the percentage change of real GDP over a
given period of time.
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What is Economic Growth?

1. An increase in real GDP over time
2. An increase in real GDP per capita over time
   (usually used to determine standard of living)

• Why is economic growth the goal of every society?
• Provides better goods and services
• Increases wages and standard of living
• Allows more leisure time
• Economy can better meet wants

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Capital Deepening

• The process of increasing the amount of capital
  per worker is called capital deepening. Capital
  deepening is one of the most important sources of
  growth in modern economies.

• Firms increase physical capital by purchasing
  more equipment. Firms and employees increase
  human capital through additional training and
  education.

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The Effects of Savings and Investing

• The proportion of disposable income spent to
  income saved is called the savings rate.
• When consumers save or invest, money in banks,
  their money becomes available for firms to borrow
  or use. This allows firms to deepen capital.
• In the long run, more savings will lead to higher
  output and income for the population, raising GDP
  and living standards.

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The Effects of Technological Progress

• Besides capital deepening, the other key source
  of economic growth is technological progress.
• Technological progress is an increase in
  efficiency gained by producing more output
  without using more inputs.

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Section 3 Assessment

• 1. Capital deepening is the process of
• (a) increasing consumer spending.
• (b) selling off obsolete equipment.
• (c) decreasing the amount of capital per worker.
• (d) increasing the amount of capital per worker.
• How does capital deepening increase the standard
  of living in a country?
• a. It increase per capita GDP
• b. It decreases per capita GDP
• c. It lowers the inflation rate
• d. It increases the cost of living.

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47
Section 3 Assessment

• 1. Capital deepening is the process of
• (a) increasing consumer spending.
• (b) selling off obsolete equipment.
• (c) decreasing the amount of capital per worker.
• (d) increasing the amount of capital per worker.
• How does capital deepening increase the standard
  of living in a country?
• a. It increase per capita GDP
• b. It decreases per capita GDP
• c. It lowers the inflation rate
• d. It increases the cost of living.

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