Download GDP

UNIT 5
Measuring and Monitoring Economic
Performance
1. What is a Procyclic Indicator?

Procyclic: one that moves in
the same direction as the
economy


So if the economy is doing
well, this number is usually
increasing, whereas if we're
in a recession this indicator
is decreasing.
2. What is an example of a
procyclic indicator?

The Gross Domestic
Product (GDP) is an
example of a procyclic
economic indicator.
What is an Economic Indicator?


An economic indicator is
simply any economic
statistic, such as the
unemployment rate, GDP,
or the inflation rate, which
indicate how well the
economy is doing and how
well the economy is going
to do in the future.
Investors use all the
information at their
disposal to make decisions.
3. What is a Countercyclic Indicator?

Countercyclic: one
that moves in the
opposite direction as
the economy.

4. What is an example
of a countercyclic
indicator?

The unemployment rate
gets larger as the
economy gets worse so
it is a countercyclic
economic indicator
Section 1: Gross Domestic Product and
Other Indicators
5. What is the
measure of the
economy that
tracks income,
spending, and
output of the
nation?
6. Define Gross
Domestic Product.
To Guide Investment Strategy


7. Why would
watching economic
indicators be an
important part of an
investment strategy?
If a set of economic
indicators suggest
that the economy is
going to do better or
worse in the future
than they had
previously expected,
they may decide to
change their
investing strategy.
Gross Domestic Product:
Measuring the Nation’s Output

8. What is GDP?


Produced Within a
Country During a Given
Period
Domestic


Only production that
takes place within a
country’s border
Examples


Cars produced in
the U.S. by foreign
owned companies
are counted.
Car produced in
Mexico by U.S.
owned companies
are not counted.
GDP depends on Market Value

Calculating GDP for
Burtonia

Total production = 4
apples, 6 bananas, and 3
pairs of shoes



Price of apples = $0.25
Price of bananas =
$0.50
Price of shoes = $20
Measuring Only Final Goods and Services

Getting a heart bypass



Doctor charges $10 for
a surgery
Doctor pays his
assistant $2
Contribution to GDP =
$10
Components of GDP

What are the components of GDP? List and identify.
9. Consumption
10. Investment
11. Government
Spending
12. Net Exports
13. Which is the largest?
14. What is the Formula for calculating GDP?





GDP = gross domestic product, or output
C = consumption expenditure
I = investment
G = government purchases
X-M = foreign - net exports (total exports –
total imports)
Two Types of GDP
15. What is Nominal
GDP?
16. What is Real
GDP?
17. Figure 12.2



a. Answer?
b. Answer?
c. Answer?
What GDP Does Not Measure
18. It does not measure
____________ , such as
home childcare.
19. It does not measure output
from ______________,
activities not reported for
taxation.
20. Countries with high GDPs
have high ______
________.
Real GDP is not the Same as
Economic Well-Being

Leisure Time



Shorter work week
Start working later
Retire earlier
21. Why do people work
fewer hours today than
their great-grandparents
did?

Hint: Use the concept of
opportunity cost
GDP & Basic Indicators of Well-Being
All developing
countries
Least developed
countries
GDP per person
(U.S. dollars)
3,530
1,170
25,860
Life expectancy at
birth (years)
64.5
51.7
78.0
Infant mortality rate
(per 1,000 live births)
61
100
6
Under-5 mortality rate
(per 1,000 live births)
89
159
6
Doctors
(per 100,000 people)
78
30
252
Incidence of HIV/Aids
(% in 15-49 age group)
1.3
4.3
0.3
Undernourished
people (%)
18
38
Negligible
72.9
51.7
98.6
Indicator
Adult literacy rate (%)
Industrialized
countries
22. What does GNP measure?
– Measure of National Income



Measures income – not
output
Dollar value of all final
goods, services,
produced in one year
with labor and property
of a country’s residents
May be inside or
outside the country
Relationship between GDP and GNP




The columns measure the output of
the factors of production of the US
or the UK.
The rows measure the output of
factors that are located
geographically within the US or
UK.
For example, the upper left (100)
cell of the table tells the value of
output produced by US factors of
production (ie: US labor or capital)
that are located within the US.
The upper right cell (5) measures
the value of output produced by UK
factors of production (ie: UK labor
or capital) that is located within the
US.
Why a Gap in GNP?


There are several
periods of time in
which the economy
of the US was
booming and actual
output was greater
than potential.
23. In the figure,
what is shown as
areas falling below
zero?
Other Economic Performance
Measures

Identify the explain:
24. Gross national product
25. Net national product
26. National Income
27. Personal Income
28. Disposable personal income
29. What is the Marginal Propensity
to Save?

Fraction of each
additional
dollar earned
that is saved
Consumer Price Index
30. What indicator
measures the average of
the prices paid by urban
consumers for a fixed
market basket of
consumer goods and
services?
 Base period is 100
 Currently fixed at 19821984
 8,000 goods from 8
categories of spending
Section 2 - Business Cycles
31. What is a business cycle?
32. What are the four stages of the
business cycle?
 C. During a contraction:
33. What is the term if this phase
lasts 2 or more quarters?
34. If it becomes an extended
downturn?
35. What is the term for the
contraction phase if the prices and
unemployment stay high?
If Inflation goes to a party
alone
- is that Stagflation?
Time of Occurrence Matters!

36. What are Leading
indicators?



Leading economic indicators
are indicators which change
before the economy changes.
Stock market returns are a
leading indicator, as the stock
market usually begins to decline
before the economy declines
and they improve before the
economy begins to pull out of a
recession.
Leading economic indicators
are the most important type for
investors as they help predict
what the economy will be like
in the future.
Baygon for cockroaches
What is Aggregate
Demand?
37. What is the total
amount of goods and
services households,
businesses, government
and foreign purchasers
will buy at each and
every price level?
Aggregate Supply
38. What is aggregate supply?
39. Figures 12.7 / 12.8
a. Answer?
b. Answer?
40. What two components are
equal in Macroeconomic
equilibrium?
41. Figures 12.9 / 12.10
a. Answer?
b. Answer?
Why Do Business Cycles Occur?

Identify the factors that contribute to business cycles and
cite an example of each.
42. Factor 1:
a.
b.
43. Factor 2:
44.
45. Factor 3:
46.
47. Factor 4:
48.
Demand Slump
New technology
Lagging Indicators

49. What is a Lagging
indicator?


Does not change direction
until a few quarters after the
economy does.
The unemployment rate is a
lagged economic indicator
as unemployment tends to
increase for 2 or 3 quarters
after the economy starts to
improve.
Unemployment Rate Since 1990
Unemployment with Wage Above Equilibrium
WAGE
Surplus of labor
Labor
supply
Minimum
wage
Labor
demand
Quantity Of Labor
50. What are Coincident Indicators?

Coincident: A
coincident economic
indicator is one that
simply moves at the
same time the economy
does.

The Gross Domestic
Product is a coincident
indicator.
Section 3
Stimulating Economic Growth?
51. Why are some nations growing at a faster pace than
others?

Identify four factors which influence rate of
economic growth and cite an example of each.
52.
53.
54.
55.
Productivity and Economic Growth
56. What is productivity?
57. How is productivity measured?
58. What contributes to productivity?
59. How can a nation experience economic growth
without increasing its productivity?
Causes and Consequences of Inflation
( p. 396)
60. What are the 2
characteristics of
inflation?
61. What is the Consumer
Price Index?
62. Figure 13.7 – Answer?
63. What is the measure of
changes in wholesale
prices?
64. What is the rate of
change in prices over a
period of time?
Types of Inflation

Are You A
Little Hoarse?
Describe each of the
types of inflation.
Creeping
Galloping
Hyperinflation
Deflation
65.
66.
67.
68.
69. What is demand-pull Inflation?
In demand-pull inflation,
total _____ rises faster
than the ______ of
goods and services
creating a ______ that
drives up prices.
70. What is the main
reason for demand-pull
inflation?
71. What government
office is responsible
for controlling the
money supply?
72. What is cost-push inflation?
In cost-push inflation, prices
are pushed _____ by rising
______ costs. When these
costs increase, _____ make
less of a _____. If
consumer _____ is strong,
producers may raise their
_____ in order to maintain
their ______.
“Are you going to ask that question with shades
on? For the viewers There’s no sun.”
Causes of CostPush Inflation
73. What is often a
cause of cost-push
inflation? Identify
and define.
74. What else may lead
to this inflation?
75. What is the wageprice spiral?
What is the Impact of Inflation?
76. Decreasing value of the
________
77. Increasing ______
________.
78. Decreasing Real
___________ on Savings
79. What is the Phillips Curve?

A curve showing an inverse
relationship between inflation
rate and unemployment rate in
the short run
Inflation
Unemployment
International Trade
Pg. 510
80. A nation’s economic
patterns are based on the
UNIQUE combinations
of the FOP. One more
time: What are the FOP?
81. What is the system
which allows a nation to
produce only what is the
most efficient use of
their resources?
82. What is an example of
specialization in
education?
Who Has the Advantage?
International trade is based
on resources or products
which one country needs
and another can provide.
83. Therefore, countries
specialize in the goods they
can produce most
efficiently. Specialization
leads to dependence on
other nations. What do we
call this?


The United States markets
wheat and farm tractors, not
items it cannot produce such
as coffee or diamonds.
Sued by Walt Disney immediately!!
Theory of Comparative Advantage
1817 and David Ricardo
84. What is the Law of
Comparative
Advantage?

The country with the
lowest opportunity
cost of producing a
particular good
should specialize in
producing that good.
85. Who has the Advantage?

Cocoa
a. Ghana uses 10
resources to produce a
ton of Cocoa;
b. Korea uses 40 resources to
produce a ton of Cocoa;

Rice
a. Ghana uses 15 resources to
produce a ton of rice;
b. Korea uses 20
resources to produce a
ton of rice.
86. When does a nation have a Comparative
Advantage?


A country has a
comparative advantage in
the product that it can
produce most efficiently
given all of the products
it could choose to
produce.
Production of this product
requires the lowest
opportunity cost
Absolute Advantage


A country has
an absolute
advantage
when it can
produce more
of a given
product than
other countries
using a given
amount of
resources.
Who has the
advantage
here?
Absolute
Advantage
England
Portugal
1 barrel of
wine
1 man day
2 man days
1 bolt of
cloth
1 man day
3 man days
International Trade Affects the
National Economy


Imports provide an
INCENTIVE for domestic
producers to increase their
productivity.
Trade Affects Employment
87. As nations specialize they
lost jobs in some areas to
gain jobs in others.
88. What type of goods are the
major exports of the US
today?
89. What is our major import
today?
Trading Partners
90. Who are our four most
important trading
partners?
91. THINK: When the US
dollar is strong what
effect does that have on
EXPORTS?
92. THINK: When the US
dollar is weak, what
effect does THAT have
on EXPORTS?
Exchange Rates
93. How is this discrepancy
between nations reflected?
 Currency rates translate
the cost of an import into
domestic prices
 Example:


If the demand for Japanese
goods increases in the US,
the demand for the Yen will
increase
If the demand for the Yen
goes up, its price in terms
of US dollars will also
increase