Download Chapter 12: Gross Domestic Product and Growth - jb

Chapter 12: Gross Domestic
Product and Growth
Section 1
Key Terms
• national income accounting: a system
economists use to collect and organize
macroeconomic statistics on production, income,
investment, and savings
• gross domestic product: the dollar value of all
final goods and services produced within a
country’s borders in a given year
• intermediate goods: products used in the
production of final goods
• durable goods: those goods that last for a
relatively long time, such as refrigerators, cars,
and DVD players
Key Terms, cont.
• nondurable goods: those goods that last
a short period of time, such as food, light
bulbs, and sneakers
• nominal GDP: GDP measured in current
prices
• real GDP: GDP expressed in constant, or
unchanging, prices
• gross national product: the annual
income earned by U.S.-owned firms and
people
Key Terms, cont.
• depreciation: the loss of the value of capital
equipment that results from normal wear and
tear
• price level: the average of all prices in the
economy
• 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
Introduction
• What does the Gross Domestic Product
(GDP) show about the nation’s economy?
– GDP measures the amount of money brought
into a nation in a single year through the
selling of that nation’s goods and services.
– GDP is a measurement of how well a nation’s
economy is doing for a particular year. A high
GDP means the nation is doing well. A low
GDP means the nation is doing poorly.
Nation Income Accounting
• Economists use a system called national income
accounting to monitor the U.S. economy.
– They collect macroeconomic statistics, which the
government uses to determine economic policies.
• The most important data economists analyze is
gross domestic product (GDP), which is the
dollar value of all final goods and services
produced within a country’s borders in a given
year.
What is GDP?
• Basically, gross
domestic product
tracks exchanges of
money.
• To understand GDP,
you need to
understand which
exchanges are
included in the final
calculations—and
which ones are not.
Expenditure Approach
• One method used to
calculate GDP is to
estimate the annual
expenditures on four
categories of final
goods and services:
– Consumer goods
– Business goods and
services
– Government goods
and services
– Net exports
Income Approach
• Another method
calculates GDP by adding
up all the incomes in the
economy.
– The rationale for this
approach is that when a
firm sells a product or
service, the selling price
minus the dollar value of
goods service purchased
from other firms
represents income from
the firm’s owners and
employees.
Nominal versus Real GDP
• Nominal GDP is measured in current prices.
– To calculate nominal GDP, we use the current year’s
prices to calculate the value of the current year’s
output.
– The problem with nominal GDP is that it does not
account for the rise in prices. Even though your
output might be the same from year to year, the
prices won’t be and nominal GDP would be different.
– To solve this problem, economists determine real
GDP, which is GDP expressed in constant, or
unchanging, prices.
Limitation of GDP
• Checkpoint: What are two economic activities
that GDP does not include?
– Nonmarket Activities—GDP does not measure goods
and services that people make or do themselves.
– The Underground Economy—GDP does not account
for black market activities or people paid “under the
table” without being taxed
– Negative Externalities—unintended economic side
effects, like pollution, are not subtracted from GDP
– Quality of Life—a high GDP does not necessarily
mean people are happier
Other Output and Income Measures
• In addition to GDP, economists use other ways
to measure the economy.
– The equations below summarize the formulas for
calculating these other economic measurements.
Influences on GDP
• Aggregate Supply
– Aggregate supply is the total amount of goods
and services in the economy available at all
possible price levels.
– In a nation’s economy, as the prices of most
goods and services change, the price level
changes and firms respond by changing their
output.
– As the price level rises, real GDP, or
aggregate supply rises. As the price level
falls, real GDP falls.
Influences on GDP, cont.
• Aggregate Demand
– Aggregate demand is the amount of goods
and services that will be purchased at all
possible price levels.
– As price levels in the economy move up and
down, individuals and firms change how much
they buy—in the opposite direction that
aggregate supply changes.
– Any shift in aggregate supply or aggregate
demand will have an impact on real GDP and
the price level.
Aggregate Supply and Demand
• Aggregate supply and demand represent supply
and demand on a nationwide level. The far righthand chart shows what happens to GDP and
price levels when aggregate demand shifts.
– What do the positive and negative slopes of these
curves mean?
Chapter 12: Gross Domestic Product
and Growth
Section 2
Key Terms
• business cycle: a period of macroeconomic
expansion followed by one of macroeconomic
contraction
• expansion: a period of growth as measured by
a rise in real GDP
• economic growth: a steady, long-term increase
in real GDP
• peak: the height of an economic expansion,
when real GDP stops rising
• contraction: a period of economic decline
marked by falling real GDP
Key Terms, cont.
• trough: the lowest point of an economic
contraction, when real GDP stops falling
• recession: a prolonged economic contraction
• depression: a recession that is especially long
and severe
• stagflation: a decline in real GDP combined
with a rise in the price level
• leading indicators: a set of key economic
variables that economists use to predict future
trends in a business cycle
Phases of a Business Cycle
• Checkpoint: What are the four phases of a
business cycle?
– Business cycles are made up of major changes in real
GDP above or below
normal levels.
– The business cycle
consists of four
phases:
•
•
•
•
Expansion
Peak
Contraction
Trough
Contractions
• There are three types of contractions,
each with different characteristics.
– A recession is a prolonged economic
contraction that generally lasts from 6 to 18
months and is marked by a high
unemployment rate.
– A depression is a recession that is especially
long and severe characterized by high
unemployment and low economic output.
– Stagflation is a decline in real GDP
combined with a rise in price level, or inflation.
Business Investment
• Business cycles are
affected by four main
economic variables.
• Business Investment
– When the economy is
expanding, business
investment increases,
which in turn increases
GDP and helps maintain
the expansion.
– When firms decide to
decrease spending, the
result is a decrease in
GDP and the price level.
Interest Rates and Credit
• Consumers often use credit to buy new cars, home,
electronics, and vacations. If the interest rates on these
goods rise, consumers are less likely to buy them.
• The same principle holds true for businesses who are
deciding whether or not to buy new equipment or make
large investments.
Consumer Expectations
• If people expect that
the economy is going
to start to contract,
they may reduce
spending.
• High consumer
confidence, though,
will lead to people
buying more goods,
pushing up GDP.
External Shocks
• Negative external shocks, like war breaking out in
a country where U.S. banks and businesses have
invested heavily, can have a great effect on
business, causing GDP
to decline.
• Positive external
shocks, like the
discovery of large oil
deposits, can lead to
an increase in a
nation’s wealth.
Business Cycle Forecasting
• Checkpoint: Why is it difficult to predict
business cycles?
– To predict the next phase of a business cycle,
forecasters must anticipate movements in real
GDP before they occur.
– Economists use leading indicators to help
them make these predictions.
• The stock market is a leading indicator.
• Today, the stock market turns sharply downward
before a recession.
The Great Depression
• Before the 1930s, many economists
believed that when an economy declined,
it would recover quickly on its own.
• The Great Depression changed this belief
and led economists to consider the idea
that modern market economies could fall
into long-lasting contractions.
• Not until World War II, more than a decade
later, did the economy achieve full
recovery.
The Great Depression, cont.
• Declining GDP and high unemployment were
two major signs of the Great Depression, the
longest recession in U.S. history.
– In what year did the Great Depression hit its trough?
– How long
did it take
GDP to
return to its
preDepression
peak?
Later Recessions
• OPEC Embargo
– In the 1970s, the United States experienced an
external shock when the price of gasoline and heating
fuels skyrocketed as a result of the OPEC embargo
on oil shipped to the United States.
• The U.S. economy also experienced a recession
in the early 1980s and another brief one in 1991,
followed by a period of steady economic growth.
• The attacks of 9/11 led to another sharp drop in
consumer spending in many service industries.
The Business Cycle Today
• The economy began to grow slowly in 2001 and
was surging by late 2003 with GDP growing at a
rate of 7.5 percent over three months.
• However, growth slowed again as a result of
high gas prices in 2006.
– The sub-prime mortgage crisis caused further decline
in 2007.
– 2008 and 2009 marked a recession in the economy,
but by the end of 2009, a rebound occurred.
Chapter 12: Gross Domestic Product
and Growth
Section 3
Key Terms
• real GDP per capita: real GDP divided by the
total population of a country
• capital deepening: the process of increasing
the amount of capital per worker
• saving: income not used for consumption
• savings rate: the proportion of disposable
income that is saved
• technological progress: an increase in
efficiency gained by producing more output
without using more inputs
Measuring Economic Growth
• The basic measure of
a nation’s economic
growth rate is the
percentage of change
in real GDP over a
period of time.
• Economists prefer a
measuring system
that takes population
growth into account.
For this, they rely on
real GDP per capita.
GDP and Quality of Life
• GDP measures the standard of living but it
cannot be used to measure people’s quality
of life.
• In addition, GDP tells us nothing about how
output is distributed across the population.
– While real GDP per capita tells us little about
individuals it does give us a starting point for
measuring a nation’s quality of life.
– In general, though, nations with a high GDP per
capita experience a greater quality of life.
Capital Deepening
• A nation with a large amount
of physical capital will
experience economic
growth.
• The process of increasing
the amount of capital per
worker, known as capital
deepening, is one of the
most important sources of
growth in modern
economies.
– What is capital deepening?
Saving and Investment
• Checkpoint: How is
saving linked to capital
deepening?
– If the amount of money
people save increases,
then more investment
funds are available to
businesses.
– These funds can then be
used for capital
investment and expand
the stock of capital in the
business sector.
Population Growth
• If the population grows while the supply of
capital remains constant, the amount of
capital per worker will shrink, which is the
opposite of capital deepening.
– This process leads to lower standards of
living.
• On the other hand, a nation with low
population growth and expanding capital
stock will experience significant capital
deepening.
Government
• Checkpoint: Do higher tax rates increase
or reduce investment?
– If government raises taxes, households will
have less money. People will reduce saving,
thus reducing the money available to
businesses for investment.
– However, if government invests the extra tax
revenues in public goods, like infrastructure,
this will increase investment, resulting in
capital deepening.
Foreign Trade
• Foreign trade can result in a trade deficit, a
situation in which the value of goods a country
imports is higher than the value of goods it
exports.
– If these imports consist of investment goods, running
a trade deficit can foster capital deepening.
– When the funds are used for long-term investment,
capital deepening can offset the negatives of a trade
deficit by helping generate economic growth, helping
a country pay back the money it borrowed in the first
place.
Technological Progress
• Technological progress is a key source of
economic growth.
• It can result from new scientific knowledge, new
inventions, and new production methods
• Measuring technological progress can be done
by determining how much growth in output
comes from increases in capital and how much
comes from increases in labor.
– Any remaining growth in output must come from
technological progress.
Technological Progress, cont.
• Causes of technological progress include:
– Scientific research
– Innovation
• New products increase output and boost GDP and
profits
– Scale of the market
• Larger markets provide more incentives for innovation
– Education and experience
• Increases human capital
– Natural resources
• Increased natural resources use can create a need for
new technology