Download GDP

Gross Domestic Product and
Growth
Chapter 12
GDP Analysis (Handout)
For Section – Create a mathematical problem …


Review the example (Figure 12.3) in your textbook on page
311.
Consider using the following format to write up your
problem:
Country __ produces ____________. During the year, it
produced __________ units.The current year (year 2)
sales value is $ _______ per unit produced.The base
year (year 1) sales value is $ _________ per unit
produced.
Section 1 – Gross Domestic Product
(GDP)
Objectives
1. Explain how gross domestic product (GDP) is
calculated.
2. Distinguish between nominal and real
GDP.
3. List the main limitations of GDP.
4. Identify factors that influence GDP.
5. Describe other output and income measures
Introduction
What does GDP show about a 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 measures 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.
National Income Accounting


Economists use a system called national income
accounting to monitor the U.S. economy.
They collect macroeconomic statistics


the Government uses them to determine economic policies.
The most important of the data economists analyze
is GDP

the dollar ($) value of all final goods and services produced for
sale within a country’s borders in a given year.
What is GDP? – Breaking it down
Dollar value – total cash value of all sales of goods and
services produced in a calendar year.
1.


Sales value; not cost of production
Donated or charitable items not included
Final goods and services – does not include
intermediate goods
2.

To avoid double counting
Produced within a country’s borders
3.

Excludes goods imported from other countries
In a given year – doesn’t include sale of used items
produced in a prior year
4.

Sale of 2012 Chevy Impala in 2015 (not included)
Included in GDP? Or Not?
1.
2.
3.
4.
5.
Shoes manufactured in U.S.
Shoes made in Korea for a U.S. company
Cotton cloth manufactured in Mississippi and
sold to manufacturers in India to make sweaters
Computer parts sold to a foreign computer
manufacturer to be included in computers sold
at Best Buy
Legal services from major Chicago law firm sold
to McDonald’s Corporation
Included in GDP? Or Not?
6.
7.
8.
9.
10.
11.
Wireless mouse made in China but sold by
Microsoft Corporation in the U.S.
Cars made in factory in Louisiana owned by
Korean auto company
Purchases made by shoppers at Fox Valley Mall
of jeans made in China
A 2015 Ford truck made this year but not sold
Childcare provided by a parent
Childcare provided by a daycare center
Methods to Calculate GDP
Expenditure Approach
 Estimate the annual
expenditures on four
categories of final goods
and services:

Consumer goods
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Durable vs. nondurable
Business goods and
services
Government goods and
services
Net exports

Income Approach
 Adding up all the incomes
in the economy.
exports – imports


Wages and salaries paid
Corporate profits
Interest and miscellaneous
investment income
Farmers’ income
Income from non-farm
unincorporated businesses
Nominal vs. Real GDP

Nominal GDP

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
measured in current prices
uses current year’s prices
to calculate the value of the
current year’s output
The problem: it does not
account for the rise in prices
(inflation).

If output is the same but
prices are higher, nominal
GDP will be higher

Real GDP

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expressed in constant, or
unchanging, prices.
More accurate reflection
of productivity
GDP – Nominal
Base Year
Current Year
GDP – Real
Base Year
Current Year
Price 1
GDP - U.S.

Real GDP
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Real GDP per Capita
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$16.3 Trillion (2014)
$15.9 Trillion (2013)
$15.5 Trillion (2012)
Represents total Real GDP divide by the nation’s population
$50,855 (Apr 2015)
$49,998 (Oct 2013)
Nominal GDP



$17.7 Trillion (2014)
$17.1 Trillion (2013)
$16.4 Trillion (2012)
US GDP – Nominal vs. Real (2006-2012)
Limitations of GDP

Nonmarket Activities
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The Underground Economy
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GDP does not account for black market activities or people
paid “under the table” without being taxed
Negative Externalities


GDP does not measure goods and services that people make
or do themselves.
Unintended economic side effects, like pollution, are not
subtracted from GDP
Quality of Life

High GDP does not necessarily mean people are happier
Other Output and Income Measures

Gross National Product

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Represents the annual income earned by firms and citizens of
a nation
Does not account for depreciation
Net National Product
National Income
Personal Income
Disposable Income

Personal income – income taxes
Influences on GDP
What is Aggregate Supply?
 The total amount of goods and services in the economy
available at all possible price levels.

As the price level rises, aggregate supply rises.


Producers willing to produce more
As the price level falls, aggregate supply falls.

Producers willing to produce less
Influences on GDP
What is Aggregate Demand?
 The amount of all goods and services that will be
purchased at all possible price levels.
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As the price level rises, purchasing power drops (quantity
demanded decreases)
As price levels decline, demand increases


Purchasing power is greater
Falling prices = increases in wealth and demand (aka wealth effect)
Section 2 – Business Cycles
Objectives
1. Identify the phases of a business cycle.
2. Describe four key factors that keep the
business cycle going.
3. Explain how economists forecast
fluctuations in the business cycle.
4. Analyze the impact of business cycles in U.S.
history.
Business Cycle
Introduction
What factors affect the phases of a business cycle?
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Economic growth and decline
Business investments
Interest rates and credit
Consumer expectations
External shock
Phases of a Business Cycle
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Business cycles are made up of major changes in real GDP
above or below normal levels.
The business cycle consists of four phases:

Expansion
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Peak
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Businesses doing well, unemployment low, real GDP no longer rising
Contraction
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Businesses doing well, unemployment dropping, real GDP rising
Business production down, unemployment rising, real GDP falling
Trough
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Unemployment high, no business investment, real GDP no longer falling
Contractions

There are three (3) types of contractions:
Recession
1.

a prolonged economic contraction that generally lasts from 6 to 18
months and is marked by a high unemployment rate (8-10+%).
Depression
2.

a recession that is especially long and severe characterized by very
high unemployment and very low economic output.
Stagflation
3.
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a decline in real GDP (output) combined with a significant rise in price
levels, or high inflation.
What Keeps a Business Cycle Going?

There are 4 main economic variables which affect
business cycles:

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Business Investment
Interest Rates and Credit
Consumer Expectations
External Shocks
Business Investment
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When the economy is expanding
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Businesses do well (sales & profits)
Business investment increases
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Buy new equipment, build or improve facilities, add workers
This increases GDP and helps maintain the expansion.
At some point firms decide to decrease or stop spending
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Demand for products is dropping
Firms cut back on business spending
The result is a decrease in GDP and the price level.
Interest Rates and Credit
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Consumers often use credit to buy new cars, a home,
electronics, and vacations.
If the interest rates are rising, 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.
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If interest rates go up, consumers and businesses buy
less
Government policy in recent years
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Keep interest rates low to encourage or increase spending
Mortgage rates at historic lows
Consumer Expectations
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If people expect that the economy is going to start to
contract, they may reduce spending.
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This occurred during the summer of 2007 – consumer
confidence fell, which contributed to the current recession
Why do people reduce spending when they feel the
economy is slowing down?
High consumer confidence, though, will lead to people
buying more goods
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They expect more job opportunities (& job security) and rising
incomes
This increases GDP.
Consumer Confidence – 1966 to 2011
External Shocks
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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.
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Another example: hurricane on East Coast
Positive external shocks, like the discovery of large oil
deposits, can lead to an increase in a nation’s wealth.
Business Cycle Forecasting
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To predict the next phase of a business cycle, forecasters
anticipate movements in real GDP
Economists use leading indicators to help them make
these predictions.
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GDP
The stock market
Housing starts, existing home sales
Retail sales
Jobless claims
Factory orders reports
Activity – Recessions
In class
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Use the handout ‘Recessions in the U.S. (since the
mid 1960’s)’ and a blank sheet of paper
Create 10 good questions from which the answers are on
the handout - cover all of the recessions (both sides)
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Example of good question:
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Print (write neatly) the questions on the front of the
sheet
Write out answers on the back of the sheet
Which recession(s) had the longest duration?
What were the main causes of the 1973-75 recession?
Example of ‘not so good’ question:

How long did the 1980 recession last?
Activity – Recessions since the mid 1960’s
Computer Lab

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You are a senior analyst working in the Finance Department
of a large company.
The CEO has given you a handout which contains 2 pages of
data related to all of the recessions in the U.S. since the mid
1960’s
The CEO wants the information summarized on 1 page
Executive Summary using a graph, chart(table), timeline or
other professional-looking format.

Summarize the key data on the Executive Summary
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Include 2-3 bullet points describing causes
Highlight (use Bold/Color) the most significant factors
Include which President(s) was in office during each recession
(separate column)
The CEO needs the analysis for tomorrow’s board meeting.
Business Cycles in American History
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.
 Not until World War II, more than a decade later, did the
economy achieve full recovery.
 Declining GDP and high unemployment were two
major signs of the Great Depression, the longest
recession in U.S. history.
The Business Cycle Today
Recent Recessions
 2001 – dot.com industry (internet businesses created in
the late 1990’s) slowed down significantly after periods of
high growth
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The attacks of 9/11 led to another sharp drop in consumer
spending in many service industries.
2007 – subprime mortgage crisis, housing collapse,
failing banks and financial institutions, automakers
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Government used funds for bailouts and stimulus
Real GDP growing at relatively low levels
Unemployment levels still haven’t recovered close to prerecession levels
Section 3 – Economic Growth
Objectives
1. Analyze how economic growth is measured.
2. Explain what capital deepening is and how it
contributes to economic growth.
3. Analyze how saving and investment are
related to economic growth.
4. Summarize the impact of population growth,
government, and foreign trade on economic
growth.
5. Identify the causes and impact of
technological progress.
Introduction
How does the economy grow?
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An increase in capital deepening
A higher savings rate
Population growth along with capital growth
Government involvement
Technological progress
Measuring Economic Growth

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The basic measure of a nation’s economic growth rate is
the % 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 (per person)
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Represents total GDP divide by the nation’s population
$50,855 (Apr 2015)
$49,998 (Oct 2013)
GDP and Quality of Life

GDP measures the standard of living
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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
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it does give us a starting point for measuring a nation’s quality of life.
In general, nations with a high GDP per capita experience a greater
quality of life
Capital Deepening
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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.
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Increasing capital investment (technology,
improvements)
Paying for training to improve workers skills
Allowing workers to gain experience on-the-job
Capital deepening leads to increased labor productivity
(amount of output produced per worker)
Saving and Investment

If the amount of money people save increases, then more
investment funds are available to businesses.
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Savings rate: the proportion of disposable income that is
saved
Higher savings = higher business investment =
higher capital per worker = capital deepening
Population Growth
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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.
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This process leads to lower standards of living.
On the other hand, a nation with low population
growth and expanding capital will experience
significant capital deepening.
Government
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If government raises taxes, households will have less money.

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People will reduce saving, thus reducing the money available to
businesses for investment.
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.

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Exports < Imports
U.S. has operating in a trade deficit position for many years
Technological Progress
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A key source of economic growth.
It can result from
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Technological progress increases a nation’s productivity.
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new scientific knowledge
new inventions
new production methods
Producing more with same factors of production
Also results in higher GDP per capita
Causes of Technological Progress

Scientific research and innovation
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Scale of the market
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Larger markets provide more incentives for innovation
Education and experience
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New products increase output and boost GDP and profits
Increases human capital
Natural resources
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Increased natural resources use can create a need for new
technology