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Gross Domestic Product and
Growth
Chapter 12
Why Measure Growth?
After the Great Depression,
economists felt it was important to
measure macroeconomic status to
predict and prevent future economic
downturns.
Established NIPA
NIPA
National Income and Product
Accounts
– Collects data on production, income,
investment, and savings
– Maintained by the Department of
Commerce
– This data is reported and used to
influence government policy
GDP (Gross Domestic Product)
Most important measure in NIPA is
Gross Domestic Product
GDP is the dollar value of all FINAL
goods and services produced within a
country’s borders in a given year.
– Final goods are those sold to consumers
– Intermediate goods are those used in
the production process (not calculated)
“Within a Country’s Borders”
GDP does not include products
made by a US company overseas
GDP does include a car made in the
US by Toyota (Japanese company)
What do you think? (Included in
GDP or no)
A new house?
A used house?
The realtor's fee on the used house?
All the products used to produce the
new house? (nails, shingles, siding
etc...)
What is included...
A new house?...Yes
A used house?...No
The realtor's fee on the used
house?...Yes
All the products used to produce the
new house (nails, shingles, siding
etc...)?...No (secondary goods)
Approaches of Measuring GDP
Expenditure Approach
– Economists estimate the annual expenditures
in four categories
Consumer goods and service
– Durable (long lasting...cars) and non durable (short
lasting...food)
Business goods and services
Government goods and services
Net exports or imports of goods and services
– All of these added together calculates GDP
Income Approach
Measures GDP by adding up all
incomes.
– When a product is sold, the selling price
is given to those who produce it
– The income approach gives a better
assessment of activity in the economy
Shows the activity for everyone
Both income and expenditure
approaches should be =
Nominal vs. Real GDP
Nominal GDP is GDP measured in
current prices (figure 12.3)
– Does not always measure an increase in
output
To measure growth from year to
year, economists measure Real GDP
– Real GDP is measured by calculating
GDP with constant prices
Try exercise on figure 12.3
Limitations of GDP
Nonmarket Activities
GDP does not measure goods and
services that people make or do
themselves, such as caring for
children, mowing lawns, or cooking
dinner.
The Underground Economy
There is much economic activity
which, although income is
generated, never reported to the
government. Examples include
black market transactions and
"under the table" wages.
Negative Externalities
Unintended economic side effects,
such as pollution, have a monetary
value that is often not reflected in
GDP.
Quality of Life
Although GDP is often used as a
quality of life measurement, there
are factors not covered by it. These
include leisure time, pleasant
surroundings, and personal safety.
Is it Accurate?
Many things to calculate in GDP and
much is missed or overlooked
However, it does provide us with a
baseline of stats and over time,
shows important trends
Review
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
GNP
GNP (Gross National Product)... measures
all goods and services produced by
Americans in one year (includes overseas
production)
Influences on GDP
Aggregate Supply
– The total amount of goods and services
available in an economy at all price
levels
Aggregate Demand
– The total amount of goods and services
demanded in an economy at all price
levels
What happens to GDP if aggregate
demand increases?
Business Cycles
Chapter 12, Section 2
Business Cycles
Period of macroeconomic expansion
followed by contraction
Phases of Business Cycles
– Expansion…period of economic growth
measured by a rise in real GDP
Growth being a steady, long term rise in
GDP
Plentiful jobs, falling unemployment
Phases of Business Cycles (cont.)
Peak…height of economic expansion
Contraction…economic decline
marked by falling real GDP
Trough…bottom of contraction
Contractions with Different
Characteristics
Recession…real GDP falls for two
straight quarters
– Prolonged period of economic
contraction
– Usually a rise in unemployment
Depression…a severe recession
Stagflation…decline in real GDP,
combined with a rise in price level
Keeping the Cycle
Typically, a sharp rise or fall in a key
indicator sparks a series of events
4 main indicators
– Business investment
– Interest rates and credit
– Consumer expectations
– External shocks
Business Investment
Spending by business or non
spending will change the cycle
Interest Rates and Credit
Low interest rates will lead to
spending
High interest rates will lead to
savings
Consumer Expectations
Consumers may spend or save
Like other things, consumer’s choices
drive the economy
External Shocks
Unpredictable and disrupt aggregate
supply
– Wars
– Floods
– Natural disasters
– Oil shortage
Can be positive
– Discoveries
– Good weather
Forecasting Business Cycles
Not easy to predict…have to predict a
change in real GDP
Use leading indicators (economic
variables)
– Stock market
– Interest rates
– Orders of capital goods
– Housing starts
American History
Great Depression was the economies most
severe recession
– Strengthened the need for government
intervention
– WW II marked the end (government spending
lead to rise in GDP)
Other recessions
–
–
–
–
70’s oil embargo
80’s unemployment (9%)
90’s turn-around and rise in GDP
2000’s downturn with 9/11
Review
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.
Economic Growth
Chapter 12, Section 3
Economic Growth
A change in GDP over time illustrates
growth
For growth to occur, it should change
with population
Real GDP per capita measures such
growth and the standard of living
Quality of Life
GDP measures standard of living but
not quality of life
– Pollution
– Stress
– Nutrition
Also does not tell how GDP is
distributed
– Poor sections of the country
– Poor bulk of population
Capital Deepening
The process of increasing capital per
worker
Goal is to increase productivity
Savings and investing lead to capital
deepening
Population
Increased population without capital
deepening will lower the standard of
living
Increased population without
increase in production will lower the
standard of living
Government
Taxes can increase or decrease
capital deepening
– It is dependant upon what the taxes are
spent on
Foreign Trade
Foreign trade and running a trade
deficit can actually be good in some
ways
– If the goods being trading enhance
capital deepening
– In the long run…this capital deepening
can increase productivity and help to
pay back debt that results from a trade
deficit
Technological Progress
An increase in efficiency gained by
producing more output from more inputs
– Technology
– Realignment
– Knowledge
Technological progress is measured by
looking at the amount of GDP that
increases from technology and not labor
Review
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.
2. Taxes and trade deficits can contribute
to economic growth if the money involved
is spent on
(a) consumer goods.
(b) investment goods.
(c) additional services.
(d) farming.