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GDP Review
Gross Domestic Product (GDP)
• The Gross Domestic Product is the dollar value
of all final goods and services produced within a
country’s borders in a given year.
• In order for a good to be included in a nation’s
GDP, it must be made in that country.
• It doesn’t matter if the factory is owned by a
foreign company as long as the factory is
located in the country where GDP will be
calculated.
GDP
• Intermediate Goods- used in the
production of final goods
E. Napp
• Final goods and services-Products in the
form sold to consumers
Real GDP
• While nominal GDP is expressed in current
prices, real GDP is adjusted for inflation.
• Inflation means rising prices. The problem with
GDP is it could appear to rise when in reality
only prices rose.
• In other words, one million in1970 dollars is not
the same as one million in 2006 dollars. The
2006 dollars must be adjusted to 1970 dollars in
order to effectively compare the two amounts.
Durable and Nondurable
Goods
• The goods included in GDP are durable and nondurable
goods.
• Durable goods are goods that last for a relatively long
time, such as refrigerators and cars.
• Nondurable goods last for a short period of time like food
and paperback books.
The Effects of the Great Depression on
Economists:
• The Great Depression taught economists that they needed
some way of tracking the nation’s economy.
• By tracking the nation’s economy, economists could
determine if the economy was in danger of a recession or a
depression and could try to apply economic policies to
prevent such hardships from occurring.
• Severe economic downturn
Expenditure
Approach
Economists estimate the amount spent on four categories of
goods and services
Consumer Goods and Services
Business goods and services
Government goods and services
Net exports or imports of goods and services
Add together all expenditures=GDP
Income Approach
• A more practical way of measuring GDP
• Selling price equals income
• All income earned in the economy will add up to the GDP
A business cycle is a period of macroeconomic
expansion followed by a period of contraction.
The Four Phases of a Business Cycle
• There are four phases in a business cycle:
Expansion: a period of economic growth
Peak: the height of the expansion
Contraction: a period of economic decline
Trough: the lowest point of the contraction
Recessions and Depressions
• Each phase of the business cycle is determined by monitoring
Gross Domestic Product.
• A contraction that lasts for at least six months is called a
recession.
• A particularly severe and long contraction is called a
depression.
Capital Deepening
• One way to increase economic productivity is through capital
deepening.
• Capital deepening is the process of increasing the amount of
capital per worker.
• Better educated workers can produce more output per hour
of work.
Technological Progress
• Another key source of economic growth is technological
progress.
• This is an increase in efficiency gained by producing more
output.
• Email replacing slower “snail mail” is an example of
technological progress.
Frictional Unemployment
• Occurs when people take time to find a job
• People might change jobs, or get laid off, or need time to find
the right job
• In a large economy many people fill into this category
Seasonal Unemployment
• Occurs when industries slow or shut down or make seasonal
shifts in their production
• Economists expect to see seasonal unemployment throughout
the year
• Policymakers do not take steps to prevent this kind of
unemployment
Structural Unemployment
• Occurs when workers skills do not fit the jobs that are available
• Five Causes:
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•
•
•
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New Technology
New Resources
Changes in consumer demand
Globalization
Lack of Education
Cyclical Unemployment
• Occurs during downturns in the economy and changes during
upturns
• Can severely strain the economy
• Underemployed- working in a job
that a person is overqualified, or part
time
• Demand Pull Theory- inflation occurs when demand for goods
and services exceeds existing supplies
• Cost Push Theory- inflation occurs when producers raise prices
in order to meet increased prices costs
• Inflation- is a general increase in prices
• Poverty Threshold-The level below which income is
insufficient to support a family or household
• Workfare- a program requiring work in exchange for
assisstance