Download Measuring the Wealth of the Nation”

Pump Primer
Using your textbook:


Define Gross Domestic Product.
List at least three categories that are not
listed in GDP.
“ECONOMICS for Christian Schools”
Unit V: Economics of the Government
By Alan J. Carper
Bob Jones University Press. 1998
“Measuring the Wealth of the Nation”
Chapter 12
Objectives




Define gross domestic product
Differentiate between final and
intermediate goods
Identify the four categories of
expenditures used to tabulate the GDP
Explain why the nominal GDP figure is not
entirely accurate and needs adjustment to
become more useful
Objectives



Define trade deficit and trade surplus
List the reasons that a nation might
experience a trade deficit
Explain the positions of the protectionists
and the supporters of free trade
MACROECONOMIC APPROACHES AND PATHWAYS

The Two Main Schools of Thought
The two main approaches to
macroeconomics are based on two
schools of thought:
 Classical macroeconomics
 Keynesian macroeconomics
(Bade slide 4)
MACROECONOMIC APPROACHES AND PATHWAYS




Classical macroeconomics is a body of
theory about how a market economy works and
why it experiences economic growth and
fluctuations.
The economy will fluctuate, and growth will
slow down from time to time.
But no government remedy can improve the
performance of the market.
The classical view = markets work well and
deliver the best available macroeconomic
performance.
(Bade slide 5)
MACROECONOMIC APPROACHES AND PATHWAYS


Classical macroeconomic fell into disrepute
during the 1930s, which was a decade of high
unemployment and stagnant production
throughout the world. (i.e., Great Depression)
Classical macroeconomics predicted that the
Great Depression would end, but gave no
method for ending it more quickly.
(Bade slide 6)
MACROECONOMIC APPROACHES AND PATHWAYS



Keynesian macroeconomics is a body of
theory about how a market economy works that
stresses it inherent instability and the need for
active government intervention to achieve full
employment and sustained economic growth.
John Maynard Keynes, in his book “The General
Theory of Employment, Interest, and Money,”
began this school of thought.
Keynes’ theory was that too little consumer
spending and investment lead to the Great
Depression.
(Bade slide 7)
MACROECONOMIC APPROACHES AND PATHWAYS




Keynes’ solution to depression and high
unemployment was increased government
spending.
But Keynes predicted that his policy aimed at
curing unemployment in the short term might
increase it in the long term.
This prediction became reality during the 1960s
and 1970s, when inflation exploded, growth
slowed, and unemployment increased.
It was time for another challenge to the
mainstream: new macroeconomics
(Bade slide 8)
MACROECONOMIC APPROACHES AND PATHWAYS
The


New Macroeconomics
New macroeconomics is a body of theory
about how a market economy works based on
the view that macro outcomes depend on micro
choices—the choices of rational individuals and
firms interacting in markets.
New classical macroeconomics incorporates the
ideas of classical economists that markets work
and new Keynesian macroeconomics that
markets adjust slowly.
(Bade slide 9)
MACROECONOMIC APPROACHES AND PATHWAYS


The key difference between the two new
schools is in their view of how quickly price and
wages adjust in the face of excess demand or
excess supply.
But this difference is tiny, and a consensus is
emerging.
The

Road Ahead
We follow the new consensus and begin with
an explanation of what determines real GDP
and employment and the pace of economic
growth.
(Bade
slide 10)
Gross Domestic Product
“One person’s spending is another
person’s income.”
Gross Domestic Product



The gross domestic product, or GDP, is
commonly used to measure economic
growth.
The GDP in the dollar value at market
prices of all final goods and services
produced in the economy during a stated
period.
Final goods are goods intended for the
final user.

For example, gasoline is a final good; but
crude oil, from which gasoline and other
products are derived, is not.
(NCEE slide 26)
Gross Domestic Product


GDP also “aims to be a full count of the
value of everything that is produced.”
Includes only those items that are traded in
U.S. markets.

GDP does not include:
sale of used goods (used cars)
 sale of intermediate goods
 illegal transactions
 purely financial transactions (A financial transaction does not

involve production of a good or service. It is a transfer of assets.)
do-it-yourself activities
 imports (goods made outside of U.S.)

How GDP is Measured
Business Investment:
a. Gross private domestic investment
(GPDI), or business investment
- sum of all business spending on capital
investment and unplanned inventories.
Government Spending
(Carper, 170-171)
- Federal, state and local governments purchase
approx. $1 of every $5 worth of products and
services
How GDP is Measured
Net Exports
a. Exports
(products sold to other countries)
b. Imports
products purchased from other countries
includes net income from assets abroad
(Carper, 172)
C=Consumption Spending
I=Investment Spending
G=Government Spending
NX=Net exports (Exports minus Imports)
I
The Financial
Market
$
T
Expansionary policy
reduces government
revenues
Incomes
NX
G
C
T
Rest of World
G
Government
Households
M
X
The Output Market
Government borrows
crowding out both
consumption
and Investment.
T=Taxes
TR=Government Transfer
Payments
S=Savings
I
Expansionary policy
adds extra flows
of government
spending
Firms
TR
Expenditures
The Input Market
Macroeconomic Goals
Activity 11
by
Advanced Placement Economics Teacher Resource
Manual. National Council on Economic Education, New
York, N.Y.
Part C: Measuring Short-Run Economic Growth
 Before using GDP to measure output growth, we
must first adjust GDP for price changes.
 Let’s say GDP in Year 1 is $1,000 and in Year 2 it
is $1,100. Does this mean the economy has
grown 10 percent between Year 1 and Year 2?



Not necessarily. If prices have risen, part of the
increase in GDP in Year 2 will merely represent the
increase in prices.
We call GDP that has been adjusted for price changes
real GDP. If it isn’t adjusted for price changes, we call it
nominal GDP.
To compute real GDP in a given year, use the following
formula:
Real GDP in Year 1 = (nominal GDP x 100) / price index

To computer real output growth in GDP from one
year to another;

Subtract real GDP from one year to another;



Divide the answer (the change in real GDP from the
previous year) by real GDP in Year 1.
The result, multiplied by 100, is the percentage growth
in real GDP from year 1 to Year 2.


Subtract real GDP for Year 2 from real GDP in Year 1.
(If real GDP declines from Year 1 to Year 2, the answer will be
a negative percentage.)
Here’s the formula:
Output growth =
(real GDP in Year 2 – real GDP in Year 1)
real GDP in Year 1
x 100
Example: If real GDP in Year 1 = $1,000 and in Year 2 = $1,028, then the
output growth rate from Year 1 to Year 2 is 2.8%: (1,028 – 1,000)/1,000
= .028, which we multiply by 100 in order to express the result as a
percentage (2.8%).

To understand the impact of output
changes, we usually look at real GDP per
capita.


To do so, we divide the real GDP of any period
by a country’s average population during the
same period.
This procedure enables us to determine how
much of the output growth of a country simply
went to supply the increase in population and
how much of the growth represented
improvements in the stand of living of the entire
population.
Example, let’s say the population in Year 1
was 100 and in Year 2 it was 110. What was
the real GDP per capita in Years 1 and 2?
Year 1
Real GDP per capita =
Year 1 real GDP
Population in Year 1
= $1,000
100
= $10
Year 2
Real GDP per capita = $1,028
110

= $9.30
In this example, the average standard of living fell even though
output growth was positive. Developing countries with positive
output growth but high rates of population growth often
experience this condition.

Nominal and Real GDP
Nominal GDP
Price Index
Population
Year 3
$5,000
125
11
Year 4
$6,600
150
12
8. What is the real GDP in Year 3? _____________________________
$4,000 [(100 x $5,000) / 125]
$4,400 [(100 x $6,600) / 150]
9. What is the real GDP in Year 4? _____________________________
$364 ($4,000 / 11)
10. What is the real GDP per capita in Year 3? ____________________
$367 ($4,400 / 12)
11. What is the real GDP per capita in Year 4? ____________________
12. What is the rate of real output growth between Years 3 and 4?
10%
[($4,400 – 4,000) / 4,000] x 100
__________________________________________
13. What is the rate of real output growth per capita between Years 3 and 4?
0.82% [($367 – 364) / 364] x 100
__________________________________________
(Hint: Use per-capita data in the output growth rate formula.)
Foreign Trade
Reasons for Trade Deficits:
1. Domestic Inability to Produce
2. Better Quality of Foreign Goods
3. Cheaper Foreign Materials
4. Lower Foreign Wages
5. Lower Foreign Capital Costs
6. Foreign Government Subsidies
(Carper, 176-178)
Foreign Trade
Trade Policy, Protectionism, and Free Trade
1. Protectionists
2. Free Trade
(Carper, 180)
John Stuart Mill (1806-1873)





Economic Philosopher
“Analyzed contemporary economic thought”
“Advanced the idea that society did not have the ability to alter its
economic production capabilities, but did have the ability to alter the
way it distributed its economic products.”
Major work, “The Principles of Political Economy”
 Government should control the distribution of wealth
 Individual freedom
 Social reforms
 Shorter work hours
 Tax reform
Laid foundation for advancements in economics
(Carper, 180)
GNP Activity

With a partner complete the GNP Activity.
Works Cited
Bade, Robin and Michael Parkin.
Foundations of Economics. Pearson
Education, Inc.: Boston, 2004.
Bade, Robin and Michael Parkin. Essential
Foundations of Economics. Power Point
presentation.
Carper, Alan. Economics for Christian
Schools. Greenville: Bob Jones University
Press, 1998.
"The New King James Version." Logos Bible
Software. CD_ROM. ed. 2004.