Download Gross Domestic Product and Growth

Gross Domestic Product and
Growth
Gross Domestic Product
• Gross Domestic Product is the usual measure of
how well an economy is doing. GDP is the
combined total of all production within a country’s
borders.
• There are two main ways of measuring GDP: 1
Total of all finished goods and services, or 2 total
of all incomes. Theoretically, these numbers
should come out the same.
Measuring GDP
• GDP (Y), is the total of:
–
–
–
–
Consumption (C)
Investment (I)
Government Purchases (G)
And net exports (NX)
• Y = C + I + G + NX
GDP and Its Components (2004)
Government Purchases
15%
Net Exports
Investment
-5 %
16%
Consumption
70%
Real GDP Based on 2000 $$
(a) Real GDP
Billions of
2000 Dollars
$10,000
9,000
8,000
7,000
Real GDP
6,000
5,000
4,000
3,000
2,000
1965
1970
1975
1980
1985
1990
1995
2000
2005
• These numbers do not mean much by themselves, so GDP is
compared to the GDP of previous years, so that the
percentage of increase or decline can be seen.
• Because the prices of various goods can change, two
different numbers need to be used, Nominal GDP and Real
GDP.
• Nominal GDP is the raw number, and the Real GDP is
adjusted for inflation, usually based on a particular year.
Mew = Mortgage Equity Withdrawal
THE CONSUMER PRICE
INDEX
• The consumer price index (CPI) is a measure of the overall
cost of the goods and services bought by a typical
consumer.
• The Bureau of Labor Statistics reports the CPI each month.
• It is used to monitor changes in the cost of living over
time.
– The Bureau of Labor Statistics (BLS) identifies a market basket of
goods and services the typical consumer buys.
– The BLS conducts monthly consumer surveys to set the weights
for the prices of those goods and services.
How the Consumer Price Index Is
Calculated
• Choose a base year and compute the index.
– Designate one year as the base year, making it
the benchmark against which other years are
compared.
– Compute the index by dividing the price of the
basket in one year by the price in the base year
and multiplying by 100.
Consumer price index 
Price of basket of goods and services
 100
Price of basket in base year
FYI: What Is in the CPI’s
Basket?
17%
Transportation
15%
Food and
beverages
Education and
communication
42%
Housing
6%
6%
6% 4% 4%
Medical care
Recreation
Apparel
Other goods
and services
How the Consumer Price Index is
used to calculate Inflation
• Compute the inflation rate. The inflation
rate is the percentage change in the price
index from the preceding period.
• The inflation rate is calculated as follows:
CPI in Year 2  CPI in Year 1
Inflation Rate in Year 2=
100
CPI in Year 1
The GDP Deflator
• The GDP deflator is a measure of the price level calculated
as the ratio of nominal GDP to real GDP times 100.
• It tells us what portion of the rise in nominal GDP that is
attributable to a rise in prices rather than a rise in the
quantities produced.
• The GDP Deflator number is derived by examining the
aggregate rise in prices in goods that people purchase
during a year.
• Nominal GDP is converted to real GDP as follows:
Real GDP = Nominal GDP/GDP Deflator x 100
Two Measures of Inflation
Percent
per Year
15
CPI
10
GDP deflator
5
0
1965
1970
1975
1980
1985
1990
1995
2000
2005
• GDP does not give a completely accurate measure of the
overall economic activity though, as there are many parts
of an economy that cannot be easily defined.
• Many activities, such as mowing the lawn, or cleaning
your house, unless done by someone else (and reported to
the IRS), are not a part of the GDP.
• Then there is an underground economy, where employers
hire people to do work, but it is not reported (and therefore
no taxes are paid), and can include black market activities.
• Negative externalities are not reported, and damage to the
environment or to people cannot be quantified.
• Finally, benefits that people get from places like parks
cannot be added in because there is no way to figure out
how much the benefit is.
• GDP also does not take into account other factors,
like the depreciation of goods over time (meaning
they have less value as time goes on).
• When including this, we have Net National
Product (NNP).
• When taxes are figured in, we come up with two
additional measures, pre-tax personal income (PI)
and disposable personal income (DPI) which is the
amount of money people have available for
spending after taxes are paid.
• GDP is affected by the total supply of
goods, and the total demand for goods, or
the aggregate supply and aggregate
demand for goods. The equilibrium point
for AS and AD roughly determines the
GDP.
Aggregate Supply and Aggregate
Demand
• The aggregate-demand curve shows the
combined quantity of goods and services
that households, firms, and the government
want to buy at each price level.
• The aggregate-supply curve shows the
combined quantity of goods and services
that firms choose to produce and sell at each
price level.
Long-Run Growth and Inflation
2. . . . and growth in the
money supply shifts
aggregate demand . . .
Long-run
aggregate
supply,
LRAS1980 LRAS1990 LRAS2000
Price
Level
1. In the long run,
technological
progress shifts
long-run aggregate
supply . . .
P2000
4. . . . and
ongoing inflation.
P1990
Aggregate
Demand, AD2000
P1980
AD1990
AD1980
0
Y1980
Y1990
Quantity of
Output
3. . . . leading to growth
in output . . .
Y2000
Business Cycles
• Businesses, and the
economy, go
through regular
cycles that can be
identified.
Contractions
• Contractions can have different characteristics depending
on how long or severe they are.
• If real GDP falls for two consecutive quarters (6 months),
this is called a Recession.
• An unusually severe recession can be called a Depression,
though there is no defined period for this.
• Stagflation is a situation where the economy is stalled or
contracting, and inflation is going up (usually inflation
falls during a contraction).
• The phases of a business cycle can be
triggered by many different factors,
including investment, interest rates,
consumer expectations, and external
shocks.
• To try and predict the business cycle,
economists try to use what are called
Leading Indicators, which are a fairly
well known set of variables that when
they change, it usually leads to a known
outcome.
• For example, the purchasing of capital
goods (large machines used to make
other goods) is usually a good indicator
that the economy will be expanding.
• Interest rates are another indicator, since
lower interest rates encourages
borrowing, which can lead to increases
in the economy.
Economic Growth
• To get a more accurate view of how well a
nation is doing, more specific numbers, such as
the GDP per capita (Gross Domestic Product per
person), unemployment rates, spending on
infrastructure (such as roads and schools), and
other items gives a better view.
• Other factors are also important, such as life
expectancy, capital goods in relation to
population, savings per capita, population
growth, foreign trade, technology, education
levels, research, and resources.
2006 GDP Per Capita
Total GDP 2006 Ranking Economy
(millions of US dollars)
1 United States 13,201,819
11 Russian Federation 986,940
2 Japan 4,340,133
12 India 906,268
3 Germany 2,906,681
13 Korea, Rep. 888,024
4 China 2,668,071
14 Mexico 839,182
5 United Kingdom 2,345,015
15 Australia 768,178
6 France 2,230,721 a
16 Netherlands 657,590
7 Italy 1,844,749
17 Turkey 402,710
8 Canada 1,251,463
18 Belgium 392,001
9 Spain 1,223,988
19 Sweden 384,927
10 Brazil 1,067,962
20 Switzerland 379,758