Download Decision-making relationships: rational

Economic Growth
(GDP)
With Mrs. Eskra
OBJECTIVES:
• WHAT WILL YOU LEARN?
– What GDP is and what it measures.
– The two approaches to calculating GDP
• Income
• Expenditure
– Shortcomings of GDP as a measure of growth.
– We need to be careful only to count FINAL
goods and services.
Measuring Economic Activity
• After the Great Depression, economists
realized they needed a better way to keep
track of the U.S. economy.
• It is normal to go through fluctuations of
growth and contraction.
– How can we better predict when a major
depression is coming?
– How can we measure economic growth over
time?
Measuring Economic Activity
The answer was to calculate GDP – Gross
Domestic Product.
Big Idea: GDP attempts to measure all
economic activity in a country in a year.
Measuring Economic Activity
If the figure rises from one year to the
next, we can feel confident that the
economy is more productive than the
year before (or growing)!
If GDP falls, it is an indication that the
economy is slowing.
GDP
Gross Domestic Product;
the sum of all final goods and services
sold within a nation’s
domestic borders;
a measurement of economic activity.
FINAL goods only, please!
GDP measures FINAL goods and services,
not intermediate goods.
Intermediate = something purchased in
the production process to make a final
good/service.
Measuring Only Final Goods:
Example
• Before I buy a new car, the manufacturer has
purchased tires (and a lot of other
components) to put on the car.
– Do we count those tires in GDP?
• No! That would be double-counting.
• They are already counted in the final selling price of
the vehicle.
• But if I need new tires for my car this
winter, then the tires I purchase to replace
my old ones WILL count this year.
GDP
• There are two approaches to calculating
GDP:
1) Income Approach
2) Expenditure Approach
They are really two sides of the same coin!
EXPENDITURE APPROACH
Sum of all final goods and services
purchased in an economy; typically
referenced as Y = C + I + G + (X-M);
Y (GDP), C (consumer purchases), I
(investment outlays), G (net
government spending), X (exports),
M (imports).
Expenditure Approach
• This approach calculates economic activity
by adding up what people spend money to
purchase.
Activity in the Output Market
from Circular Flow
Expenditure Approach
• C + I + G + (X-M)
– C = Consumer purchases
– I = Investment in capital (generally by
businesses)
– G = Government purchases
– (X-M) = Exports minus Imports
Expenditure Approach:
Circular Flow Model
Rest
of
world
Exports:
Foreign
purchases
from us.
(ADD)
Payments for goods & services
OUTPUT MARKET
Taxes
Payments for g/s
Firms
Government
Taxes
Imports: Our
purchases from
foreign countries
(SUBTRACT)
Households
Wages, interest,
transfer payments
Wages, rent, interest, profits paid for
land, labor and capital
INCOME APPROACH
Sum of the amount of resources used
to produce goods and services, or
sum of the income received from
purchases of these resources.
W+R+I+P
Resource Cost / Income Approach
• This approach calculates economic activity
by adding up the costs that go into
producing goods and services (all the ways
that people make money in an economy).
Activity in the Input Market
from Circular Flow
Resource Cost / Income Approach
• Cost of land, labor, and capital OR the income
received from these resources being
purchased.
• WRIP:
– Income earned by workers: wages, salaries,
benefits
– Rental income earned by landlords
– Interest income earned by lending money to
businesses
– Profits earned by businesses
Resource Cost / Income Approach
Process:
• We have data on the income that people
make from tax returns.
– Not all of this equates to income for business,
though.
• Ex: adjust for depreciation of equipment
– Include income that foreigners make HERE.
– Exclude income that Americans make ABROAD.
Resource Cost / Income Approach:
Circular Flow Model
Payments for goods & services
Taxes
Payments for g/s
Firms
Government
Taxes
Households
Wages, interest, transfer payments
INPUT MARKET
Wages, rent, interest, profits paid for
land, labor and capital
Expenditure & Income Approach
• Will arrive at the same GDP because:
One person’s spending becomes another
person’s income.
You can see this on the Circular Flow
Model!
GDP GROWTH
The measure of change
in GDP over time.
GDP Growth
• This is the most common way of measuring
growth today.
GDP growth is a measure or
indication of a “healthy”
macroeconomy.
Other measures?
• GNP = Gross National Product
– Calculates the value of goods and services
produced BY Americans (instead of IN
America).
– Was used in the past.
GDP: Shortcomings
• Is it a perfect measure of all economic
activity or how people live in a country?
– Does not measure any nonmarket activities:
• Cleaning our own homes
• Caring for children
• Changing the oil on our own car
– Does not measure the value we place on leisure,
either.
GDP: Shortcomings
• It is an average:
If GDP per capita (person) rises, we can say
our standard of living has improved.
But does that mean everyone is better off?
RECAP
• What did you learn?
– What GDP is and what it measures.
– The two approaches to calculating GDP
• Income
• Expenditure
– Shortcomings of GDP as a measure of growth.
– We need to be careful only to count FINAL
goods and services.