Download Gross domestic product

Gross Domestic Product
• What is gross domestic product
(GDP)?
• How is GDP calculated?
• What is the difference between
nominal and real GDP?
• What are the limitations of GDP
measurements?
• What factors influence GDP?
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What Is Gross Domestic Product?
• Economists monitor the
macroeconomy using national
income accounting.
• A system that collects statistics
on:
production,
income,
investment,
and savings.
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What Is Gross Domestic Product?
• Gross domestic product (GDP) - the
dollar value of all final goods and
services produced within a country’s
borders in a given year.
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What Is Gross Domestic Product?
• Does not include the value of
intermediate goods (goods used in the
production of final goods and services).
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Calculating GDP
The Expenditure Approach
• Totals annual expenditures on four
categories of final goods or services.
1. Consumer goods and services
2. Business goods and services
3. Government goods and services
4. Net exports or imports of goods or
services.
C + Ig + G + Xn = GDP
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Calculating GDP
Consumer goods
include:
Durable goods, goods
that last for a relatively
long time like
refrigerators, and
Nondurable goods, or
goods that last a short
period of time, like food
and light bulbs.
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Calculating GDP
The Income Approach
• Calculates GDP by adding up all
the incomes in the economy.
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Real and Nominal GDP
• Nominal GDP is GDP measured in
current prices.
Does not account for inflation.
• Real GDP is GDP expressed in
constant, or unchanging,
dollars.
• See chart figure 12.3, page 304.
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Limitations of GDP
• GDP does not include:
1. Nonmarket Activities
Goods and services that
people make or do
themselves.
2. Negative
Externalities
Unintended economic
side effects, such as
pollution.
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Limitations of GDP
• GDP does not include:
3. The Underground
Economy
Economic activity which
never reported to the
government.
4. Quality of Life
Include leisure time,
pleasant surroundings,
and personal safety.
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Other Income and Output Measures
Gross National Product (GNP)
• GNP market value of all goods and
services produced by Americans.
Net National Product (NNP)
• NNP output made by Americans
minus adjustments for
depreciation. (loss of value of
capital equipment from wear and
tear.
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Other Income and Output Measures
National Income (NI)
• NI - NNP minus sales and excise
taxes.
Personal Income (PI)
• PI - total pre-tax income paid to U.S.
households.
Disposable Personal Income (DPI)
• DPI - personal income minus
individual income taxes.
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Key Macroeconomic Measurements
Measurements of the Macroeconomy
Gross Domestic
Product
+
income earned
outside U.S. by U.S.
firms and citizens
Gross National
Product
–
depreciation of
capital equipment
Net National
Product
–
sales and excise taxes
National Income
–
• firms‘ reinvested profits
• firms‘ income taxes
• social security
Personal Income
–
individual income taxes
–
=
Net National
Product
=
National Income
+
other household income
=
Disposable
Personal Income
Figure
12.4, page 306
Section
Chapter 12
income earned by foreign
firms and foreign citizens
located in the U.S.
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=
Gross National
Product
=
Personal Income
13
Factors Influencing GDP
Aggregate Supply
• Aggregate supply - total
amount of goods and
services in the economy
available at all possible
price levels.
• As price levels rise,
aggregate supply rises and
real GDP increases.
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Factors Influencing GDP
Aggregate Demand
• Aggregate demand amount of goods and
services that will be
purchased at all possible
price levels.
• Lower price levels will
increase aggregate
demand as consumers’
purchasing power
increases.
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Factors Influencing GDP
Aggregate Supply/Aggregate
Demand Equilibrium
• By combining aggregate supply
curves and aggregate demand
curves, equilibrium for the
macroeconomy can be
determined.
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Business Cycles
• What is a business cycle?
• What keeps the business cycle
going?
• How do economists forecast
business cycles?
• How have business cycles
fluctuated in the United States?
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What Is a Business Cycle?
A business cycle is a macroeconomic period
of expansion followed by a period of
contraction.
• Four main phases of
the business cycle:
expansion, peak,
contraction
trough
http://www.nber.org/cycles.html
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Phases of the Business Cycle
Expansion
• An expansion - period of rise in
real GDP.
• Economic growth is a steady, longterm rise in real GDP.
Peak
• Peak - GDP stops rising, height of
economic expansion.
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Phases of the Business Cycle
Contraction
• Contraction - a period of decline
marked by a fall in real GDP.
• Recession - a prolonged economic
contraction.
• Depression - long or severe
recession.
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Phases of the Business Cycle
Contraction
Trough
• Trough - the lowest point of
economic decline, when real GDP
stops falling.
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What Keeps the Business Cycle Going?
• Variables that affect business
cycles:
1. Business Investment
During expansion firms invest in
new plants and equipment. This
creates new jobs and furthers
expansion. In a recession, the
opposite occurs.
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What Keeps the Business Cycle Going?
• Variables that affect business
cycles:
2. Interest Rates and Credit
When interest rates are low,
businesses and consumers spend
more. When interest rates climb,
they spend less. Unemployment
rises.
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What Keeps the Business Cycle Going?
3. Consumer Expectations
Forecasts of an expanding economy
often fuel more spending, while
fears of recession tighten
consumers' spending.
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What Keeps the Business Cycle Going?
4. External Shocks
External shocks, such as
disruptions of the oil supply, wars,
or natural disasters, greatly
influence the output of an
economy.
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Forecasting Business Cycles
• Economists try to predict changes
in the business cycle.
• Leading indicators are key
variables used to predict a new
phase of a business cycle.
• Ex. - stock market performance,
interest rates, and new home
sales.
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Leading indicators
• Average Workweek
• Initial Claims for Unemployment
Insurance
• New Orders for Consumer Goods
• Vendor Performance
• New Orders for Capital Goods
• Building Permits for Houses
• Stock Prices
• Money Supply
• Interest-Rate Spread
• Consumer Expectations
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Business Cycle Fluctuations
The Great Depression
–GDP fell by almost one third, and
unemployment rose to about
25%. Ended with WWII.
Later Recessions
–In the 1970s, an OPEC embargo
caused oil and gas prices to rise,
led to recession in the 70s – early
80s.
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Business Cycle Fluctuations
U.S. Business Cycles in the 1990s
–Following a brief recession in
1991, the U.S. economy grew
steadily during the 1990s, with
real GDP rising each year.
–Economy moved more toward
services.
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Business Cycle Fluctuations
U.S. Business Cycles in the 1990s
Recession followed 9/11/01,
recovery in 2003-04.
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GDP Growth 2001-2003
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Economic Growth
• How do economists measure
economic growth?
• What is capital deepening?
• How are saving and investing
related to economic growth?
• How does technological progress
affect economic growth?
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Measuring Economic Growth
The basic measure of a nation’s
economic growth rate is the
percentage change of real GDP
over time.
GDP and Population Growth
• Real GDP per capita is the best
measure of a nation’s standard of
living.
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Measuring Economic Growth
GDP and Quality of Life
• excludes many factors that affect
the quality of life.
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Capital Deepening
• Capital deepening - process of
increasing the amount of capital
per worker is called.
Important source of growth in
modern economies.
• Physical capital - more equipment.
• Human capital - training and
education.
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The Effects of Savings and Investing
• Savings rate - proportion income
spent to income saved.
• When consumers save or invest,
money becomes available for firms
to borrow.
• In the long run, more savings will
lead to higher output and income,
raising GDP and living standards.
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The Effects of Technological Progress
• Increase in efficiency gained by
producing more output without
using more inputs.
–Innovation - new products and
ideas boost GDP and business
profits.
–Scale of the Market - Larger
markets provide more incentives
for innovation.
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The Effects of Technological Progress
• Education and Experience
Increased human capital makes
workers more productive.
Educated workers can use new
technology.
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Other Factors Affecting Growth
Government
• Government can affect growth by
raising or lowering taxes.
• Use of tax revenues also affects
growth: funds spent on public
goods increase investment, while
funds spent on consumption
decrease net investment.
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Other Factors Affecting Growth
Foreign Trade
• Trade deficits can sometimes
increase investment and capital
deepening if the imports consist of
investment goods rather than
consumer goods.
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