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Chapter 12
Gross Domestic
Product and Growth
How Can We Measure
Economic Growth?
• Gross Domestic Product
(GDP) – dollar value of all
goods and services produced
in the country’s borders in a
year
–Dollar Value is the final selling
price to consumers
Calculating GDP
• Includes cars built in America
by a Japanese company
• Does not include cars built in
Japan by an American
company
Calculating GDP
• Includes cars that are sold to
consumers (the final good)
• Does not include rubber, glass, or
steel bought by the automaker
(intermediate good used to make
the final good)
– Prevents double counting; the cost
of inputs is already in the price
Two Approaches to
Calculating GDP
• The Expenditure
Approach
– add together
final value of
all goods and
services
Formula for Expenditure
Approach
• C + I + G + NX = GDP
– C is Consumer spending
– I is Business investments
– G is Government spending
– NX is Net Exports
– U.S. current GDP =
$13.8 Trillion (#1 in the World)
Two Approaches to
Calculating GDP
• Income Approach –
add all people’s
annual income
together
– Easier, since IRS
already does this
Nominal vs. Real GDP
• Just because GDP is higher, it
does not mean the economy is
necessarily better
Nominal GDP
• Nominal means “by name only”
• GDP is usually calculated by using
current prices for either
expenditure or income approach
• Problem: Inflation would cause
GDP to rise, which would indicate
economic growth falsely
Real GDP
• Real GDP compares current
production to past production
using constant prices
Per Capita GDP
• Measures economic output per
person (per capita always
means per person)
• Shows how changes in GDP
are affecting the average
person in an economy
Typical High School Boy
Questions?
This is stupid.
Why do we
have to learn
this?
What GDP does not Measure
• Nonmarket
Activities
–Bartering
–Doing Favors
for people
–Producing
your own
goods
What GDP does not Measure
Cookie Monster
want $2Gs on
Cookie!
• Underground
Economy
–Black markets
–Drug dealing
–Gambling
What GDP does not Measure
• Negative
Externalities
–Pollution
–Disease
Cookie Monster
have Type 2
Diabetes.
What GDP does not Measure
• Quality of Life
–Personal
safety
–Leisure time
Other Economic Statistics to
Watch
• Rate of Inflation
– Measured by the Consumer Price Index (CPI)
• Takes a “market basket” of commonly bought
goods, measures changes in price of the
market basket from month to month
• Rising CPI = Inflation
• Unemployment Rate
– Poll taken by U.S. Bureau of Labor Statistics
– Measures what % of people are looking for work
and are not currently employed
GDP, Supply and Demand
• GDP and Price Levels in macroeconomics
are graphed similarly to Quantity and Price
in microeconomics
GNP
• GNP measures output of
Americans, rather than output
within the United States
• GDP + $ from U.S. Business
overseas - $ from Foreign
Business here = GNP
• Doesn’t help measure success of
economy… more a measure of
national economic power abroad
The Business Cycle
• In any capitalist country, the
economy will go up and down
as time passes
• This process looks like a roller
coaster when graphed
The Business Cycle
Phases of the Business
Cycle
• Expansion – real GDP is rising
• Peak – real GDP stops rising,
unemployment % is low
• Contraction – falling real GDP,
increasing unemployment
• Trough – lowest point, real GDP
stops falling
Terms for Describing
Contraction and Trough
• Recession – contraction
happens for 6 straight months
• Depression – no official
definition, just means
extremely bad, long
contraction
• Stagflation – drop in GDP plus
rising inflation
Factors That Cause the
Business Cycle
• Interest rates and credit fluctuations
– The Fed helps to restrict these effects by
increasing and decreasing rates to slow
and speed the business cycle
Factors That Cause the
Business Cycle
• Consumer Expectations –
they will spend if they
believe times are good,
they will save if they believe
bad times are coming
– Spending means banks have
less capital, economy will
expand now but contract
later
– High savings provides capital
for future economic growth
Factors that Cause the
Business Cycle
• Savings Rate - % of
disposable (spendable)
income saved by Americans
–Fun Fact! – Savings Rate
generally drops in America
during good economic times
–What effect does that have?
Factors That Cause the
Business Cycle
• External Shocks –
Negatively affect
aggregate supply,
thus dropping
GDP while raising
prices
Economic Indicators
• Things to watch to see if the
economy is in contraction or
expansion
– rate of new home construction
– stock market activity
– manufacturer’s new orders of
capital goods