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GDP The Strength of the National Economy Essential Standards The student will explain that overall levels of income, employment, and prices are determined by the spending and production decisions of households, businesses, government and net exports. The student will define Gross Domestic Product (GDP), economic growth, unemployment, aggregate supply and aggregate demand. The student will explain how economic growth is calculated. The student will define the stages of the business cycle as well as recession and depression. GDP GDP stands for… Gross Domestic Product. It measures: The total dollar value… Of all FINAL goods and services… Produced WITHIN a country… In ONE year. It is used to compare economic performance among countries… And also to compare current economic performance with past performance. US GDP in 2012: $15,090,000,000,000 Per Capita GDP: $48,112 China GDP, 2012 $7,203,784,000,000 Per Capita GDP: $8,400 GDP Calculation Remember, GDP measures FINAL OUTPUT ONLY. Which of these would be included in GDP calculation? Industrial plastic used to make children’s toys… NO. The frosting used on a wedding cake… NO. The ink in a ball-point pen… NO. We would only count the TOYS, the CAKE and the PEN— Because does the value of the pen also include the value of the ink? YES. If we count both, we are double counting. Limits of GDP Calculation Items must be made WITHIN the country your are measuring. What nationality is the Coca Cola Corporation? American. What about a case of Coke that is made in a Russian plant—whose GDP will be affected? RUSSIAN GDP. What nationality is the Nissan Corporation? Japanese. What about a Nissan pickup truck made in Tennessee— whose GDP? American GDP. GDP only measures FINAL OUTPUT. Which of the following would be included as a part of GDP calculation? A.) a fish that is caught in the North Atlantic by a commercial fishing fleet. B.) a bottle of Coca Cola. C.) a bale of cotton. D.) a gallon of crude oil that is transported from Iran to Texas. Which of the following would MOST LIKELY be counted in the calculation of the US' GDP? A.) a pair of Nike running shoes. B.) a Harley Davidson motorcycle. C.) a bottle of French champagne. D.) an Atlanta Thrashers jersey. GDP= C+I+G+(X-M) C= Consumer expenditures. This includes all durable goods (a lifetime of more than one year)… Non-durable goods (a lifetime of less than one year), and… Services. The GDP Formula GDP= C+I+G+(X-M) I= Gross Investment. This is the total value of all capital goods produced during one year. Gross investment includes: Physical capital (tools, factories, etc.)…and… Human capital (hiring workers, paying for workers to be trained, etc.) GDP= C+I +G+(X-M) G=Government purchases. Government spending… Schools, highways, national defense, etc. X=Net Exports. Goods and services PRODUCED HERE but sold in other countries. M=Net Imports. Goods and services produced in other countries, but bought HERE. Which of the following variables of the GDP formula (GDP = C+I+G+(X-M)) would MOST likely be affected by the construction of a new administrative lounge at Hillgrove High School? A.) C B.) G C.) I D.) X E.) M Which of the following variables of the GDP formula would MOST LIKELY be affected by Mr. Lawrence having his car washed? (GDP = C+I+G+(X-M) A.) C B.) I C.) G D.) X E.) M Which of the following variables of the GDP would MOST LIKELY be affected by your father purchasing a new Ford pickup truck in order to haul his jet skis to the beach? (GDP = C+I+G+(X-M) A.) C B.) I C.) G D.) X E.) M Which of the following variables of the GDP would MOST LIKELY be affected by your father purchasing a new Ford pickup truck to haul his plumbing equipment to work? GDP = C+I+G+(X-M) A.) C B.) G C.) I D.) X E.) M Which of the following variables of the GDP would MOST LIKELY be affected by your purchase of a Nintendo Wii? GDP = C+I+G+(X-M) A.) C B.) I C.) G D.) X E.) M Which of the following variables of the GDP would MOST LIKELY be affected by the purchase of a case of Vermont Maple Syrup by a restaurant in the south of France? GDP = C+I+G+(X-M) A.) C B.) I C.) G D.) X E.) M Aggregate Demand Aggregate demand is TOTAL demand for: C + I + G + (X-M) It is the SUM TOTAL of ALL DEMAND for ALL PRODUCTS in an economy. Shifts in AD Just like demand, AD shifts to the left and right. When determining the direction of a shift, ask yourself this question: Is this situation likely to lead people to want to buy MORE or FEWER products. If the answer is “more”, AD will shift… RIGHT. If the answer is “less”, AD will shift… LEFT. Shifts in AD An increase in consumer optimism? AD RIGHT. An increase in tax rates? AD LEFT. A decline in business investment? AD LEFT. Aggregate Supply AS is the SUM TOTAL of ALL PRODUCTS that are AVAILABLE in an economy. Just like AD, AS shifts left and right. When determining a shift in AS, ask yourself this question: Is this situation likely to lead to MORE or FEWER products AVAILABLE to consumers? Shifts in AS An increase in the price of RESOURCES (oil, for example)— AS LEFT. Advances in manufacturing productivity (the assembly line, for example)— AS RIGHT. Expanding government regulation (an increase in minimum wage, for example)— AS LEFT. AD has a huge effect on the BUSINESS CYCLE— Sometimes the economy is on the UPSWING: The Roaring 20’s— The Tech-Boom of the 90’s— Sometimes the economy is in BAD SHAPE— The Great Depression— Or the Great Recession. Business Cycles Phases of the Business Cycle • Expansion—a period of economic growth (rising GDP)… • Peak—when real GDP stops rising… • Contraction—a period of falling GDP… • Trough—bottoming out. When GDP stops falling. Types of Contraction Recession—when GDP falls for two consecutive quarters… Depression—a long & severe recession… …with high unemployment & low production. Stagflation—a decline in GDP combined with a rise in prices (inflation). Market Psychology The biggest influence on GDP and economic performance is public perception. Question: If a person comes to school with the attitude of school sucks, I’m no good at it—what happens? They FAIL. And if they come in with an UNSTOPPABLE, UNBEATABLE attitude, what happens? They are successful. The economy works the same way: If people are negative, or SCARED, they stop spending… And the market crashes. If people are positive, or OPTIMISTIC, they spend more money… And the economy booms.
