Download Chapter 15 Gross Domestic Product

Chapter 15
Gross Domestic
Product
• Key Concepts
• Summary
• Practice Quiz
• Internet Exercises
©2002 South-Western College Publishing
What is gross
domestic product?
GDP is the most widely
reported measure of a
nation’s economic
performance
What does GDP
measure?
The market value of all
final goods and
services produced in a
nation during a period
of time, usually a year
What is an advantage
of using GDP?
GDP measures value
using dollars, rather than
a list of the number of
goods and services
Does GDP measure
secondhand
transactions?
No, Current GDP does not
include the sale of a used
car or the sale of a home
constructed some years ago
What are
intermediate goods?
Goods and services used
as inputs for production
of final goods
Does GDP count
intermediate goods?
No, to avoid double
counting, GDP only
measures final goods and
services
What are final goods?
Finished goods and
services produced for
the ultimate user
Does GDP measure
nonproductive financial
transactions?
No, GDP does not count
purely private or public
financial transactions
such as giving gifts,
stocks, bonds, or
transfer payments
What is a
transfer payment?
A government payment to
individuals, not in
exchange for goods or
services currently produced
Does GDP measure the
whole economy?
Yes, GDP consists of
many puzzle pieces to fit
together, including
markets for products,
resources, consumers,
workers, and businesses
What is a
circular flow model?
A model that show us
how all the pieces of
the puzzle fit together
Product
markets
Basic
Circular
Businesses Flow Households
Model
Factor
markets
What is a flow?
A rate of change in a
quantity during a
given time period
What is a stock?
A quantity measured
at one point in time
What additional sectors
does a complex circular
flow model contain?
• Financial markets
• Government
• Foreign markets
What leakages are
present in the more
complex model?
• Household saving
• Household taxes paid
• Income spent on imports
What injections are
present in the more
complex model?
• Business spending
• Government spending
• Foreign spending
What point is the
economy tending
toward?
Where the dollar value of
leakages equals the
dollar value of injections
What are the two
approaches we use to
measure GDP?
Expenditure
Income
What is the
expenditure approach?
The national income
accounting method that
measures GDP by adding
all the spending for final
goods and services
What are the four
sectors of GDP?
• Consumption
• Investment
• Government
• Foreign (X - M)
GDP = C + I + G + (X - M)
What is the
income approach?
The method that
measures GDP by
adding all incomes
What are shortcomings
of GDP?
• Nonmarket transactions
• Distribution, kind, &
quality of products
• Neglect of leisure time
• Underground economy
• Economic bads
What other national
accounts measure
economic performance?
• Net National Product
• National Income
• Personal Income
• Disposable Personal Income
• Nominal and Real GDP
• GDP Chain Price Index
What is nominal GDP?
The value of all final
goods based on the
prices existing during
the time period of
production
What is real GDP?
The value of all final
goods produced during a
given time period based
on the prices existing in a
selected base year
Real GDP =
nominal GDP x 100
GDP price index
What is the
chain price index?
A measure that compares
changes in the prices of
all final goods during a
given period to the
prices of those goods in
a base year
What is a
business cycle?
Alternating periods of
economic growth and
contraction, which can
be measured by
changes in real GDP
What are the four
phases of a business
cycle?
• Peak
• Recession
• Trough
• Recovery
What is a peak?
The phase of the
business cycle during
which real GDP reaches
its maximum after rising
during a recovery
What is a recession?
A downturn in the
business cycle during
which real GDP
declines
What is a trough?
The phase of the
business cycle in which
real GDP reaches its
minimum after falling
during a recession
What is a recovery?
An upturn in the
business cycle during
which real GDP rises
Hypothetical Business Cycle Peak
Real GDP
per year
Peak
Trough
Recession
Recovery
How long before a
downturn is a
recession?
The Department of
Commerce considers a
recession to be at least
two consecutive quarters
in which GDP declines
When is a downturn
considered a
depression?
The term depression is
primarily an historical
reference to the extreme
deep and long recession
of the early 1930’s
What is
economic growth?
An expansion in national
output measured by the
annual percentage
increase in a nation’s
real GDP
Why is economic growth
one of our nation’s
economic goals?
It increases our
standard of living - it
creates a bigger
“economic pie”
What are the three types
of economic indicators?
• Leading
• Coincident
• Lagging
What causes
unemployment?
When total spending falls,
businesses will find it
profitable to produce a
lower volume of goods and
avoid unsold inventory
Who is considered
unemployed?
Anyone who is 16
years of age and
above who is
actively seeking
employment
Who is considered
employed?
Anyone who works at
least one hour a week
for pay or at least 15
hours per week as an
unpaid worker in a
family business
What is the
unemployment rate?
The percentage of
people in the labor
force who are without
jobs and are actively
seeking jobs
http://www.bls.gov/
unemployed
Unemployment
=
rate
civilian labor
force
X 100
How is the
unemployment rate
calculated?
56,000 households are
surveyed each month
What is the
civilian labor force?
People 16 years or older
who are either employed
or unemployed, excluding
members of the armed
forces and people in
institutions
Total Population
age 16 and over
Not in Labor Force
Armed forces
Household workers
Students
Retirees
Persons with
disabilities
Institutionalized
Discourage workers
Civilian labor force
Employed
Employees
Self-employed
Unemployed
New entrants
Re-entrants
Lost last job
Quit last job
Laid off
Who is a
discouraged worker?
A person who wants to
work, but who has
given up searching for
work. He or she
believes there will be
no job offers
What is
underemployment?
People working at jobs
below their level of skills
What are criticisms of the
unemployment rate?
• Does not include
discouraged workers
• Includes part-time workers
• Does not measure
underemployment
The U.S. Unemployment Rate
25
20
15
10
5
1930 40
50
60
70
80
90
00
What are the types of
unemployment?
• Seasonal
• Frictional
• Structural
• Cyclical
What is seasonal
unemployment?
Unemployment caused
by recurring changes in
hiring due to changes in
weather conditions
What is frictional
unemployment?
Unemployment caused by
the normal search time
required by workers with
marketable skills who are
changing jobs, entering, or
re-entering the labor force
What is structural
unemployment?
Unemployment caused
by a mismatch of the
skills of workers out of
work and the skills
required for existing job
opportunities
What is cyclical
unemployment?
Unemployment caused
by the lack of jobs
during a recession
What is
full employment?
The situation in which an
economy operates at an
unemployment rate equal
to the sum of the seasonal,
frictional, and structural
unemployment rates
What percent
unemployment is
considered full
employment?
The natural rate of
unemployment changes
over time, but today it is
considered to be about 5%
What is the GDP gap?
The GDP gap is the
difference between fullemployment real GDP
and actual real GDP
What is the cost of
unemployment?
The GDP gap
What is inflation?
An increase in the
general (average) price
level of goods and
services in the economy
What is deflation?
A decrease in the general
(average) price level of
goods and services in
the economy
What is the most
widely reported
measure of inflation?
The Consumer Price Index
What is the
Consumer Price Index?
The CPI is an index that
measures changes in the
average prices of consumer
goods and services
Who reports the CPI?
The Bureau of Labor
Statistics (BLS) of the
Department of Labor
How is the CPI
calculated?
Price collectors contact retail
stores, homeowners, and
tenants in selected cities in
the U.S. monthly
Which goods and
services are included in
the CPI?
The BLS records average
prices for a “market
basket” of different items
purchased by the typical
urban family
Does the makeup of
the CPI change?
As people’s tastes and
preferences change,
some of the goods and
services that go into the
basket change
How is the CPI
computed?
Current year prices are
compared to prices of a
similar basket of goods and
services in a base year
What is a base year?
A year chosen as a
reference point for
comparison with some
earlier or later year
Why is the CPI always
100 in the base year?
The numerator and the
denominator of the
CPI formula are the
same in the base year
*CYP = cost of the market basket of
products at current-year prices
*BYP = cost of the market basket of
products at base-year prices
CPI =
CYP X 100
BYP
How is the
inflation rate computed?
The annual inflation rate is
computed as the
percentage change in
the official CPI from one
year to the next
*ARI = Annual rate of inflation
*CPIY = Consumer price index
in given year
*CPIPY = Consumer price
index in previous year
ARI =CPI - CPIPYX 100
CPIPY
20
16
12
8
The U.S. Inflation Rate 1929 - 2002
4
0
-4
-8
-12
1930 40
50
60
70
80
90
00
What is disinflation?
A reduction in the rate
of inflation
What are some
criticisms of the CPI?
• It can overstate or
understate the impact of
inflation for certain groups
• Does not measure quality
• Substitutes are ignored
What does inflation do to
people’s income?
A general rise in prices will
shrink people’s income
What is
nominal income?
The actual number of
dollars received over a
period of time
What is real income?
The actual number of
dollars received (nominal
income) adjusted for
changes in the CPI
*RI = Real income
*NI = Nominal income
*CPI = CPI as a decimal or CPI ÷ 100
NI
RI =
CPI
%  in real
income
=
%  in
nominal
income
_
%  in
CPI
What is wealth?
The value of the stock
of assets owned at
some point in time
How is wealth affected
by inflation?
Inflation can benefit
holders of wealth
because the value of
their assets tends to
increase as prices rise
What will cause your real
income to decline?
The rate of inflation is
greater than your
rate of income
How does inflation
affect borrowers and
savers?
They can win or lose
depending on the
rate of inflation
What is the
interest rate?
Interest per year as a
percentage of the
amount loaned or lent
What is the
nominal interest rate?
The actual rate of
interest earned over a
period of time
What is the
real interest rate?
The nominal rate of interest
minus the inflation rate
What are the two basic
types of inflation?
Demand-pull
Cost-push
What is
demand-pull inflation?
A rise in the general
price level resulting
from an excess of total
spending (demand)
When does demand-pull
inflation occur?
When the economy is
operating at or near full
employment
What is
cost-push inflation?
A rise in the general
price level resulting
from an increase in the
cost of production
What can cause costpush inflation?
Cost increases for labor, raw
materials, construction,
equipment, borrowing etc.
Do people’s
expectations affect
inflation?
Yes, expectations can
influence both demandpull and cost-push
inflation
What is hyperinflation?
An extremely rapid rise in
the general price level
What is a
wage-price spiral?
A situation that occurs when
increases in nominal wage
rates are passed on in
higher prices, which, in turn,
result in even higher
nominal wages and prices
How does the U.S.
inflation rate compare
with other countries?
It is lower than some
and higher than
others
Key Concepts
END