Download Gross Domestic Product & Growth

Gross Domestic Product
& Growth
Macroeconomics – Part 1
Economic Indicators
 The government has broad economic goals
for the economy:
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Full employment
Price stability
Economic growth
 Economic indicators are used to measure the
overall well being of economic activity and
how we stand in relation to our goals.
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Unemployment rate
Price stability
Economic growth
Gross Domestic Product
 Gross Domestic Product, or GDP, is used to
measure economic growth
 GDP is defined as “The dollar value of all
final goods and services produced within a
country’s borders in a given year.”
Let’s break that down, piece by piece.
Gross Domestic Product is
The dollar value of all final goods and services
produced within a country’s borders in a
given year.
To get Dollar value we look at the total of the
selling prices
We don’t look at what they were “worth”
Gross Domestic Product is
The dollar value of all final goods and
services produced within a country’s borders
in a given year.
Final goods and services means products
sold to consumers
It does not mean intermediate goods
OR goods that have been resold
Gross Domestic Product is
 The dollar value of all final goods and
services produced within a country’s
borders in a given year.
The goods must have been made in the
country’s border by anybody
•So, a Toyota plant in the USA counts
•A Chevrolet plant in Japan does not.
Calculating GDP – Two Methods
The Expenditure Approach: counting up the
total amount spent on all goods and services.
2. The Income Approach: Add up all income
earned in the economy
1.
In method 1, we are adding up all the goods
and services purchased. In method 2 we are
looking at incomes that were used to buy the
things in method 1. Thus, they should come
out the same.
Famous Economic Formula
 GDP= C+I +G+(X-M)
 C= Personal Consumption expenditures
(consumer spending). This includes all
durable goods (a lifetime of more than one
year), non-durable goods ( a lifetime of less
than one year), and services.
I
I = Gross Investment. This is the total value of all
Private business investment on capital goods.
( this does NOT include your investment in an
education, or the stock market. It does NOT
include Government investment) only private
business investment
G
 G = Government purchases. This is the
dollar amount that federal, state, and local
governments spend on things like highways,
education, defense, etc.
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Note that “government purchases” does NOT
include all government spending.
Transfer payments or payments that are not
for a good or a service are excluded.
Net Exports
 X = Exports. This is the value of goods and
services produced domestically but sold in other
countries.
 M = Imports. This is the value of goods and
services produced in other countries, but bought
domestically
 Therefore net Exports is equal to the value of
Exports MINUS the value of Imports.
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Xn
(X-M)
NX
F
GDP as an indicator of standard of
living
 Per capita GDP : GDP/ population
 Criticism of GDP as a measure for SoL:

Doesn’t account for many of the things that we
consider important for quality of life:
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Happiness
Literacy
Divorce rate
Environmental degradation
Improved or weakened quality of production, etc.
Nominal vs Real GDP
 Nominal GDP is a GDP measured in current prices
Thus if a country produced $4,000,000 worth of
goods last year, it’s nominal GDP is $4,000,000)
 Real GDP is a GDP measured by a fixed or
constant price.
 Because prices might have risen and because we
are measuring Product (or items produced) and
not their price, we have to adjust for those price
changes.
Economic Growth
 A steady, long-term increase in a nation’s real
GDP that tends to raise living standards.
 Primary Causes:
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Capital Deepening: increasing the amount of
capital per worker
Saving and Investing
Advances in Technology
Improved human capital
Measuring Economic Growth
 Take Real GDP from the later Year (GDP2)
 Subtract Real GDP from the earlier Year
(GDP1) from it
 Divide by Real GDP1
 Multiply by 100
 ((GDP2 – GDP1) ÷ GDP1) x 100
Measuring Economic Growth
 So if the Real GDP in 1994 was $7.8 billion
 And Real GDP in 2004 was $10.8 billion
 What was the economic growth?
 ((10.8 – 7.8) ÷ 7.8) x 100 =
 (3 ÷ 7.8) x 100 =
 .384 x 100 =
 38.4%
Supply and Demand Revisited
Price Level: An average of all the goods and
services made in one year.
2. Aggregate Demand: the Demand for all goods
and services in the Country’s economy
3. Aggregate Supply: the Supply of all goods and
services in the Country
4. Aggregate Supply/Aggregate Demand
Equilibrium: the Equilibrium price for a
Country’s economy
1.
Business Cycles
1. A period of macroeconomic expansion followed
by a period of contraction.
2. Has Four Stages: Expansion, Peak, Contraction
and Trough
Business Cycle (Continued)
3. Three more terms:
A. Recession: a period in which GDP falls for
at least 2 consecutive quarters (minimum 6
months)
B. Depression: a long and severe recession
C. Stagflation (Stagnant + Inflation): a decline
in Real GDP and a rise in the price level