Download Measures of Macroeconomic Growth

Bell Ringer
 How do we know if the economy is
healthy?
 How do we know if the economy is
healthy?
Objectives
1. Explain how gross domestic product
(GDP) is calculated.
2. Distinguish between nominal and real
GDP.
3. List the main limitations of GDP.
4. Identify other output and income
measures.
Crash Course Economics Macroeconomics
Gross Domestic Product
• Gross domestic product (GDP) is the dollar
value of all final goods and services produced
within a country’s borders in a given year.
• In short, GDP tracks exchanges of money.
• GDP is a measurement of how well a nation’s
economy is doing for a particular year.
• Current U.S. GDP (nominal): $16.8 trillion
• Google’s World Development Indicators
Expenditure Approach
• One method used to calculate GDP is to
use the expenditure approach.
• This approach estimates the annual
expenditures on all final goods and
services.
Expenditure Approach
Income Approach
• Another method calculates GDP by adding
up all the incomes in the economy.
• The income approach and the expenditure
approach give the same answer for GDP.
Why?
• Total expenditures on final goods and
services are eventually received by
households and firms in the form of wages,
profits, rent, and other income.
Income Approach
Nominal vs. Real GDP
• Nominal GDP is measured in current prices.
– To calculate nominal GDP, we use the current
year’s prices to calculate the value of the current
year’s output.
– The problem with nominal GDP is that it does not
account for the rise in prices. Your output might
be the same from year to year, but the prices
won’t be and nominal GDP would be different.
• Real GDP is measured in constant prices based
on a particular year.
• Real GDP = Nominal GDP adjusted for inflation
What is NOT included in GDP?
• Intermediate Goods (components of the final
good)
– Steel, corn syrup, car engines, etc.
•
•
•
•
Second-hand sales
Purely financial transactions (stocks & bonds)
Goods produced by U. S. firms overseas
The “Underground Economy”
– Tips, royalties, under-the-table work
• The Black Market
What Counts for GDP?
Money paid by shoppers in NYC for corn grown
in Iowa
YES
Fees charged to patients by a dentist in Texas
YES
NO
Cost of processing wood pulp into paper at a
factory in Maine
Money paid by buyers in Indiana for cars made
by a Japanese company at a factory in Ohio
Money paid by a computer factory in New
Mexico for computer chips produced in
California
Money paid by shoppers in Florida for jeans
manufactured in Mexico by a company based in
North Carolina
YES
NO
NO
What Counts for GDP?
Your friend began a fashion design company in 2013.
She produces and independently distributes her work. The
year she started, she purchased all the necessary supplies
and fabric used in producing her designs.
Her supplies were made in China, and her fabrics
were made in the United States. She bought used desks and
stools that were made in New Mexico and new mannequins
that were made in Canada. She also paid a local advertising
company $10,000 to create ads and promote her company
in fashion magazines. At the end of the year, she had $2,200
worth of clothing still in inventory.
What Counts for GDP?
Which items would be counted in determining
U.S. GDP for 2013? Explain your answer.
1.
2.
3.
4.
5.
The clothing she sells in 2013.
The desks and stools.
The mannequins.
The advertising she purchases.
Her inventory of remaining clothing.
Gross National Product
• In addition to GDP, economists use other ways
to measure the economy.
• Another leading measure is the gross national
product (GNP).
• GNP is the market value of all goods and
services produced by Americans in one year.
• Current U.S. GNP = $17.8 trillion
Other Measures
• Some economists argue
that we shouldn’t measure
a country’s value on its
wealth alone.
• The Social Progress Index
measures a country’s Basic
Human Needs (food, clean
water), Foundations of
Wellbeing (education,
health care), and
Opportunity (civil rights,
freedom).
Key Terms
• gross domestic product: the dollar value of all
final goods and services produced within a
country’s borders in a given year
• intermediate goods: products used in the
production of final goods
• nominal GDP: GDP measured in current prices
• real GDP: GDP expressed in constant, or
unchanging, prices
• gross national product: the annual income
earned by U.S.-owned firms and citizens
Closure
1. Explain the difference
between GDP and GNP
in your own words.
2. Should economists use
a measure of a country’s
well-being that looks at
more than just money
and wealth? If so, why
is this a better
indication of how a
country is doing?
Explain your answer.
Bell Ringer
Based off what you’ve heard from
me, other people, or the news, do
you think the U.S. economy is in a
period of recovery or decline?
How do you know this to be true?
How do other people know this to
be true?
Objectives
1. Identify the phases of a business cycle.
2. Describe four key factors that keep the
business cycle going.
3. Explain how economists forecast
fluctuations in the business cycle.
4. Analyze the impact of business cycles in U.S.
history.
Introduction
• What is a business cycle?
– The business cycle is the upward and downward
movements of the GDP.
– It refers to periods of expansion and contraction in
the economy over several months or years.
Phases of a Business Cycle
• The business cycle consists of four phases:
– Expansion
– Peak
– Contraction
– Trough
Phases of a Business Cycle
Contractions
• There are three types of contractions:
– A recession is a long economic contraction
(6 to 18 months) and is marked by a high
unemployment rate.
– A depression is a prolonged and severe
recession that is characterized by high
unemployment and low economic output.
– Stagflation is a decline in real GDP
combined with inflation.
Business Cycle Forecasting
• Why do business cycles happen?
– No single answer, but it has to do with
imbalances between supply and demand.
• What affects business cycles?
– Negative external shocks (war) and positive
external shocks (drop in the price of oil)
– Consumer confidence in the economy
Quick Activity
1. Copy the business cycle graphic.
2. Where was the economy in 2007 (just before
the Great Recession)?
3. Where was it in 2010?
4. Where do you think it is in 2015?
The Great Depression
• Before the 1930s, many economists believed
that when an economy declined, it would
recover quickly on its own.
• Declining GDP and high unemployment were
two major signs of the Great Depression, the
longest recession in U.S. history.
• Not until World War II, more than a decade
later, did the economy achieve full recovery.
Recent U.S. Recessions
• 1973-1975
– Cause: Oil embargo by Middle Eastern countries.
• 1981-1982
– Cause: Inflation combined with rising gas prices.
• 1991
– Cause: First Iraq War; rising gas prices.
• 2001
– Cause: 9/11; Dot-Com bubble
The Great Recession
• 2007-2009
• Cause: High gas prices; sub-prime mortgage crisis
Key Terms
• business cycle: a period of macroeconomic
expansion followed by one of macroeconomic
contraction
• expansion: a period of growth as measured by a rise
in real GDP
• contraction: a period of economic decline marked by
falling real GDP
• recession: a prolonged economic contraction
• depression: a recession that is especially long and
severe
• stagflation: a decline in real GDP combined with a
rise in the price level
Bell Ringer
 What ideas/images/thoughts do you
associate with unemployment?
 The current unemployment rate is
5.0 percent. How long do you think the
average person remains unemployed?
A: 28 weeks
Objectives
• Define unemployment and the labor force
• Describe how the government measures the
economy’s rate of unemployment
• Identify the problems in interpreting
unemployment data
Identifying Unemployment
• Natural Rate of Unemployment (Long Term)
– The amount of unemployment that the
economy normally experiences and does not go
away on its own even in the long run.
• Cyclical Unemployment (Short Term)
– Associated with short-term ups and downs of
the business cycle and refers to the year-toyear fluctuations in unemployment around its
natural rate.
How Is Unemployment Measured?
• Unemployment is measured by the Bureau of Labor
Statistics (BLS).
– It surveys 60,000 randomly selected households every
month.
– The survey is called the Current Population Survey.
• Based on the answers to the survey questions, the
BLS places each adult (over 16) years old into one of
three categories:
– Employed
– Unemployed
– Not in the labor force
Employment Definitions
• Employed: A person is considered employed if he or
she has spent most of the previous week working at
a paid job.
• Unemployed: A person is unemployed if he or she is
on temporary layoff, is looking for a job, or is waiting
for the start date of a new job.
– Labor Force: the total number of available workers; the
sum of the employed and the unemployed.
• Not in the Labor Force: A person who fits neither of
these categories, such as a full-time student,
homemaker, disabled person, retiree, etc., is not in
the labor force.
Unemployment Rate Since 1960
Percent of
Labor Force
10
Unemployment rate
8
6
Natural rate of
unemployment
4
2
0
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
The Breakdown of the Population
Labor Force Participation
Labor Force Participation Rates for Men
and Women Since 1976
Labor-Force
Participation
Rate (in percent)
100
80
Men
60
40
Women
20
0
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
Issues in Measuring Unemployment
• Discouraged workers, people who would like
to work but have given up looking for jobs
after an unsuccessful search, don’t show up in
unemployment statistics.
• Underemployed workers are counted as fully
employed.
• Some people falsely claim to be unemployed
in order to receive financial assistance, even
though they aren’t looking for work.
“America’s Increasingly
Irrelevant ‘Unemployment Rate’”
Work with a partner to complete questions 1-6
on the worksheet.