Gross Domestic Product and Gross Domestic Product and GrowthGrowth

Chapter 12Chapter 12

Why Measure Growth?Why Measure Growth?

After the Great Depression, After the Great Depression, economists felt it was important to economists felt it was important to measure macroeconomic status to measure macroeconomic status to predict and prevent future economic predict and prevent future economic downturns.downturns.

Established NIPAEstablished NIPA

NIPANIPA

National Income and Product National Income and Product AccountsAccounts– Collects data on production, income, Collects data on production, income,

investment, and savingsinvestment, and savings– Maintained by the Department of Maintained by the Department of

CommerceCommerce– This data is reported and used to This data is reported and used to

influence government policyinfluence government policy

GDP (Gross Domestic Product)GDP (Gross Domestic Product)Most important measure in NIPA is Most important measure in NIPA is Gross Domestic ProductGross Domestic Product

GDP is the dollar value of all GDP is the dollar value of all FINALFINAL goods and services produced within goods and services produced within a a country’s borderscountry’s borders in a given year. in a given year.– Final goods are those sold to consumersFinal goods are those sold to consumers– Intermediate goods are those used in Intermediate goods are those used in

the production process (not calculated)the production process (not calculated)

““Within a Country’s Borders”Within a Country’s Borders”

GDP GDP doesdoes notnot include products include products made by a US company overseasmade by a US company overseas

GDP GDP doesdoes include a car made in the include a car made in the US by Toyota (Japanese company)US by Toyota (Japanese company)

What do you think? (Included in What do you think? (Included in GDP or no)GDP or no)

A new house?A new house?

A used house?A used house?

The realtor's fee on the used house?The realtor's fee on the used house?

All the products used to produce the All the products used to produce the new house? (nails, shingles, siding new house? (nails, shingles, siding etc...)etc...)

What is included...What is included...

A new house?...A new house?...YesYes

A used house?...A used house?...NoNo

The realtor's fee on the used The realtor's fee on the used house?...house?...YesYes

All the products used to produce the All the products used to produce the new house (nails, shingles, siding new house (nails, shingles, siding etc...)?...etc...)?...No (secondary goods)No (secondary goods)

Approaches of Measuring GDPApproaches of Measuring GDP

Expenditure ApproachExpenditure Approach– Economists estimate the annual expenditures Economists estimate the annual expenditures

in four categoriesin four categoriesConsumer goods and serviceConsumer goods and service

– Durable (long lasting...cars) and non durable (short Durable (long lasting...cars) and non durable (short lasting...food)lasting...food)

Business goods and servicesBusiness goods and services

Government goods and servicesGovernment goods and services

Net exports or imports of goods and servicesNet exports or imports of goods and services

– All of these added together calculates GDPAll of these added together calculates GDP

Income ApproachIncome Approach

Measures GDP by adding up all Measures GDP by adding up all incomes.incomes.– When a product is sold, the selling price When a product is sold, the selling price

is given to those who produce itis given to those who produce it– The income approach gives a better The income approach gives a better

assessment of activity in the economyassessment of activity in the economyShows the activity for everyoneShows the activity for everyone

Both income and expenditure Both income and expenditure approaches should be =approaches should be =

Nominal vs. Real GDPNominal vs. Real GDPNominal GDP is GDP measured in Nominal GDP is GDP measured in current prices (figure 12.3)current prices (figure 12.3)– Does not always measure an increase in Does not always measure an increase in

outputoutput

To measure growth from year to To measure growth from year to year, economists measure Real GDPyear, economists measure Real GDP– Real GDP is measured by calculating Real GDP is measured by calculating

GDP with constant pricesGDP with constant prices

Try exercise on figure 12.3Try exercise on figure 12.3

Limitations of GDPLimitations of GDP

Nonmarket ActivitiesGDP does not measure goods and

services that people make or dothemselves, such as caring for

children, mowing lawns, or cookingdinner.

Negative ExternalitiesUnintended economic side effects,such as pollution, have a monetaryvalue that is often not reflected in

GDP.

The Underground EconomyThere is much economic activity

which, although income isgenerated, never reported to thegovernment. Examples includeblack market transactions and

"under the table" wages.

Quality of LifeAlthough GDP is often used as aquality of life measurement, there

are factors not covered by it. Theseinclude leisure time, pleasant

surroundings, and personal safety.

Is it Accurate?Is it Accurate?

Many things to calculate in GDP and Many things to calculate in GDP and much is missed or overlookedmuch is missed or overlooked

However, it does provide us with a However, it does provide us with a baseline of stats and over time, baseline of stats and over time, shows important trendsshows important trends

ReviewReview1. Real GDP takes which of the following 1. Real GDP takes which of the following

into account?into account?(a)(a) changes in supply changes in supply(b)(b) changes in prices changes in prices (c)(c) changes in demand changes in demand(d)(d) changes in aggregate demand changes in aggregate demand

2. Which of the following is an example of a 2. Which of the following is an example of a durable good?durable good?(a)(a) a refrigerator a refrigerator(b)(b) a hair cut a hair cut (c)(c) a pair of jeans a pair of jeans(d)(d) a pizza a pizza

GNPGNPGNP (Gross National Product)... measures GNP (Gross National Product)... measures all goods and services produced by all goods and services produced by Americans in one year (includes overseas Americans in one year (includes overseas production)production)

Influences on GDPInfluences on GDPAggregate SupplyAggregate Supply– The total amount of goods and services The total amount of goods and services

available in an economy at all price available in an economy at all price levelslevels

Aggregate DemandAggregate Demand– The total amount of goods and services The total amount of goods and services

demanded in an economy at all price demanded in an economy at all price levelslevels

What happens to GDP if aggregate What happens to GDP if aggregate demand increases?demand increases?

Business CyclesBusiness Cycles

Chapter 12, Section 2Chapter 12, Section 2

Business CyclesBusiness Cycles

Period of macroeconomic expansion Period of macroeconomic expansion followed by contractionfollowed by contraction

Phases of Business CyclesPhases of Business Cycles– Expansion…period of economic growth Expansion…period of economic growth

measured by a rise in real GDPmeasured by a rise in real GDPGrowth being a steady, long term rise in Growth being a steady, long term rise in GDPGDP

Plentiful jobs, falling unemploymentPlentiful jobs, falling unemployment

Phases of Business Cycles (cont.)Phases of Business Cycles (cont.)

Peak…height of economic expansionPeak…height of economic expansion

Contraction…economic decline Contraction…economic decline marked by falling real GDPmarked by falling real GDP

Trough…bottom of contractionTrough…bottom of contraction

Contractions with Different Contractions with Different CharacteristicsCharacteristics

Recession…real GDP falls for two Recession…real GDP falls for two straight quartersstraight quarters– Prolonged period of economic Prolonged period of economic

contractioncontraction– Usually a rise in unemploymentUsually a rise in unemployment

Depression…a severe recessionDepression…a severe recession

Stagflation…decline in real GDP, Stagflation…decline in real GDP, combined with a rise in price levelcombined with a rise in price level

Keeping the CycleKeeping the Cycle

Typically, a sharp rise or fall in a key Typically, a sharp rise or fall in a key indicator sparks a series of eventsindicator sparks a series of events

4 main indicators4 main indicators– Business investmentBusiness investment– Interest rates and creditInterest rates and credit– Consumer expectationsConsumer expectations– External shocksExternal shocks

Business InvestmentBusiness Investment

Spending by business or non Spending by business or non spending will change the cyclespending will change the cycle

Interest Rates and CreditInterest Rates and Credit

Low interest rates will lead to Low interest rates will lead to spendingspending

High interest rates will lead to High interest rates will lead to savingssavings

Consumer ExpectationsConsumer Expectations

Consumers may spend or saveConsumers may spend or save

Like other things, consumer’s choices Like other things, consumer’s choices drive the economy drive the economy

External ShocksExternal ShocksUnpredictable and disrupt aggregate Unpredictable and disrupt aggregate supplysupply– WarsWars– FloodsFloods– Natural disastersNatural disasters– Oil shortageOil shortage

Can be positiveCan be positive– DiscoveriesDiscoveries– Good weatherGood weather

Forecasting Business CyclesForecasting Business Cycles

Not easy to predict…have to predict Not easy to predict…have to predict a change in real GDPa change in real GDP

Use leading indicators (economic Use leading indicators (economic variables)variables)– Stock marketStock market– Interest ratesInterest rates– Orders of capital goodsOrders of capital goods– Housing startsHousing starts

American HistoryAmerican HistoryGreat Depression was the economies most Great Depression was the economies most severe recessionsevere recession– Strengthened the need for government Strengthened the need for government

interventionintervention– WW II marked the end (government spending WW II marked the end (government spending

lead to rise in GDP)lead to rise in GDP)

Other recessionsOther recessions– 70’s oil embargo70’s oil embargo– 80’s unemployment (9%)80’s unemployment (9%)– 90’s turn-around and rise in GDP90’s turn-around and rise in GDP– 2000’s downturn with 9/112000’s downturn with 9/11

ReviewReview1. A business cycle is1. A business cycle is

(a)(a) a period of economic expansion followed by a period of a period of economic expansion followed by a period of contraction.contraction.

(b)(b) a period of great economic expansion. a period of great economic expansion. (c)(c) the length of time needed to produce a product. the length of time needed to produce a product.(d)(d) a period of recession followed by depression and a period of recession followed by depression and

expansion.expansion.

2. A recession is2. A recession is(a)(a) a period of steady economic growth. a period of steady economic growth.(b)(b) a prolonged economic expansion. a prolonged economic expansion. (c)(c) an especially long or severe economic contraction. an especially long or severe economic contraction.(d)(d) a prolonged economic contraction. a prolonged economic contraction.

Economic GrowthEconomic Growth

Chapter 12, Section 3Chapter 12, Section 3

Economic GrowthEconomic Growth

A change in GDP over time illustrates A change in GDP over time illustrates growthgrowth

For growth to occur, it should change For growth to occur, it should change with populationwith population

Real GDP per capita measures such Real GDP per capita measures such growth and the standard of livinggrowth and the standard of living

Quality of LifeQuality of LifeGDP measures standard of living but GDP measures standard of living but not quality of lifenot quality of life– PollutionPollution– StressStress– NutritionNutrition

Also does not tell how GDP is Also does not tell how GDP is distributeddistributed– Poor sections of the countryPoor sections of the country– Poor bulk of populationPoor bulk of population

Capital DeepeningCapital Deepening

The process of increasing capital per The process of increasing capital per workerworker

Goal is to increase productivityGoal is to increase productivity

Savings and investing lead to capital Savings and investing lead to capital deepeningdeepening

PopulationPopulation

Increased population without capital Increased population without capital deepening will lower the standard of deepening will lower the standard of livingliving

Increased population without Increased population without increase in production will lower the increase in production will lower the standard of livingstandard of living

GovernmentGovernment

Taxes can increase or decrease Taxes can increase or decrease capital deepeningcapital deepening– It is dependant upon what the taxes are It is dependant upon what the taxes are

spent onspent on

Foreign TradeForeign Trade

Foreign trade and running a trade Foreign trade and running a trade deficit can actually be good in some deficit can actually be good in some waysways– If the goods being trading enhance If the goods being trading enhance

capital deepeningcapital deepening– In the long run…this capital deepening In the long run…this capital deepening

can increase productivity and help to can increase productivity and help to pay back debt that results from a trade pay back debt that results from a trade deficitdeficit

Technological ProgressTechnological ProgressAn increase in efficiency gained by An increase in efficiency gained by producing more output from more inputsproducing more output from more inputs– TechnologyTechnology– RealignmentRealignment– KnowledgeKnowledge

Technological progress is measured by Technological progress is measured by looking at the amount of GDP that looking at the amount of GDP that increases from technology and not laborincreases from technology and not labor

ReviewReview1. Capital deepening is the process of 1. Capital deepening is the process of

(a)(a) increasing consumer spending. increasing consumer spending.(b)(b) selling off obsolete equipment. selling off obsolete equipment. (c)(c) decreasing the amount of capital per worker. decreasing the amount of capital per worker.(d)(d) increasing the amount of capital per worker. increasing the amount of capital per worker.

2. Taxes and trade deficits can contribute to 2. Taxes and trade deficits can contribute to economic growth if the money involved is economic growth if the money involved is spent on spent on (a)(a) consumer goods. consumer goods.(b)(b) investment goods. investment goods. (c)(c) additional services. additional services.(d)(d) farming. farming.