Gross Domestic Product
• What is gross domestic product (GDP)?
• How is GDP calculated?
• What is the difference between nominal and real GDP?
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What Is Gross Domestic Product?
• Economists monitor the macroeconomy
using national income accounting, a
system that collects statistics on
production, income, investment, and
savings.
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• Gross domestic product (GDP) is the
dollar value of all final goods and
services produced within a country’s
borders in a given year.
• GDP does not include the value of
intermediate goods. Intermediate goods
are goods used in the production of final
goods and services.
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Intermediate vs. Final Goods
Intermediate Goods
Not included in GDP
Final Good $500,000
Included in GDP
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Calculating GDP
Consumer goods include durable
goods, goods that last for a
relatively long time like
refrigerators, and nondurable
goods, or goods that last a short
period of time, like food and light
bulbs.
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Durable Goods vs. Nondurable Goods
Durable Goods
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Nondurable Goods
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Formula to Calculate GDP
C + I + G + (X-M) = GDP
Where
– C = Consumer Goods (Consumption)
– I = Investment Spending (Business Goods)
– G = Government Spending
– X = Exports
– M - Imports
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C + I + G + (X-M) = GDP
Where:
C=
I=
G=
X=
MGDP =
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+ 4,390.6
+ 892.0
+ 1157.1
+ 660.1
725.8
6374.0
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United States GDP – (in billions of dollars)
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• Per Capita GDP (GDP Divided by the
Population) is often used to compare the
economies of countries and the well-being of
their citizens. This is the best measure of how
well people live in a given country.
Real GDP per capita is the best
measure of a nation’s standard of
living.
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List the top 5 most populated countries
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11
GDP Per Capita
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12
Video
Virtual Economics - GDP
Chapter 12
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How can you figure out which is the most popular
movie of all time?
What is the problem with this method?
Nominal Box Office Receipts
Rank
Title
USA Box Office
1. Avatar (2009)
2. Titanic (1997)
3. The Avengers (2012)
4. The Dark Knight (2008)
$760,505,847
$658,672,302
$623,279,547
$533,316,061
5. Star Wars: Episode I - The Phantom Menace (1999)
$474,544,677
6. Star Wars (1977)
$460,935,665
7. The Dark Knight Rises (2012)
$448,130,642
8. Shrek 2 (2004)
$436,471,036
9. E.T. the Extra-Terrestrial (1982)
$434,949,459
10. The Hunger Games: Catching Fire (2013)
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$424,532,478
14
How can you figure out which is the most popular
movie of all time?
Real Box Office Receipts (adjusted for inflation)
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Video – Virtual Economics
•Real vs. Nominal GDP
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Nominal GDP is GDP measured in current
prices. It does not account for price level
increases from year to year.
Real GDP is GDP expressed in constant, or
unchanging, dollars. (Inflation adjusted
dollars)
Real GDP is best measure of
Economic Growth!
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GDP and How We Measure It
GDP Per Capita In South
America
Source: IMF, via
http://en.wikipedia.org/wiki/List_of_South_American_countries_
by_GDP_%28PPP%29_per_capita
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• 1) What assumptions
can we make about how
well the people live in
Guyana as opposed to
in Suriname?
• 2) What doesn’t this
chart tell you? Is there
any reason why you
might prefer to live in
Brazil rather than
Venezuela?
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Real vs. Nominal GDP Example
2008
10 cars at $15,000 each = $150,000
10 trucks at $20,000 each = $200,000
Nominal GDP = $350,000
2009
10 cars at $16,000 each = $160,000
10 trucks at $21,000 each= $210,000
Nominal GDP = $370,000
2009
10 cars at $15,000 each = $150,000
10 trucks at $20,000 each= $200,000
REAL GDP = $350,000
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The GDP in year 2008 shows
the dollar value of all final
goods produced.
The nominal GDP in year 2009
is higher which suggests that
the economy is improving.
But how much is the REAL
GDP? How do you get it?
Use 2008 Prices.
The Real GDP for 2009 is the
same as 2008 after we adjust
for inflation.
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19
Influences on GDP
• Aggregate Supply – the total amount of
goods and services in the economy
available at all possible price levels
• Aggregate Demand – the amount of
goods and services in the economy that
will be purchased at all possible price
levels
• Price level – the average of all prices in
the economy
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Section 1 Assessment
1. Real GDP takes which of the following into account?
(a) changes in supply
(b) changes in prices
(c) changes in demand
(d) changes in aggregate demand
2. Which of the following is an example of a durable good?
(a) a refrigerator
(b) a hair cut
(c) a pair of jeans
(d) a pizza
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Chapter 12
Section
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Section 1 Assessment
1. Real GDP takes which of the following into account?
(a) changes in supply
(b) changes in prices
(c) changes in demand
(d) changes in aggregate demand
2. Which of the following is an example of a durable good?
(a) a refrigerator
(b) a hair cut
(c) a pair of jeans
(d) a pizza
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Chapter 12
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QUIZ
1.
2.
3.
4.
5.
6.
7.
8.
Define Macroeconomics
What are the 3 economic goals that all countries have
Identify the 3 key parts of the definition of GDP
How do we use GDP
Identify what is NOT included in GDP
List the 4 components of GDP
Define Inflation
Explain the difference between Nominal and Real
GDP
9. Explain the usefulness of Real GDP per Capita
10.Name 10 Disney Movies
Chapter 12
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Business Cycles
• What is a business cycle?
• What keeps the business cycle going?
• How do economists forecast business cycles?
• How have business cycles fluctuated in the United
States?
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Virtual Economics
Video – Business Cycles
Chapter 12
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What Is a Business Cycle?
A modern industrial economy experiences cycles of
goods times, then bad times, then good times again.
Business cycles are of major interest to
macroeconomists, who study their causes and effects.
A business cycle is a macroeconomic
period of expansion followed by a
period of contraction.
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Four Phases of the Business Cycle
Expansion
•
An expansion is a period of economic growth as measured by a rise in
real GDP. Economic growth is a steady, long-term rise in real GDP.
Peak
•
When real GDP stops rising, the economy has reached its peak, the height
of its economic expansion.
Contraction
•
Following its peak, the economy enters a period of contraction, an
economic decline marked by a fall in real GDP. A recession is a
prolonged economic contraction. ( Two consecutive quarters or 6 month
of a decline in GDP) An especially long or severe recession may be called
a depression.
Trough
•
The trough is the lowest point of economic decline, when real GDP stops
falling.
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What Keeps the Business Cycle Going?
Business cycles are affected by four main
economic variables:
1 Business Investment
2. Interest Rates and Credit
3. Consumer Expectations
4. External Shocks
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Forecasting Business Cycles
• Economists try to forecast, or predict, changes in the
business cycle.
• Leading indicators are key economic variables
economists use to predict a new phase of a business
cycle.
• Examples of leading indicators are stock market
performance, interest rates, new home sales, and
manufacturers new orders of capital goods.
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Lagging Indicator
• A lagging indicator follows the performance of the
economy – an example would be the unemployment
rate.
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Economy
Leading
Indicators
Lagging
Indicators
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History of the Business Cycle
1. Why is the business cycle like a roller coaster?
2. How do wars affect the economy?
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34
Section 2 Assessment
1. A business cycle is
(a) a period of economic expansion followed by a period of contraction.
(b) a period of great economic expansion.
(c) the length of time needed to produce a product.
(d) a period of recession followed by depression and expansion.
2. A recession is
(a) a period of steady economic growth.
(b) a prolonged economic expansion (6 month decline in GDP).
(c) an especially long or severe economic contraction.
(d) a prolonged economic contraction.
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Chapter 12
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Section 2 Assessment
1. A business cycle is
(a) a period of economic expansion followed by a period of contraction.
(b) a period of great economic expansion.
(c) the length of time needed to produce a product.
(d) a period of recession followed by depression and expansion.
2. A recession is
(a) a period of steady economic growth.
(b) a prolonged economic expansion.
(c) an especially long or severe economic contraction.
(d) a prolonged economic contraction.
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Economic Growth
• How do economists measure economic growth?
• What is capital deepening?
• How are saving and investing related to economic
growth?
• How does technological progress affect economic
growth?
• What other factors can affect economic growth?
Chapter 12
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Vocabulary
• Real GDP Per Capita
• Capital Deepening
• Saving
• Savings Rate
• Technological Progress
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Measuring Economic Growth
GDP and Population Growth
In order to account for population increases in an economy,
economists use a measurement of real GDP per capita. It is a
measure of real GDP divided by the total population.
Real GDP per capita is considered the best measure of a nation’s
standard of living.
The basic measure of a nation’s economic
growth rate is the percentage change of real
GDP over a given period of time.
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What is Economic Growth?
1. An increase in real GDP over time
2. An increase in real GDP per capita over
time (usually used to determine standard of
living)
Why is economic growth the goal of every
society?
•
•
•
•
Provides better goods and services
Increases wages and standard of living
Allows more leisure time
Economy can better meet wants
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40
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Capital Deepening
• The process of increasing the
amount of capital per worker
is called capital deepening.
Capital deepening is one of
the most important sources of
growth in modern economies.
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• Firms increase physical
capital by purchasing more
equipment. Firms and
employees increase human
capital through additional
training and education.
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The Effects of Savings and Investing
The proportion of disposable
income spent to income saved
is called the savings rate.
When consumers save or invest,
money in banks, their money
becomes available for firms to
borrow or use. This allows
firms to deepen capital.
How Saving Leads to Capital Deepening
Shawna’s income: $30,000
$25,000 spent
• In the long run, more savings
will lead to higher output and
income for the population,
raising GDP and living
standards.
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$5,000 saved
$3,000 in a mutual
fund (stocks and
corporate bonds)
$2,000 in “rainy day”
bank account
Mutual-fund firm makes
Shawna’s $3,000
available to firms
Bank lends Shawna’s
money to firms in forms
such as loans and
mortgages
Firms spend money
on business capital
investment
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The Effects of Technological Progress
•
Besides capital deepening, the other key source of economic growth is
technological progress.
•
Technological progress is an increase in efficiency gained by producing
more output without using more inputs.
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Section 3 Assessment
1. Capital deepening is the process of
(a) increasing consumer spending.
(b) selling off obsolete equipment.
(c) decreasing the amount of capital per worker.
(d) increasing the amount of capital per worker.
2.
How does capital deepening increase the standard of living in a country?
a. It increase per capita GDP
b. It decreases per capita GDP
c. It lowers the inflation rate
d. It increases the cost of living.
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Chapter 12
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Section 3 Assessment
1. Capital deepening is the process of
(a) increasing consumer spending.
(b) selling off obsolete equipment.
(c) decreasing the amount of capital per worker.
(d) increasing the amount of capital per worker.
2. How does capital deepening increase the standard of living in a
country?
a. It increase per capita GDP
b. It decreases per capita GDP
c. It lowers the inflation rate
d. It increases the cost of living.
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Chapter 12
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Chapter 12 Review
Chapter 12
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1
The dollar value of all final goods and services
produced in a country in a given year
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1
Gross Domestic Product
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2
Which of the following is a DURABLE good?
1)
2)
3)
4)
A television
A t-shirt
A pound of bacon
Post-it notes
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2
The television
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3
Why is nominal GDP not a good measurement of
economic growth?
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3a
Because it does not account for inflation
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4
• What is the best measurement of a nation’s standard of
living?
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4
• Real GDP per capita
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5
• Draw and label all parts of the business cycle (I will call
you up the whiteboard)
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5
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6
• What do economists use to predict changes in the
business cycle
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6
• Leading Indicators
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7
• Give an example of a lagging indicator
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7
• Unemployment
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8
When people gain education and firms build new capital,
this causes ___________________ which will lead to a/an
______________ in real GDP per capita
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8
• Capital deepening; increase
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9
What effect would an increase in aggregate demand have
on GDP? Be prepared to demonstrate it graphically
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9
• An increase in AD An increase in GDP
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10
• What effect do higher savings rates have on GDP (be
prepared to explain the entire process)
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10
• Higher savings rates more money available for
borrowingCapital Deepeningan increase in GDP
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11
• For each of the following, explain what component of
US GDP it is C, G, I, X, M (if any) and calculate the US
GDP accordingly.
•
$3 spent on a cookie
•
$6000 spent on a 1999 Buick LeSabre
•
$15,000 spent on a 2013 Ford Focus
•
$1MM spent on a new fighter jet for the Navy
•
$10MM spent by Intel building a factory
•
$5MM spent on Intel Stock
•
A $100,000 toothbrush made in Oregon and sold in Japan
•
A $200,000 toilet (it’s a really nice toilet) made in Belgium and sold in California
•
$1 spent on eggs used to make a cookie
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11
•
$3 spent on a cookie ===C
•
$6000 spent on a 1999 Buick LeSabre NOTHING
•
$15,000 spent on a 2013 Ford Focus -----C
•
$1MM spent on a new fighter jet for the Navy----G
•
$10MM spent by Intel building a factory-----I
•
$5MM spent on Intel Stock----NOTHING
•
A $100,000 toothbrush made in Oregon and sold in Japan---X
•
A $200,000 toilet (it’s a really nice toilet) made in Belgium and sold in California---M
•
$1 spent on eggs used to make a cookie----NOTHING
• TOTAL: $10,915,003
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