How do we know if the economy is healthy?

How do you think the health of the economy is related to your own opportunities?

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.

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 (or Adjusted) GDP is measured in constant prices based on a particular year.

Nominal GDPIf we wanted to look at

the GDP for 1990 by itself, we would use

nominal GDP. We are looking at the GDP for

1990 based on the prices in 1990.

**SNAPSHOT**

Real GDPIf we wanted to compare

the GDP for 1990 with the GDP for 1995, we

would use real GDP. To calculate real GDP for

1995, we would take the quantities of all goods

and services purchased in 1995 and adjust them for

1990 prices.**PANORAMIC**

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

Fees charged to patients by a dentist in Texas

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

YESYES

YESYESNONO

YESYES

NONO

NONO

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.The clothing she sells in 2013.2.The desks and stools.3.The mannequins.4.The advertising she purchases.5.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 = $16.1 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

Bell RingerBased off what you’ve heard from me, other people, or the news, do you think the U.S. economy is in a period of recoveryrecovery or declinedecline?

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 Activity1. Copy the business cycle graphic.

2. Where was the economy in 2007 (just before the economic meltdown)?

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

What ideas/images/thoughts do you associate with unemployment?

The current unemployment rate is 5.5 percent. How long do you think the average person remain unemployed?

A: 27 weeks

Bell Ringer

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-to-year 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.

The Breakdown of the Population

Unemployment Rate Since 1960

10

8

6

4

2

01970 19751960 1965 1980 1985 1990 2005

Percent ofLabor Force

1995 2000

Natural rate ofunemployment

Unemployment rate

Labor Force Participation Rates for Men and Women Since 1950

100

80

60

40

20

01950 1955 1960 1965 1970 1975 1980 1985 1990 2000

Labor-ForceParticipation

Rate (in percent)

Women

Men

1995

Issues in Measuring Unemployment

• It is difficult to distinguish between a person who is unemployed and a person who is not in the labor force.– 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.

– Other people may 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 Work with a partner to complete questions 1-6

on the worksheet.on the worksheet.