chapter 12 gross domestic product (gdp)
TRANSCRIPT
Chapter 12
Gross Domestic Product (GDP)
http://en.wikipedia.org/wiki/Gross_domestic_product
Table of Contents
What is GDP? Other Vocabulary / Approaches to GDP Measurements of Macroeconomics The Business Cycle
“Stuff”
How much money you have does not measure your economic well-being. Money, by itself, has no intrinsic value. It will not make you live longer. It does not entertain you. It does not make it easier to get around town, and so on. The only reason to have money is so you can exchange it for something that does have intrinsic value, like a car or a stereo or a sandwich or an doctor’s services or a macroeconomics tutor or what not.
“Stuff”
How much stuff you have does measure your economic well-being. Your car makes getting around town easier. Sandwiches keep you from starving and if they taste good, you enjoy eating them. Stereos entertain you. Doctors' services help you live longer.
Gross Domestic Product (GDP)
The dollar value of all final goods and services produced within a country’s borders in a given year
Signals the health of the economy Basically, you want GDP to increase
Example
If a person from China comes to the U.S. and produces items in the U.S., those items are part of the U.S.’s GDP
If a person from the U.S. goes to Italy and produces items in Italy, those items are part of Italy’s GDP
U.S. GDP excludes "American" goods produced on foreign soil, such as a Ford built in England.
U.S. GDP includes "foreign" goods produced in American soil, such as a Toyota built in Kentucky.
GDP does NOT include:
(Limitations)
Intermediate goods Used Products Non-market activities Black market Externality Quality of life
Intermediate Goods
Goods that are used in the production of a final good and services
Examples: Raw materials
Intermediate Example: Apples
If the purpose of the apples to sell the apples as is, then the apples ARE included in GDP
However, if the purpose of the apple is to make applesauce, then the apple is an intermediate good and is NOT counted in GDP. The applesauce would be counted in GDP
Examples
The steel used to make cars.
The bread used in sandwiches that are sold in delis.
The gas used in the cars of taxicabs.
We do this to prevent double counting
Example: counting the steel in its raw form and second in its final form, as the automobile
Example: Paper is the intermediategood; the book is the final good. The book is counted in GDP
Used Products
Products can ONLY be counted ONE time—the year they were FINISHED being made
A product does NOT have to be SOLD.
It only has to finish being made.
Example
GDP is for 2005
If you finish building a house in 2005. It is counted in GDP for 2005
If you resell the house in 2006, it does NOT count in 2006’s GDP.
Example
GDP is for 2005
A 2006 Volkswagon Jetta is made in 2005. Therefore, the car is considered part of 2005’s GDP
Example
Additions to houses sometimes are considered part of the year the addition was made
It all depends on several factors, such as the size, and who constructed it.
Non-market activities
Goods that people do themselves
Example: Childcare, mowing lawn
Example
If a farmer grows tomatoes and sells them to me at the farmer's market, the tomatoes are included in GDP.
But if I grow tomatoes and eat them myself, the tomatoes are NOTincluded in GDP.
Loophole
If the business (childcare, mowing lawn) is by the books—legitimate—then, it may be considered part of GDP
Black Market
The market for illegal goods
Examples: Drugs, weapons, babies
Externality
Unintended economic side effects have a monetary value that is often NOT reflected in GDP
Examples: Building a pool causes changes in ecology
However,
If you pay someone to fix up the ecology that was destroyed, that person’s income is part of GDP
Quality of life
Additional goods do NOT necessarily make people happier
Examples: Pleasant surroundings, personal safety, leisure time
Other Vocabulary
Durable goods
Goods that last for more than ONE year
Examples: Refrigerator,
Washer, Dryer
Nondurable goods
Goods that last for less than ONE year
Examples: Light bulbs,
food, sneakers
Price level
Average of all prices in an economy
Expenditure
Amounts spent
National Income Accounting
Collects statistics to define and measure GDP
The Great Crash (1929)
The stock market fell rapidly, causing people to lose much of their money
Caused a severe economic decline
The government found a way to predict and prevent economic downturns
Approaches to GDP
Output Approach
Expenditure Approach
Income Approach
(sometimes people combine the Output and Expenditure approach)
Output Approach
Adding up the market value (the market price) of all final goods and services produced domestically (within the borders of the country)
Expenditure Approach
Estimate the annual expenditures on four final goods and services.
Expenditure Approach
Y = GDP
Y = C + I + G + Nx
Nx = (X - M)
Expenditure Approach
C = Consumption (household items; ex: food, cars)
I = Investments (business; ex: factories, equipment, houses)
G = Government(ex: navy purchases, tanks, guns)
Nx = Net ExportsX = Exports (going OUT of country)M = Imports (coming INTO country)
Expenditure Approach
Y = GDP
Y = C + I + G + Nx
Nx = (X - M)
Income Approach
The total income of everyone in the economy compromises all payments to the factors of production—land, labor, and capital—in the form of rent, wages, interest, and profits
MOST accurate
Income Approach
Is problematic in the sense that it takes into consideration the suppliers of the resources, which is difficult to define. Moreover it is problematic to calculate Interest and Profit.
Measures of GDP
Nominal GDP
(“Current GDP”)
GDP measured in current year’s prices
Problem: A general increase in prices appears to make GDP rise—when it really didn’t
Real GDP Expressed in constant,
unchanging prices
MORE accurate
Measures of GDP
Year Nominal GDP Real GDP
2001 $1 x 1000 = $1,000 $1 x 1000 = $1,000
2002 $2 x 2000 = $4,000 $1 x 2000 = $2,000
2003 $3 x 3000 = $9,000 $1 x 3000 = $3,000
2004 $4 x 4000 = $16,000 $1 x 4000 = $4,000
2005 $5 x 5000 = $25,000 $1 x 5000 = $5,000
Measurements of Macroeconomics
Gross Domestic Product (GDP)
Gross National Product (GNP)
Net National Product (NNP)
National Income (NI)
Personal Income (PI)
Disposable Personal Income (DPI)
Gross National Product (GNP)
GDP + Income earned - Income earned
outside U.S. by by foreign firms
U.S. firms & & citizens in
citizens the U.S.
Means: Products produced by Americans Does NOT account for depreciation
Net National Product (NNP)
GNP - Cost of depreciation
Means: Reflects depreciation Does NOT reflect taxes
What is depreciation?
Decreases in value
Example: Car
What is Appreciation?
Increases in value
Example: House
National Income (NI)
NNP - (Sales tax + Excise tax)
Means: Reflects taxes
What is an excise tax?
A tax on items the government believes is “harmful” to people
Purpose: is to deter people from buying or using the product
Example: Cigarettes, alcohol, gas
Personal Income (PI)
NI - (firms reinvested profits + Other + firm’s income taxes household + social security taxes ) income
Means: What everyone in the household makes—before taxes AKA: Gross Income
Disposable Personal Income (DPI)
PI - Individual taxes
Means: Income to spend or put in the bank AKA: Net Income
Business Cycle
A period of Macroeconomic expansion followed by a period of contraction
Business Cycle
Peak
Contraction
Trough
Expansion
Business Cycle
Expansion: Recovery, growth. A period of economic growth as measured by a rise in Real GDP
Peak: The height of the economic expansion, when real GDP stops rising
Contraction: A period of economic decline marked by a falling real GDP
Trough: The lowest point in an economic contraction, when real GDP stops falling
Business Cycle(Levels of Severity)
Recession: A prolonged economic contraction, 2 consecutive quarter of decreased GDP
Depression: A recession that is especially long and severe
Stagflation: A decline in real GDP combined with a rise in the price level
Business Cycle(with Levels of Severity)
Business Cycle(with Levels of Severity)
Peak
ContractionExpansion
Trough
Recession
Depression
Business Cycle
Business Cycle
Peak
Expansion
Trough
Contraction
Leading Indicators(Economic Variables)
Key economic variables that economists use to predict a new phase of the business cycle
Business Investment
Explanation Positive Examples & Characteristics
Negative Examples & Characteristics
Expansion leads to sales and profits keep rising until a point when firms expand enough or demand for a product drops
Hire more workers
Increase Output
Lay off workers
Reduce output
Interest Rates & Credit
Explanation Positive Examples & Characteristics
Negative Examples & Characteristics
Consumers use credit to purchase “big ticket” items
Low interest rates
Businesses BORROW money
High interest rates
Businesses PAY back loans
Interest Rate Calculator
Low Interest Rates…
More money saved
Spend more money on other “things” Businesses stay operating People keep jobs People spend…
Consumer Expectations
Explanation Positive Examples & Characteristics
Negative Examples & Characteristics
Partially determined by consumer spending
Expectation of rapid growth
Fears of a weakening economy
External Shocks
Explanation Positive Examples & Characteristics
Negative Examples & Characteristics
Huge events occur—usually suddenly
Discovery of Oil or Mineral deposits
Wars
Droughts
Shortages
Disruption of oil supply
September 11, 2001
Positives Negatives
Bush says positives to boost consumer confidence
WAR—September 11th
Lower Interest Rates
Bush give money to families
“New Discoveries” advertized
September 11, 2001
“It’s often said that if you ask ten economists the same question you will get ten different answers.”
“Economists were virtually unanimous in their forecast that the horrific tragedy of September 11, 2001, would lead to a contraction of economic activity.”
--Naked Economics, page xii
Review
Are these positive factors, or negative factors?
Expansionary
Business Hire more workers.
Expansionary
Businesses borrow money from banks
Expansionary
People feel good about the economy
Contraction
The government increases interest rates
Expansionary
Businesses increase output
Contraction
The United States enters a war
Standards
6.1.12 CD 6.2.12 I 6.4.12 ABCDEFG 6.5.12 E