GDPEconomics Chapter 12 Section 1

Nation Income Accounting

• Economists use a system called national income accounting to monitor the U.S. economy.

– They collect macroeconomic statistics, which the government uses to determine economic policies.

• The most important data economists analyze is gross domestic product (GDP), which is the dollar value of all final goods and services produced within a country’s borders in a given year.

What does GDP show us?

• GDP measures the amount of money brought into a nation in a single year through the selling of that nation’s goods and services.

• GDP is a measurement of how well a nation’s economy is doing for a particular year.

• A high GDP means the nation is doing well. A low GDP means the nation is doing poorly.

What is GDP?

• Basically, gross domestic product tracks exchanges of money.

• To understand GDP, you need to understand which exchanges are included in the final calculations—and which ones are not.

– Non-market activities

– Externalities

– Quality of life

Expenditure Approach

• One method used to calculate GDP is to estimate the annual expenditures on four categories of final goods and services:– Consumer goods

– Business goods and services

– Government goods and services

– Net exports

Income Approach

• Another method calculates GDP by adding up all the incomes in the economy.– The rationale for this

approach is that when a firm sells a product or service, the selling price minus the dollar value of goods service purchased from other firms represents income from the firm’s owners and employees.

Nominal versus 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. Even though your output might be the same from year to year, the prices won’t be and nominal GDP would be different.

– To solve this problem, economists determine real GDP, which is GDP expressed in constant, or unchanging, prices.

Aggregate Supply and Demand

• Aggregate supply and demand represent supply and demand on a nationwide level. The far right-hand chart shows what happens to GDP and price levels when aggregate demand shifts.

Business CycleEconomics Chapter 12 Section 2

Phases of a Business Cycle

– Business cycles are made up of major changes in real GDP above or below normal levels.

– The business cycle consists of four phases:

• Expansion

• Peak

• Contraction

• Trough

Consumer Expectations

• If people expect that the economy is going to start to contract, they may reduce spending.

• High consumer confidence, though, will lead to people buying more goods, pushing up GDP.

External Shocks

• Negative external shocks, like war breaking out in a country where U.S. banks and businesses have invested heavily, can have a great effect on business, causing GDP to decline.

• Positive external shocks, like the discovery of large oil deposits, can lead to an increase in a nation’s wealth.

Business Cycle Forecasting

– To predict the next phase of a business cycle, forecasters must anticipate movements in real GDP before they occur.

– Economists use leading indicators to help them make these predictions.

• The stock market is a leading indicator.

• Today, the stock market turns sharply downward before a recession.

Economic GrowthEconomics Chapter 12 Section 3

Measuring Economic Growth

• The basic measure of a nation’s economic growth rate is the percentage of change in real GDP over a period of time.

• Economists prefer a measuring system that takes population growth into account. For this, they rely on real GDP per capita.

GDP and Quality of Life

• GDP measures the standard of living but it cannot be used to measure people’s quality of life.

• In addition, GDP tells us nothing about how output is distributed across the population.

– While real GDP per capita tells us little about individuals it does give us a starting point for measuring a nation’s quality of life.

– In general, though, nations with a high GDP per capita experience a greater quality of life.

UnemploymentEconomics Chapter 13

Types of Unemployment• Frictional

– People change jobs, get laid off, or quite for some reason

• Structural

– Worker skills do not match the available jobs

• Seasonal

– Industries slow or shut down for a season or make

• Cyclical

– Rises and falls with the business cycle

Inflation

The Effects of Rising Prices• Inflation is a general increase in prices.

– Purchasing power, • the ability to purchase goods and services, is decreased by rising

prices.

Quantity Theory

Too much money in the economy

Cost-Push Theory

Wage-Price Spiral

Demand-Pull Theory

Demand is higher than supply

The Consumer Price Index(CPI)

• The consumer price index (CPI) is computed each month by the Bureau of Labor Statistics.

• The CPI is determined by measuring the price of a standard group of goods meant to represent the typical “market basket” of an urban consumer.– Food, apparel, transportation,

education, etc.

• Changes in the CPI from month to month help economists measure the economy’s inflation rate.

Poverty

The Census Bureau collects data about how many families and households live in poverty.

Who Is Poor?

The Poverty Threshold

• The poverty threshold is an income level below which income is insufficient to support a family or household. It varies based on the size of the family.

The Poverty Rate

• The poverty rate is the percentage of people in a particular group who live in households below the official poverty line.

Income Distribution in the United States

Income Inequality

• The Lorenz Curve illustrates income distribution. Income Gap

• A 1999 study showed that the richest 2.7 million Americans receive as much income after taxes as the poorest 100 million Americans.

• Differences in skills, effort, and inheritances are key factors in understanding the income gap.

Percent Distribution of Aggregate Household

Income in 1978, by Fifths of Households

HouseholdsPercent of

Income

Lowest Fifth

(under $6391)4.3

Second Fifth

($6392 - $11955)10.3

Third Fifth

($11956 - $18122)16.9

Fourth Fifth

($18122 - $26334)24.7

Top Fifth

($26335 and over)43.9

Source: U.S. Bureau of Census, Current Population Reports, P-60, No. 121, "Money Income in 1978 of Households in

the United States," Washington, D.C.: U.S. Government Printing Office, 1980. Data taken from cover. (Data are before

taxes.)

Lorenz Curve

How to Combat these negatives

• Government has numerous was to overcome such societal problems

– Fiscal Policy

– Monetary Policy

– Capital Deepening

– Technology

– Foreign Trade