HOW DO WE MEASURE ECONOMIC GROWTH?

GDP Calculation and the Business Cycle

Gross Domestic Product (GDP)

GDP is the market value of all final goods and services produced within a nation’s borders

“Intermediate”

does not include intermediate goods

“Finisher” = YES

GDP MEASURES : AGGREGATE SPENDING INCOME OUTPUT

What’s the difference?

Good or service produced for its final user

Good or service produced by one firm, bought by another firm, and used as an input into a final good or service. Raw materials

FINAL GOOD: YES!INTERMEDIATE GOOD: NO!

GDP DOES NOT INCLUDE…

ANYTHING WITHOUT A MARKET TRANSACTION Intermediate goods Nonmarket transactions

Household chores Underground economy:

Babysitting Black market

Drugs, etc.

How DO YOU CALCULATE AGGREGATE SPENDING?

THIS IS HOW YOU DO IT: GDP = C + I + G+ X-M (NX)

CONSUMPTION : 70%

Household spending on Durable goods

Cars and appliances Nondurable goods

food Services

College degree Haircuts

I and G

New capital machinery New trucks for UPS

New construction ZARA building a

new store Unsold inventory

2008 Porsche Carrera

Law enforcement policemen

Infrastructure Highways, airports

*Does not include transfer payments because no dollars

are spent

Investment: spending in order to increase output

Government Spending: purchase of final goods

X – M (Net Exports)

Sold to other countries Money flows to

the United States

Bought from other countries Money flows away

from the U.S. in exchange for foreign production

X = Exports M = Imports

Nominal vs. Real GDP

Nominal: Value of current

production at current prices

Overvalued due to inflation Ex: Price of movie

1930: $.05Price of movie2010: $9

*Real * Value of current

production using fixed prices

Takes out inflation Does not

overvalue Used to compare

GDP between different time periods

WHICH OF THE FOLLOWING ARE CALCULATED IN GDP?

QUICK GAME OF GDPARDY

The Expenditure/Aggregate Approach: (C+I+G+X-M)The Income Approach: (R:W+I+P)

Two ways to calculate GDP

THE INCOME APPROACH

Resource Supplied Income Received

Land Rent

Labor Wages

Capital Interest

Entrepreneurship Profit

R + W+ I + P = Y

+ Indirect Income Taxes+ Consumption of Fixed Capital+ Net foreign factor income = GDP

EXPENDITURE = INCOME

How can we use real GDP?

1. To compare GDP/Capita across the world

http://www.nber.org/cycles.html

BUSINESS CYCLESTIME

2. To Compare GDP through Time

REAL GDP GROWTH

The shaded areas show recessions during our economy which is a period of 6 months with limited growth.

THE BUSINESS CYCLE DEFINED Peak:

The top of the cycle where Real GDP is at a maximum Unemployment is low Inflation may be high

Contraction: Real GDP is falling for two consecutive

quarters Unemployment rate is increasing Inflation falls, might have deflation

THE BUSINESS CYCLE DEFINED

Trough: The bottom of the Cycle where a

contraction has stopped Unemployment is very high

Expansion: A period where real GDP is growing and

returning to Full Employment Unemployment is decreasing Inflation is increasing

Business Cycles in the U.S.

1929

1933

1937

1941

1945

1949

1953

1957

1961

1965

1969

1973

1977

1981

1985

1989

1993

1997

2001

2005

-15

-10

-5

0

5

10

15

20

25

US Business Cycles from 1929 - 2008

US Real GDP Growth RateAverage Growth Rate

Real G

DP

grw

oth

rate

(%

)

Source: Bureau of Eco-nomic Analysis

US Recession Status: 2009

http://www.economy.com/dismal/map/default.asp?src=nav

US Recession Status: 2010, from the Dismal Scientist

Global Economy Map

Click on the link below to see how the global economy is doing.

The Dismal Scientist, Global Economy