Gross Domestic Product and Economic Growth Power Point Notes

Chapter 12 Gross Domestic Product
and Growth
1. Gross Domestic Product
2. Business Cycles
3. Economic Growth
How do we know if the economy is healthy . . . Economists measure
Gross Domestic and Gross National Product!
Yes: Money paid by shoppers in
New York for corn grown in
Iowa.
Yes: Money paid by buyers in
Indiana for cars made by a
Japanese company at a factory
in Kentucky.
Yes: Fees charged to patients
by a dentist in Texas
No: Money paid by a computer
factory in New Mexico for computer
chips produced in California.
No: Cost of processing wood pulp into
paper at a factory in Maine.
No: Money paid by shoppers in
Florida for jeans manufactured in
Mexico by a company headquartered
in North Carolina.

National Income Accounting
• System to collect and organize macroeconomic statistics on
production, income, investment, and savings
• Under the Department of Commerce
Cabinet position in the Executive Branch of government
whose main focus to promote economic growth.
Hello, I am Gary Locke, the
Secretary of Commerce in
President Obama’s Cabinet. I
am the first Chinese-American
Secretary. I was two term
governor of Washington, the
nation’s most trade-dependent
state.

1. Gross Domestic Product
• Dollar Value - cash value of all goods and services
• Final Goods and Services - All goods/services offered to
consumers
• Within a Country’s s border - American and foreign within U.S.
• tracks the exchange of money
DOLLAR VALUE
YES: Cash value of
all goods and
services sold
NO: Cost of
producing goods and
services
FINAL GOODS AND
SERVICES
YES: Goods and
services offered to
consumers
NO: Intermediate
goods used to
produce other goods
and services
WITHIN A
COUNTRYS BORDER
YES: American or
foreign companies
producing in the
United States
NO: American
companies producing
overseas

Calculated Two Ways
• Expenditure Approach -what we spend
• Consumer, business, and government goods and services as
well as net exports
• Durable goods - goods that last awhile
• Non durable goods - short period of time
• Income Approach -what we make
• firm sells a product or service, the selling price minus the
dollar value of goods/services
• In theory, they should give us same total

Expenditure Approach
• Suppose an economy’s entire output is cars and trucks. This year the
economy produces:
• 10 cars at $15,000 each = $150,000
• 10 trucks at $20,000 each = $200,000
• total = $350,000
• The economy’s GDP for this year is $350,000!
Income Approach
• Suppose an economy’s entire output is cars and trucks.
• All employed citizens, therefore, would work in the car and truck
industry, or for its suppliers.
• The combined selling price of all the cars and trucks reflects the
money paid to all the people who helped build the vehicles.
• The economy’s GDP for this year, then, is the sum of the income of
all its working citizens, or $350,000 (This includes the combined
income of all engineers, designers, planners, assembly-line workers,
managers, suppliers, etc.)~
• The economy’s GDP for this year is $350,000!

Nominal Versus Real GDP
• Nominal - GDP measured in current prices
• Real - GDP measured in constant, unchanging prices
Year 1: Nominal GDP
•Suppose an economy’s
entire output is cars and
trucks.
•This year the economy
produces:
10 cars at $15,000 each =
$150,000
10 trucks at $20,000 each =
$200,000
350,000
•Since we have used the
current year’s prices to
express the current year’s
output, the result is a
nominal GDP of $350,000
Year 2: Nominal GDP
•In the second year, the
economy’s output does not
increase, but he prices of
the cars and trucks do:
10 cars at $16,000 each =
$160,000
10 trucks at $21,000 each =
$210,000
370,000
•This new GDP figure of
$370,000, is misleading. GDP
rises because of an increase
in prices. Economists prefer
to have measure of GDP that
is not affected by changes in
prices. So they calculate real
GDP.
Year 3: Real GDP
•To correct for an increase
in prices, economists
establish a set of constant
prices by choosing one year
as a base year. When the y
calculate real GDP for other
years, they use the prices
from the base year. So we
calculate the real GDP for
Year 2 using the prices from
Year 1:
10 cars at $15,000 each =
$150,000
10 trucks at $20,000 each =
$200,000
350,000
•Real GDP is $350,000

Limitations of GDP
• Non-market activities -wash car, mow lawn
• The Underground economy - black market
• Negative Externalities - power plants polluting
• Quality of Life - leisure time
What do you
mean I’m not
counted
toward the
GDP
Look at the Pollution!

Other Output and Income
Measures
• Gross National Product - the annual income earned by a nation’s
firm and citizens
• Does not account for depreciation - loss of the value or a good

Measurements of the Macro
economy
• Gross Domestic Product + income earned outside the U.S. by
U.S. firms and citizens – income earned by foreign firms and
foreign citizens located in the U.S. = Gross National Product
• Gross National Product – depreciation of capital equipment = Net
National Product
• Net National Product + minor statistical adjustments - =
National Income
• National Income - Firms’ reinvested profits, Firms’ income
taxes, Social Security Taxes + other household income =
Personal Income
• Personal Income - individual income taxes =
Disposable Personal Income

Influences on GDP
• Price Level - the average of all prices
• Aggregate Supply - total amount of all goods and services in the
economy available at all price levels
• Aggregate Demand - the total amount of all goods and services in
the economy that will be purchased at all possible price levels
• Equilibrium Aggregate Supply /Demand
Aggregate Supply
Aggregate Demand
Price level
Real GDP

2. Business Cycles
• A periods of macroeconomic expansion followed by one of
contraction
Where do you
suppose we
are? Why?

Phases of Business Cycles
• Expansion - economic growth measured by by rise in GDP
• economic growth - long term increase
• peak - the height of economic growth
• Contraction - economic decline marked by a fall in GDP
• trough - the lowest point
• recession - prolonged economic contraction
• depression - recession that is long and severe
• Stagflation - decline in real GDP - combined with rise in the
price level

What Keeps a Business Going
• Business Investments – when economy is expanding, business
expect sales and profits to keep rising, therefore businesses
invest heavily; however sometimes too much expansion
• Interest Rates and Credit – credit for big purchases, cars and
homes, the cost is the interest rate financial institutions charge
• Consumer Expectations – consumer spending is determined by
consumer expectations. If consumers expect economy to
contract, they reduce spending and vice a versa
• External Shocks – disruptions in oil, wars, droughts and
hurricanes

Business Cycle Forecasting
• Prediction is quite difficult
• Leading indicators - set of key economic variables that
economists use to predict future market trends
• stock market
• The Conference Board
“In my opinion the wealth of the country is bound to increase at a
very rapid rate . . . Anyone who believes that opportunities are now
closed and that from now on the country will get worse instead of
better is welcome to the opinion-and whatever increment it will
bring. I think that we have scarcely started . . . I am firm in my
belief that anyone not only can be rich but ought to be rich.
-John Jakob Raskob, interview in the Ladies Home Journal,
August 1929

Business Cycles throughout
history
• The Great Depression - the U.S. stock market
crash in 1929
• John Maynard Keynes - Theory of
Employment, Interest, and Money -the
government should intervene to pull an
economy out of the market
• Some later recessions
• 1970’s s OPEC - oil market shortage
• 1980’s s recession - high interest rates
• 1991 - brief recession - unemployment

3. Economic Growth
• Economic rise in the nation
Americans have seen a fairly steady
rise in their standard of living
40
35
30
25
20
15
10
5
0
1970 1975 1980 1985 1990 1995 2000 2005
Real GDP per
capita,
1970-2005

Measuring Economic Growth
• Real GDP per capita - real GDP divided by the total population of
a country
• Capital Deepening - increasing the amount of capital per worker
• Savings and Investments - income not used for consumption
Capital Deepening
Human Capital
+
Physical Capital
Increased Labor Productivity
Increased Output
Increased Wages
Increased Labor Demands

Population, Government and
Foreign Trade
• Population Growth - leads to lower standards
• Government - raising taxes to pay for government services,
households will have less money but will have more services
• Foreign Trade - trade deficit - importing more than exporting
When the economy is on the upswing,
financial institutions are more likely
to lend money. A strong economy
means you have a greater access to
loans that help pay for education.
Many economists see teen spending
as a huge source of future economic
growth. When you spend money
responsibly, you help expand the
economy.

Technological Progress
• An increase in efficiency gained by producing more output
without using more inputs
• Causes
• scientific research
• innovation
• The Government aids innovation

Important Measures of Economic Growth
Gross Domestic
Product
Gross National
Product
Net National
Product
National Income
Definition
Dollar value of all
final goods and
services produced
within a country’s
borders in a year
Annual income
earned by U.S.
owned firms and
U.S. citizens
GNP with the cost
of replacing the
physical capital
How much pretax
income businesses
actually pay to
U.S. household
Does Not Include
Products made in
another country
by American
manufacturer
Depreciation
Taxes
How Compiled
Expenditure and
Income Approach
Variations:
Nominal and Real
GDP plus income
earned outside
U.S. by U.S.
firms and citizens
minus income
earned by foreign
firms and foreign
citizens located in
the U.S.
GNP minus cost of
depreciation
MNP minus taxes