GDP NSocialStudies

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					           Chapter 12

Gross Domestic Product
           Table of Contents

 What is GDP?
 Other Vocabulary / Approaches to GDP
 Measurements of Macroeconomics
 The Business Cycle

 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.

 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

 If a person from China    If a person from the
  comes to the U.S. and      U.S. goes to Italy and
  produces items in the      produces items in
  U.S., those items are      Italy, those items are
  part of the U.S.’s GDP     part of Italy’s GDP
 U.S. GDP includes         U.S. GDP excludes
  "foreign" goods            "American" goods
  produced in American       produced on foreign
  soil, such as a Toyota     soil, such as a Ford
  built in Kentucky.         built in England.
        GDP does NOT include:

 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:
 If the purpose of the      However, if the
  apples to sell the apples   purpose of the apple is
  as is, then the apples      to make applesauce,
  ARE included in GDP         then the apple is an
                              intermediate good and
                              is NOT counted in
                              GDP. The applesauce
                              would be counted in

 The steel used to make cars.

 The bread used in sandwiches that are sold in

 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

 Example: Paper is the intermediate
  good; 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

  It only has to finish being

 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.

 GDP is for 2005

 A 2006 Volkswagon Jetta is made in 2005.
  Therefore, the car is considered part of
  2005’s GDP

 Additions to houses sometimes are
  considered part of the year the addition was

 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

 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 NOT
  included in GDP.

 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

 Unintended economic side effects have a
  monetary value that is often NOT reflected
  in GDP

 Examples: Building a pool causes changes in

 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

 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

 Amounts spent
     National Income Accounting

 Collects statistics to define and measure
         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 Exports
          X = 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                   Real GDP
(“Current GDP”)                Expressed in constant,
GDP measured in current         unchanging prices
  year’s prices

Problem: A general increase    MORE accurate
  in prices appears to make
  GDP rise—when it really
                   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.

 Products produced by Americans
 Does NOT account for depreciation
       Net National Product (NNP)

 GNP - Cost of depreciation

 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)

 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

 What everyone in the household makes—before taxes
 AKA: Gross Income
    Disposable Personal Income (DPI)

 PI - Individual taxes

 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




                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)




Business Cycle
         Business Cycle


    Expansion             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 &   Negative Examples &
                 Characteristics       Characteristics

Expansion leads Hire more              Lay off workers
to sales and     workers
profits keep
rising until a   Increase Output
point when firms                       Reduce output
expand enough
or demand for a
product drops
               Interest Rates & Credit

 Explanation               Positive Examples &   Negative Examples &
                           Characteristics       Characteristics

 Consumers use credit to   Low interest          High interest
 purchase “big ticket”
 items                     rates                 rates

                           Businesses            Businesses PAY
                           BORROW                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 &   Negative Examples &
                          Characteristics       Characteristics

Partially determined by   Expectation of        Fears of a
consumer spending
                          rapid growth          weakening
                     External Shocks

Explanation           Positive Examples &   Negative Examples &
                      Characteristics       Characteristics

Huge events occur—    Discovery of Oil Wars
usually suddenly
                      or Mineral       Droughts
                      deposits         Shortages
                                       Disruption of oil
            September 11, 2001

Positives                     Negatives
Bush says positives to boost WAR—September 11th
consumer confidence

Lower Interest Rates
Bush give money to families
“New Discoveries”
            September 11, 2001
“It’s often said that if you ask ten economists the
  same question you will get ten different

“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
Are these positive factors, or
      negative factors?

 Business Hire more workers.

 Businesses borrow money from banks

 People feel good about the economy

 The government increases interest rates

 Businesses increase output

 The United States enters a war

 6.1.12 CD
 6.2.12 I
 6.4.12 ABCDEFG
 6.5.12 E

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