Gross Domestic Product

GDP

SSEMA1 The student will illustrate the means by which economic activity is measured.a. Explain that overall levels of income,

employment, and prices are determined by the spending and production decisions of households, businesses, government, and net exports.

b. Define Gross Domestic Product (GDP), economic growth, unemployment, Consumer Price Index (CPI), inflation, stagflation, and aggregate supply and aggregate demand.

c. Explain how economic growth, inflation, and unemployment are calculated.

Gross Domestic ProductGDP = the total

market value of all final goods and services produced in a country in a year.

Two ways to measure GDP:

Expenditure approach

Income approach

Measuring GDPExpenditure

Expenditure Approach counts: (think expenses)

Consumption spending by households

Investment spending by businesses

Government spendingNet exports =

Exports – importsOnly final goods count to

avoid double counting.A car counts, but not

individual tires, steering wheel, seats, nuts, bolts, etc used to make the car.

ReasoningI spend money on your

goods/servicesYou earn incomeIssues:Goods bought include:Responses to

terrorism, pollution, natural disaster

Left out: Leisure time activities,

time spent w/family

Mixed bagWho contributes to the GDP?DivorceeRetireeHeart surgery

Wars, hurricanes, disease, crime = contribute

Y =

C + I + G + X -M

Consumption by householdsInvestment purchases of business and households

National GDP

Is composed of

Government Spending

Total Exports minus

Total Imports

Recap - GDPThe expenditure approach transactions made in the

product market. product market =households use incomes to

purchase goods/services from firms.

household expenditures (consumption), business expenditures on capital (investment), military contracts (government spending), and foreign expenditures on U.S. goods and services (net exports).

Note: Changes in these expenditures shift the aggregate demand curve

Value approach(Income approach)

Examines output values.

Has different way of avoiding double counting

$1 worth cotton bought =

$5 fabric =$30 dress30= 1(price of the cotton) + (5

– 1)(the fabric – the price of the

cotton) + 30 – 5 (the dress – the price of the fabric)

Income ApproachTransactions on factor

marketFactor Market = firms

pay households for resources

i.e. land, labor, capital w/specific income payment

Firms pay: rent, wages, interest (borrow $)

Note: Changes in these costs of production shift the short-run aggregate supply curve

GDP = Media DarlingGovernment + media =

GDP Growth = Best thing ever!

Is it really?Signals societal failuresBad stuff is happeningBad habits growing

war started, more fast food instead of

home cooked, nannies instead of

parents, social media instead of

friends

Bad StuffDefensive Goods

and servicesCorruptionNatural disastersDiseaseWarPollutionCongestionWork related stress

Not CountedSpending on:Raw materialsIntermediate goods

Car parts, etcAnything for resalePurchase of stocks and

bonds (transfer of money nothing is bought)

Money put in savingsLeisure activities

reading, listening to music, etc.

Household activities: cleaning, cooking, mowing

lawn, etc.

Not includedRetirementDays offVacationsChild careHouseworkGardeningDIY

Economic GrowthReal GDP = GDP

adjusted for inflation. achieved through an

increase in real GDP Economic growth can be

shown by an outward shift of the production possibilities curve.

economic growth = gains in new technology used to improve production or gains in new factors of production.

VocabularyGross Domestic Product = the

total market value of all final goods and services produced within a country in a given time period.

“market value” – GDP uses market prices of goods and services for calculations.

“final goods” = The Finished product.

Intermediate goods = Materials purchased by companies that become part of the final good.

“produced within a country” – All final goods produced within the United States are counted in U.S. GDP, foreign or domestic.

InflationInflation = occurs in an

economy when the average price level of goods and services rise over time.

An index number, i.e. consumer price index, is used to calculate the inflation rate between two specified years or periods

Base year = basis of comparison for all other periods

Calculating:

Real GDPNominal GDP = GDP

not adjusted for inflation

Implicit price deflator = an index of average levels of prices for all goods and services in the economy.

Real GDP = GDP that is adjusted for inflation, a/k/a GDP in constant dollars

Calculating real GDP:

https://sp1.yimg.com/ib/th?id=H.4717241166463561&pid=15.1

StagflationStagflation = economic condition

rising average price level (inflation)

decrease in Real GDP (recession) usually accompanied by a rising

unemployment rate. Usually real GDP declines

w/falling price level. stagflation = stimulating

economic growth = rising prices. Causes: The most common

causes of stagflation include negative supply shocks i.e. large

increase in the price of oil or major increases in regulation and/or corporate tax rates by the government.

Aggregate SupplyAggregate Supply = total of all

goods and services firms are willing/able to supply at each price level in a given period of time.

Short run = aggregate supply curve (SRAS) is upward-sloping showing a direct relationship between price level and real GDP.

It is upward because wages/prices slow to change due to contracts. a/k/a sticky wages/prices

Long run = prices completely flexible

supply curve (LRAS) is vertical at the full employment level of real GDP (real output or real national income).

Aggregate DemandAggregate Demand =

total quantity of all goods and services consumers are willing and able to purchase at each price level in a given period of time.

The aggregate demand curve (AD) is downward-sloping showing an inverse relationship between price level and real GDP.

Three Effects The interest rate effect =

downward slope of the aggregate demand curve because price level rises interest rates (the price of

borrowing money) rises consumers and businesses

spend less on interest sensitive purchases i.e. cars, new homes, and physical capital.

The wealth effect occurs = rising price level reduces the purchasing power of consumers = lowers consumption

foreign purchases = higher price level in a country = country’s exports higher = reducing demand for the country’s exports in other countries.

Economic GrowthEconomic growth =

calculated by finding the percentage change in real GDP from one time period to the next.

If the real GDP growth rate = positive, then economic growth has occurred.

Real GDP 2010 15.03 TrillReal GDP 2011 15.29 Trill15.29-15.03 / 15.03 X 100

= 1.72% positive growth rate.

Inflation RateThe inflation rate =

calculated by finding the % change in the price index from one period to another.

ExampleJune 2011 the CPI as

reported by the Bureau of Labor statistics was 225.722.

In June 2012, the CPI was 229.478.

Inflation Rate = June 2012- June 2011 divided by June 2011 multiplied by 100 =

229.478 – 225.722 = 3.756 / 225.722 = 0.0166 X 100 = 1.66 % inflation rate, OR 1.7% rounded.