C + Ig + G + Xn [X-M]C + Ig + G + Xn [X-M]

GDPGDP

Gross Domestic Product – market value of Gross Domestic Product – market value of all finalall final legal output produced in a country in one legal output produced in a country in one year.year.

Year oneYear one

$2.00$2.00 $2.00$2.00 $2.00$2.00

NNominal (money) ominal (money) GDPGDP=$=$6.006.00

Year TwoYear Two

$3.05$3.05 $3.05$3.05

NNominal (money) ominal (money) GDPGDP=$6.10=$6.10

[R[Recession - decreaseecession - decrease in output] in output]

Real GDP Real GDP – measures only output. – measures only output. [measures current output at base-year [measures current output at base-year prices ($4), not current prices ($6.10)].prices ($4), not current prices ($6.10)].

What’s a Gross What’s a Gross Domestic Product?Domestic Product? Broccoli?Broccoli? I was gonna say I was gonna say

“Preparation H.”“Preparation H.”

So – “gross”, or “entire” means broccoli, Preparation H,So – “gross”, or “entire” means broccoli, Preparation H,and the “entire sum of all products produced in a year.”and the “entire sum of all products produced in a year.”

GDP - LocationGDP - LocationAll goods/services produced All goods/services produced legally for pay legally for pay inin a country’s borders.a country’s borders.[[GeographyGeography matters, matters, not citizenshipnot citizenship]]

GNP – OwnershipGNP – OwnershipAll goods/services produced All goods/services produced legally for paylegally for pay byby citizens of a country.citizens of a country.[[CitizenshipCitizenship mattered, mattered, not geographynot geography]]

The difference between GDP & GNP is about The difference between GDP & GNP is about 2/102/10 of 1%. of 1%.

Nike inNike inIndonesiaIndonesiaPlano, TXPlano, TX

ChinaChina EuropeEurope

BMWBMW in Waco in Waco

Provo,UTProvo,UT

Honda in OhioHonda in Ohio

in Chicagoin Chicago

Real Gross Domestic ProductReal Gross Domestic Product - Health of the - Health of the EconomyEconomy

0 Real GDP

ADAD11ADAD22 AS1 ASAS22

PL1

PL2

PLPL33

Y*1 Y2 YY33

Can sustain a much greater increase in AD if the AS curve isCan sustain a much greater increase in AD if the AS curve isalso shifting to the right, due to also shifting to the right, due to increasing productivityincreasing productivity.

Economy’s Economy’s Speed LimitSpeed Limit at at FFull ull EEmploymentmployment isis 44%%,, instead ofinstead of 2.52.5%%..

2.52.5%%

In the early 90’s, at FED, 2.5%was the speed limit. AS shiftedslowly due to low productivity.

So, at FED, theSo, at FED, the “goldilocks“goldilockseconomy”economy” has expanded.has expanded.

PL1

Increasing productivityIncreasing productivity of theof thelate 90’slate 90’s allowed more growth allowed more growthat full employment.at full employment.

*Represents*Represents “GDP Speed Limit”“GDP Speed Limit” at full employmentat full employment

<10 years without<10 years without a a recession>recession>

Personal Consumption Expenditure ( Personal Consumption Expenditure ( CC ) )Personal Consumption Expenditure ( Personal Consumption Expenditure ( CC ) )

EXPENDITURES APPROACHEXPENDITURES APPROACHGDP = C(66%) + Ig(18%) + G(17%) + XnGDP = C(66%) + Ig(18%) + G(17%) + Xn

•DDurable urable CConsumeronsumer GGoods[12%]oods[12%]

•NNondurableondurables[29s[29%][soup & soap]%][soup & soap]

•Consumer ExpendituresConsumer Expenditures for Services[59%] for Services[59%]

Ferrari Ferrari producedproduced here hereMaytag Maytag producedproduced here here

COMPOSITION OF CONSUMER SPENDING, COMPOSITION OF CONSUMER SPENDING, 20122012

ServicesServices$7,341 billion$7,341 billion

(66%)(66%)

Nondurable GoodsNondurable Goods$2,549 billion$2,549 billion

(23%)(23%)

Durable GoodsDurable Goods$1,219 billion$1,219 billion

(11%)(11%)

Total of $11,109 billionTotal of $11,109 billion

GGovernmentovernment P Purchasesurchases (G) (G) [state, local & federal][state, local & federal]GGovernmentovernment P Purchasesurchases (G) (G) [state, local & federal][state, local & federal]

Personal Consumption Expenditure ( C )Personal Consumption Expenditure ( C )Personal Consumption Expenditure ( C )Personal Consumption Expenditure ( C )

Gross Private Gross Private DomesticDomestic Investment ( I Investment ( Igg ) )Gross Private Gross Private DomesticDomestic Investment ( I Investment ( Igg ) )

EXPENDITURES APPROACHEXPENDITURES APPROACH

[“G” purchases of goods/svcs produced (not transfer payments)

3 Subcategories of Government A. Federal government [55%] B. 50 State governments C. 89,000 local governments [45% for state and local]

ConsumptionConsumption

$8,534$8,534

InvestmentInvestment

$2,085$2,085

GGovernmentovernment

purchasespurchases

$2,260$2,260 Export Export SpendingSpending

$1,210$1,210ImportImport

SpendingSpending

$1,938$1,938

ConsumptionConsumption

$10,362$10,362

InvestmentInvestment

$1,763$1,763

GGovernmentovernment

purchasespurchases

$2,974$2,974 Export Export SpendingSpending

$1,729$1,729ImportImport

SpendingSpending

$2,228$2,228

3.53.5

Average % IncreasesAverage % Increases in in Real GDP, Real GDP, 1900-20061900-2006

19001900ToTo

20062006

00

1%1%

2%2%

3%3%

4%4%

5%5%

19291929ToTo

19401940

19401940ToTo

19501950

19501950ToTo

19601960

19601960ToTo

19701970

19701970ToTo

19801980

19801980ToTo

19901990

19291929ToTo

20002000

0.8%0.8%

4.5%4.5%

3.3%3.3%

3.8%3.8%

2.8%2.8% 2.7%2.7% 2.6%2.6%

LongLongTermTerm

GrowthGrowth

3.2%3.2%

19901990ToTo

20002000

SLOWDOWN?SLOWDOWN?

U.S.Japan

GermanyChina

U.K.France

ItalyCanada

SpainBrazil

S. KoreaIndia

MexicoRussia

Australia

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14Comparative GDPs in Trillions, 2006

1313

4.54.5

2.82.8

.795.795

2.22.2

2.22.2

2.72.7

1.71.7

1.11.1

.790.790

.780.780

.770.770

.763.763

.708.708

1.11.1

U.S.ChinaJapan

GermanyFrance

U.K.Brazil

RussiaItaly India

CanadaAustralia

SpainMexico

South Korea

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17Comparative GDPs in Trillions, 2012

16.216.2

8.48.4

66

795795

2.42.4

2.62.6

3.43.4

1.71.7

22

1.721.72

1.51.5

1.31.3

1.181.18

1.121.12

22

2.22.2

1.871.87

We have 19% of the world’s GDP, 18% of global trade, We have 19% of the world’s GDP, 18% of global trade, 3030% of world stock market capitalization, and nearly % of world stock market capitalization, and nearly 26% of the world’s largest companies.26% of the world’s largest companies.

Texas, at $1.3 trillion would Texas, at $1.3 trillion would be thebe the 13 13thth largest country. largest country.Texas produces approximately the same as Spain. Texas produces approximately the same as Spain.

California, with a California, with a $$22 trillion GDP would be number trillion GDP would be number 99..

We make upWe make up 4.454.45%% of the world’s population, of the world’s population,

but produce but produce 1919% of GDP [output]% of GDP [output]..

Gross World Product is Gross World Product is $85 $85 trilliontrillion/7.1 /7.1 billionbillion==$9,500$9,500So, World Per Capita So, World Per Capita is aboutis about $12,000$12,000..

China, India, Indonesia, & Bangladesh have over 40%China, India, Indonesia, & Bangladesh have over 40%of the world’s population, but produce only 23% of theof the world’s population, but produce only 23% of theworld’s GDP.world’s GDP.

Per Capita GDP – 2005Per Capita GDP – 2005[Selected Countries]

Country Per CapitaLLuxembourguxembourg 55,600 55,600Switzerland 48,230Switzerland 48,230U.S.U.S. $44,000 $44,000

Japan 37,180Norway 30,800

France 30,090Denmark 29,800

Canada 29,700Austria 27,000

Germany 27,000Belgium 26,100

In 2005 China and India are still poorer than he U.S. was in 1900.In 2005 China and India are still poorer than he U.S. was in 1900.4646% of % of Africans live on less than $1 a day Africans live on less than $1 a day & it is& it is getting worse. getting worse.

Country Per CapitUnited Kingdom $24,700Sweden 24,700

Italy 24,300Australia 24,000

New Zealand 19,500Greece 17,900

Hungary 12,000Mexico 6,770

China 1,290Pakistan 600

Rwanda 220Liberia 110

Per Capita GDP – 2013Per Capita GDP – 2013[Selected Countries]

Country Per CapitaQatar Qatar $145,894$145,894LuxembourgLuxembourg 90,33390,333U.S.U.S. $53,001 $53,001

Japan 36,654Norway 64,363

France 39,813Denmark 43,080

Canada 43,253Austria 44,402

Germany 43,475Belgium 40,760

China and India are still poorer than he U.S. was in 1940.China and India are still poorer than he U.S. was in 1940.Turns out that the percentage of $1 per day is dropping!!!Turns out that the percentage of $1 per day is dropping!!!

Country Per CapitUnited Kingdom $36,208Sweden 43,407

Italy 34,103Australia 45,138

New Zealand 33,626Greece 25,126

Hungary 23,236Mexico 17,390

China 11,868Pakistan 4,574

Rwanda 1,608Liberia 887

12 tril.12 tril.

10 tril.10 tril.

9 tril.9 tril.

8 tril.8 tril.

7 tril.7 tril.

6 tril.6 tril.

5 tril.5 tril.

4 tril.4 tril.

3 tril.3 tril.

2 tril.2 tril.

1 tril.1 tril.

001929 1940 1950 1960 1970 1980 1990 2006 1929 1940 1950 1960 1970 1980 1990 2006

709709 773773 1,2041,2041,6651,665

2,4162,4163,1873,187

4,1524,152

13 tril.13 tril.

Per Per CapitaCapita

$$44,00044,000[If GDP increases, p[If GDP increases, per er ccapitaapita income increases] income increases]

1313 tril. tril.

GDP Per CapitaGDP Per Capita[in 1992 dollars][in 1992 dollars]

TThe he PoorestPoorest NationNationssNation Nation Per CapitaPer Capita1.1. AfghanistanAfghanistan $125$1252. Sierra Leone2. Sierra Leone $510$5103. Ethiopia3. Ethiopia $600$6004. Somalia4. Somalia $600$6005. Congo5. Congo $600$6006. Eritrea6. Eritrea $710$7107. Tanzania7. Tanzania $710$7108. Burundi8. Burundi $720$7209. Rwanda9. Rwanda $900$90010. Malawi10. Malawi $900$90011. Mozambique 11. Mozambique $1,000$1,000 DjiboutiDjibouti $1,300$1,300

There are 6.5 billion people on our planet; 5 b5 billion illion are are in thein the Third ThirdWorldWorld. 2.5 billion2.5 billion live on less than $2 a dayless than $2 a day. The direst povertydirest poverty is in AfricaAfrica, home of the world’s 10world’s 10 poorest countriespoorest countries. Over ½½ the people of Sub-Sahara Africathe people of Sub-Sahara Africa live on less thanless than $2 a day$2 a day.

8 million people die each year because they are too poor to stay alive.8 million people die each year because they are too poor to stay alive.

$6,538$6,538

19291929

$15,931$15,931

19671967

$25,989$25,989

19961996

$44,000$44,000

20062006

½ of the world’s ½ of the world’s population have population have yet to yet to make theirmake their first phone call.first phone call.

GDPGDP – – measures legal production in U.S. measures legal production in U.S. in one year. in one year.

GDP measures allGDP measures all final goods/services final goods/services produced produced byby workers workers and and capital located capital located in the U.S.in the U.S., regardless of ownership., regardless of ownership.[[Domestically located resourcesDomestically located resources]]

What Eight Things Do Not Count In GDP?What Eight Things Do Not Count In GDP?

1.1. Intermediate GoodsIntermediate Goods – components of the final good.– components of the final good. A. Ford buysA. Ford buys batteries batteries or or tirestires for its cars.for its cars.

B. KFC buysB. KFC buys chickenschickens to eventually sell to customers.to eventually sell to customers.

Value AddedValue Added – increase in the market value at each stage

$1$1

$4$4

$7$7

$8$8

$1$1 $1$1 $1$1

$4$4$4$4

$7$7

Val

ue

of

Ou

tpu

t($)

Val

ue

of

Ou

tpu

t($)

$20$20

$12$12

$5$5

$1$1

Final GoodFinal GoodRetail ShirtRetail Shirt

WWholesaleholesale

ShirtShirt

ClothCloth

CottonCotton

Val

ue

Ad

ded

($)

Val

ue

Ad

ded

($)

Intermediate GoodIntermediate Good

SSum = um = $$3838CottonCottonFarmerFarmer

TextileTextileMillMill

ShirtShirtManufacturerManufacturer

00RetailRetailStoreStore

$20 = sum$20 = sum

88

77

44

11

So, to avoidSo, to avoid “multiple counting”“multiple counting”, we count the, we count the $20$20 final price, notfinal price, not $38$38..

$20 $20 ““Wife-beaterWife-beater””Shirt from KohlsShirt from Kohls

Only Only Final SalesFinal Sales($20)($20) CountCount [[to prevent to prevent “multiple counting”“multiple counting”(($38$38))]]

..

Value AddedValue Added

$2.02$2.02

[It has[It has not been produced againnot been produced again so would not count.]so would not count.]

ChevyChevy

GDP GDP - - what is not counted [#2]what is not counted [#2]2.2. Second Hand SalesSecond Hand Sales – no current production– no current production.. A. If aA. If a 1957 Chevy1957 Chevy is bought in 2005is bought in 2005

The salesman is doing productive work. HisThe salesman is doing productive work. His commission would countcommission would count..

B.B. Boots producedBoots produced in in 19801980 are bought are bought in ain a Thrift Store in 05. Thrift Store in 05.

They also haveThey also have not been produced againnot been produced again..Salesman’sSalesman’s commission would countcommission would count..You are buying his services.You are buying his services.

Car salesmanCar salesman

Shoe salesmanShoe salesman

5757

3. Purely Financial TransactionsPurely Financial Transactions – stocks, bonds, CDs. There is no current productionno current production. Ex: If 100 shares of Dell stock100 shares of Dell stock is bought

GDPGDP – – what is not counted [#3]what is not counted [#3]

I’m not buying a Dell computerI’m not buying a Dell computerbut part ownership of Dell.but part ownership of Dell.

Exchanging one financial asset for anotherExchanging one financial asset for another

Buying stock is not buying a product butBuying stock is not buying a product but buying buying ownership of the firmownership of the firm. .

GDPGDP – – what is not counted [#4].what is not counted [#4].

4.4. Transfer PaymentTransfer Paymentss –welfare, unemployment, social security –welfare, unemployment, social security. [There is nono contribution to final productioncontribution to final production]

“Now that I’ve gotten my welfare check, I can get an iPod nano and listen to 1,000 songs”

5.5. Unreported “Legal” Business Unreported “Legal” Business ActivityActivity

Unreported “legal”“legal” business activity does not count.This is two-thirdstwo-thirds of the “underground economy.”“underground economy.”

Then he has LASIK but the

surgeon doesn’t reportdoesn’t report

$500$500 of his $3,400 bill?

And what if thiswaitress doesn’tdoesn’treport all tipsreport all tips?

And what if the dentist doesn’t doesn’t report $400 forreport $400 forteeth whiteningteeth whitening?

Before LASIK SurgeryBefore LASIK Surgery

6.6. Illegal business activityIllegal business activity is also not is also not counted.counted.

Illegal business activity, because Illegal business activity, because it it goes unreported, goes unreported, also doesalso does

not count. Making up not count. Making up 1/31/3 of the of the “underground economy,”“underground economy,” it it includes murder for hire, gambling, drugs, and prostitutionincludes murder for hire, gambling, drugs, and prostitution..

“I’m getting $1,000 to killyou, Ziggy, but at least itwill not count in GDP.”

Self EmploymentSelf Employment

$255$255

OOther ther Legal $25Legal $25RRents & ents & RoyaltiesRoyalties $ $3030

CCorporate

orporate Profits $50

Profits $50

Interest $55

Interest $55

Wages andWages andSalaries $185Salaries $185

Drugs $120Drugs $120Bribery $35

Bribery $35Gambling andGambling andLoan Sharking $10

Loan Sharking $10

Pornography $20Pornography $20

Fraud $30

Fraud $30

Other I

llegal $

20

Other I

llegal $

20

Prost

itutio

n $30

Prost

itutio

n $30

Stol

en G

oods

$35

Sto

len

Goo

ds $

35

IIllegalllegal$300 B$300 B

LLegalegal$600 B$600 B

What gets reported isWhat gets reported isthe “Above Ground”the “Above Ground”

WWhat hat doesn’t get reporteddoesn’t get reportedis the “Underground”is the “Underground”

Underground EconomyUnderground Economy [compared to “above ground”][compared to “above ground”]

Unreported exchanges that takeUnreported exchanges that take place - place - legallegal andand Illegal [Hidden – “off the books”]Illegal [Hidden – “off the books”]

TotalTotal illegal illegal activities -activities - $300 billion$300 billionTotal Total legal legal activities -activities - $600 billion$600 billionTotal Total legallegal andand illegalillegal - - $900 billion$900 billion

Underground EconomyUnderground Economy 1.1. Illegal business activities (1/3)Illegal business activities (1/3) – gambling, – gambling, narcotics trade, prostitution, loan sharking, etc.narcotics trade, prostitution, loan sharking, etc.

2.2. Unreported legal business activities (2/3)Unreported legal business activities (2/3) a. waitresses not reporting all of her tipsa. waitresses not reporting all of her tips b. Cabdriver not reporting all of his incomeb. Cabdriver not reporting all of his income c. Self employedc. Self employed cheat the most. cheat the most. Off-the-books cash transactionsOff-the-books cash transactions

d. $300 billiond. $300 billion

**IRSIRS estimates that about estimates that about $300 billion$300 billion in income taxes from in income taxes from the underground economy escapes federal taxes each year.the underground economy escapes federal taxes each year.$300 B$300 B

Source: Journal of Economic Literature

Underground Economy as a Percentage of GDP [Select Nations]

GreeceItaly

SpainPortugalBelgiumSweden

GermanyFrance

HollandUnited Kingdom

JapanUnited States

Switzerland

0 5 10 15 20 25 30 Percentage of GDP

7.7. Non-market Transactions Non-market Transactions Are Not Are Not CountedCounted

Work in your own householdown household or volunteer workvolunteer work in the community does not count because there was no payment.

You need to do some ofYou need to do some ofthis housework.this housework.

7.7. Non-market Transactions Non-market Transactions Are Not Are Not CountedCounted

Work in your own householdown household or volunteer workvolunteer workin the community does not count because there wasno payment.

So, don’t marry your maid, gardener, or don’t marry your maid, gardener, or fitness instructorfitness instructor, or you will hurt GDP.

8. 8. U.S. Corporations Producing Goods U.S. Corporations Producing Goods OverseasOverseas

IfIf U. S. corporationsU. S. corporations produce goods overseasproduce goods overseas, it does not count in GDP, but would count in GNP.it does not count in GDP, but would count in GNP.Remember, we are measuring production insideRemember, we are measuring production insidethe U.S. Imports represent production outside ofthe U.S. Imports represent production outside ofthe U.S. the U.S.

GM in GM in FranceFrance

Nike in Nike in IndonesiaIndonesia

Eight Things Not Counted in GDPEight Things Not Counted in GDP[no production][no production]

1. Second Hand Sales[no production]2. Public/Private Transfer Payments3. Purely Financial Transactions4. Intermediate Goods

5. U.S. Corporations producing overseas6. Non-market transactions [household or volunteer work]Underground EconomyUnderground Economy7. Illegal business activity8. Unreported legal business activity

- WWhen Outback buys potatoes for baked potatoeshen Outback buys potatoes for baked potatoes

- When a tattoo business buys When a tattoo business buys ink for tattoosink for tattoos- When Tom Thumb buys When Tom Thumb buys spam to sell it to you spam to sell it to you - WhenWhen the the popsicle maker buys popsicle maker buys the the stickssticks- Dell buys a computer monitor frame Dell buys a computer monitor frame - Ice cream Ice cream that Braums buys for sundaesthat Braums buys for sundaes

- A bakery A bakery buys anbuys an apple to put apple to put in itsin its pies pies- WWhen hen FFord ord buys abuys a windshield wiper windshield wiper for a carfor a car

Is It Counted in GDP?Is It Counted in GDP?

Answers to “Is It Counted in GDP?”Answers to “Is It Counted in GDP?”

Does Her Work Count?Does Her Work Count?

It depends on whether she is the maid or housewife.It depends on whether she is the maid or housewife.

And – What About This Work?And – What About This Work?

Depends on whether he is the owner or hired mechanic.Depends on whether he is the owner or hired mechanic.

Simon Kuznets and Sir Richard Simon Kuznets and Sir Richard StoneStone

Simon KuznetsSimon Kuznets Father of GDPFather of GDP - gave “quantitative precision to to economic entities”“quantitative precision to to economic entities”

Sir Richard StoneSir Richard Stone After WWII, Stone headed a U.N. project that developed a standard NIA model for other countries. Today, most countries follow these guidelines, making international comparisons possible.

GDP• GDP can be measured either by total total

spending on U.S. productionspending on U.S. production or by total total income received from that productionincome received from that production..

• Expenditure approachExpenditure approach [C+Ig+G+Xn] [C+Ig+G+Xn]– Adds up the aggregate expenditure on all final

goods and services produced during that year

• Income approachIncome approach– Adds up the aggregate income earned during

the year by those who produce that output

Non-market Transactions don’t count

Leisure isn’t factored in

Improved Product Quality

The Underground Economy

GDP’s impact on the Environment

Per Capita OutputCountries with low GDP per capitalow GDP per capita have more infants with more infants with low birth weightlow birth weight, , higher rateshigher rates of of infant mortalityinfant mortality, , higher rateshigher rates

of of maternal mortalitymaternal mortality, , higher rateshigher rates of of child malnutritionchild malnutrition, and less common access to safe drinking watersafe drinking water. Also, fewer gofewer go to schoolto school and they have fewer teachersfewer teachers. They have fewer fewer TVsTVs and telephonestelephones, , fewer paved roadsfewer paved roads. They also win . They also win fewer fewer Olympic medalsOlympic medals.

SHORTCOMINGS OF SHORTCOMINGS OF GDPGDP

Importance of Real GDP in Determining aImportance of Real GDP in Determining a RecessionRecession

Apple GDP ExampleApple GDP ExampleA A country producescountry produces 10 apples 10 apples in base year in base year x $1; x $1; Nominal and Real GDP both = $10 Nominal and Real GDP both = $10

Year 2: AYear 2: A country country produces produces 10 apples x $1.25;10 apples x $1.25;Nominal GDP=$12.50 Nominal GDP=$12.50 (no recession but worse off)(no recession but worse off)[Real GDP would = $10 (10 apples x $1)][Real GDP would = $10 (10 apples x $1)]

Or Year 2: AOr Year 2: A country producescountry produces 9 apples 9 apples x $x $1.25;1.25;Nominal GDP=$Nominal GDP=$11.25 11.25 but real isbut real is $9 $9 (9 apples x $1)(9 apples x $1)

((recessionrecession although nominal GDP is up)although nominal GDP is up)

Real GDPReal GDP measures current output at base-year prices. measures current output at base-year prices.

NominalNominal [money][money] GDPGDP v.v. Real GDPReal GDP

An increase in pricesincrease in prices and/or outputoutput will increasenominal GDP.

Only an increase in output will increase real GDPincrease in output will increase real GDP.Nominal GDP could increase even if output falls.

Real GDP = Nominal Y/GDP deflator x 100

So, nominal GDP measures output & pricesnominal GDP measures output & prices.

Real measures only output [actual production]Real measures only output [actual production]

Constant (real) GDPConstant (real) GDP v. current (money) GDPcurrent (money) GDP

NominalNominal [ ][ ] GDP GDP v.v. RealReal GDP GDP

Nominal [Current) GDPNominal [Current) GDPv.v.

Real (constant) GDPReal (constant) GDP

Price of Market Basket(2001Price of Market Basket(2001) [nominal GDP][nominal GDP] $64$64GDP Price IndexGDP Price Index = Price = Price of sameof same Market Basket(1998)x100; Market Basket(1998)x100; [Real GDP] $50x100=128[Real GDP] $50x100=128[GDP Deflator][GDP Deflator] in the base year (1998) in the base year (1998) [$64/128 x 100 = $50][$64/128 x 100 = $50]

BBase yearase year[$50/$50=1x100=100][$50/$50=1x100=100] $46/$50x100=92 $46/$50x100=92 [deflation of 8%][deflation of 8%]

The “GDP” BalloonThe “GDP” Balloon

takes Nominal – measured in terms of money.

Real–measured in terms of goods/services.

$6,736.9/126.1 x 100 = $5,342.5

No RecessionNo Recession [[Real GDPReal GDP must decline for 6 months] must decline for 6 months]

RecessionRecession[[RealReal, not nominal GDP has declined], not nominal GDP has declined]

1990-911990-91

Real GDPReal GDP

InflationInflationcomponentcomponent

19301930 19401940 19501950 19601960 19701970 19801980 19901990 20002000

Annual Annual growthgrowth

GR

OW

TH

RA

TE

(pe

rcen

t pe

r ye

ar)

Long-term average Long-term average growth (3%)growth (3%)

RecessionsRecessions

Zero growth

0

35

10

15

20

-10

-5

The Business Cycle in U.S. HistoryThe Business Cycle in U.S. History[10 Recessions since WWII, from 6 months to 16 months][10 Recessions since WWII, from 6 months to 16 months]

20052005