23
Macroeconomics Gross Domestic Product

Macroeconomics Gross Domestic Product. Categories of GDP C - Personal Consumption Expenditure Consumer purchases- includes durable & nondurable goods

Embed Size (px)

Citation preview

Page 1: Macroeconomics Gross Domestic Product. Categories of GDP C - Personal Consumption Expenditure Consumer purchases- includes durable & nondurable goods

MacroeconomicsGross

Domestic Product

Page 2: Macroeconomics Gross Domestic Product. Categories of GDP C - Personal Consumption Expenditure Consumer purchases- includes durable & nondurable goods

Categories of GDPC - Personal Consumption Expenditure Consumer purchases- includes durable & nondurable goods I- Gross Investment Total value of all capital goods produced in a nation during one year and also, changes in the dollar value of business inventories. G- Government Purchases of goods and services Includes highways, national defense, public education spending. Not included: SS and aid payments (X-M) – Net export of goods and services Exports minus imports. Includes value of goods and services made in US but sold elsewhere, but not the valued of goods made in other countries but consumed here. •Can be a positive or negative number depending on whether one has a trade surplus (exporting more than importing) or a trade deficit (importing more than exporting)

Page 3: Macroeconomics Gross Domestic Product. Categories of GDP C - Personal Consumption Expenditure Consumer purchases- includes durable & nondurable goods

Limitations of GDP(What doesn’t it count?)

1. Nonmarket ActivitiesG & S that people make or do themselves Ex. Caring for own children, mowing own lawn, or cooking own dinner. GDP ignores: Household work, financial transactions (buying stock) & transfer payments (Social Security).

2. Negative ExternalitiesUnintended economic side effects, such as pollution, have a monetary value that is often not reflected in GDP.

Page 4: Macroeconomics Gross Domestic Product. Categories of GDP C - Personal Consumption Expenditure Consumer purchases- includes durable & nondurable goods

3. Quality of Life

Q o L measurements are not included: leisure time,

pleasant surroundings, and personal safety. Even

though rising GDP is an indicator of well-being.

4. Underground economy

Illegal activities (Black Market) & informal, legal

transactions (Selling car to friend, mowing lawns)

Limitations of GDP(What doesn’t it count?)

Page 5: Macroeconomics Gross Domestic Product. Categories of GDP C - Personal Consumption Expenditure Consumer purchases- includes durable & nondurable goods

5. Secondhand sales Reselling a good from one person to another - no new wealth is created. Only the original sale is included in

GDP. 6. Intermediate Products Products used to make other products Example: A farmer sells tomatoes to a wholesaler. Wholesaler to restaurant. Restaurant to consumers. If we counted sold, we would count them three times. Instead, their value will be counted at the price you pay for them as they go into your hamburger.

Limitations of GDP(What doesn’t it count?)

Page 6: Macroeconomics Gross Domestic Product. Categories of GDP C - Personal Consumption Expenditure Consumer purchases- includes durable & nondurable goods

Nominal and Real GDP

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

Total = $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.

In the second year, the economy’s output does not increase, but the prices of the cars and trucks do:

This new GDP figure of $370,000 is misleading. GDP rises because of an increase in prices. Economists prefer to have a measure of GDP that is not affected by changes in prices. So they calculate real GDP.

10 cars at $16,000 each = $160,000

+ 10 trucks at $21,000 each = $210,000

Total = $370,000

Year 2 Nominal GDP

10 cars at $15,000 each = $150,000

+ 10 trucks at $20,000 each = $200,000

Total = $350,000

To correct for an increase in prices, economists establish a set of constant prices by choosing one year as a base year. When they calculate real GDP for other years, they use the pricesfrom the base year. So we calculate the real GDP for Year 2 using the prices from Year 1:

Year 3 Real GDP

Real GDP for Year 2, therefore, is $350,000

Types of GDPNominal GDP•Measured in current prices. It does not account for price level increases from year to year.

Real GDP •Expressed in constant, or unchanging, dollars.

Page 7: Macroeconomics Gross Domestic Product. Categories of GDP C - Personal Consumption Expenditure Consumer purchases- includes durable & nondurable goods

What is Gross National Product?

• GDP + Income earned outside U.S. (U.S. firms & citizens) – Income earned by foreign firms & citizens in the U.S.

Page 8: Macroeconomics Gross Domestic Product. Categories of GDP C - Personal Consumption Expenditure Consumer purchases- includes durable & nondurable goods

Factors Influencing GDPAggregate Supply• Total amount of G &

S in the economy available at all possible price levels.

• As price levels rise, aggregate supply rises and real GDP increases.

Aggregate Demand• Amount of G & S that

will be purchased at all possible price levels.

• Lower price levels will increase aggregate demand as consumers’ purchasing power increases.

Aggregate Supply/Aggregate Demand Equilibrium• Combining AS & AD curves, equilibrium for the macro economy can be determined.

Page 9: Macroeconomics Gross Domestic Product. Categories of GDP C - Personal Consumption Expenditure Consumer purchases- includes durable & nondurable goods

Percentage of GDP

Page 10: Macroeconomics Gross Domestic Product. Categories of GDP C - Personal Consumption Expenditure Consumer purchases- includes durable & nondurable goods

What Is a Business Cycle?

• Industrial economies experience cycles of good times, then bad times, then good times again.

• Four Main Phases

-Expansion (Rising), peak (high point),

contraction (Falling), and trough (low point).

Page 11: Macroeconomics Gross Domestic Product. Categories of GDP C - Personal Consumption Expenditure Consumer purchases- includes durable & nondurable goods

What Keeps the Business Cycle Going?

Four main economic variables:Business InvestmentInvestment creates new jobs and furthers expansion. Expanding economy = more investment in plants & equipment.In a recession, the opposite occurs.

Interest Rates and CreditLow interest rates = new investments (Often adding jobs to the economy.)Higher interest rates = less investments (Less jobs)

Consumer ExpectationsForecasts of an expanding economy often fuel more spending.Fears of recession tighten consumers' spending.

External ShocksExternal shocks, such as disruptions of the oil supply, wars, or natural disasters, greatly influence the output of an economy.

Page 12: Macroeconomics Gross Domestic Product. Categories of GDP C - Personal Consumption Expenditure Consumer purchases- includes durable & nondurable goods

Business Cycles

Expansion Contraction

Real GDP Growing Negative

Unemployment Decreasing Increasing

Businesses Expanding Closing

Production Increasing Decreasing

Interest Rates Low High

Consumer Spending

Increasing Decreasing

Page 13: Macroeconomics Gross Domestic Product. Categories of GDP C - Personal Consumption Expenditure Consumer purchases- includes durable & nondurable goods

Forecasting Business Cycles

• Economists try to predict changes in the business cycle.

• Use Leading indicators key economic like the stock market performance & interest rates.

Page 14: Macroeconomics Gross Domestic Product. Categories of GDP C - Personal Consumption Expenditure Consumer purchases- includes durable & nondurable goods
Page 15: Macroeconomics Gross Domestic Product. Categories of GDP C - Personal Consumption Expenditure Consumer purchases- includes durable & nondurable goods

Rank Order GDP 2006Rank Country GDP

1 World $65,000,000,000,000

2 United States $12,980,000,000,000

3 European Union $12,820,000,000,000

4 China $10,000,000,000,000

5 Japan $4,220,000,000,000

6 India $4,042,000,000,000

7 Germany $2,585,000,000,000

8 United Kingdom $1,903,000,000,000

9 France $1,871,000,000,000

10 Italy $1,727,000,000,000

Page 16: Macroeconomics Gross Domestic Product. Categories of GDP C - Personal Consumption Expenditure Consumer purchases- includes durable & nondurable goods

GDP 20101 European Union $ 14,890,000,000,000

2 United States $ 14,720,000,000,000

3 China $ 9,872,000,000,000

4 Japan $ 4,338,000,000,000

5 India $ 4,046,000,000,000

6 Germany $ 2,951,000,000,000

7 Russia $ 2,229,000,000,000

8 Brazil $ 2,194,000,000,000

9 United Kingdom $ 2,189,000,000,000

10 France $ 2,160,000,000,000

Page 17: Macroeconomics Gross Domestic Product. Categories of GDP C - Personal Consumption Expenditure Consumer purchases- includes durable & nondurable goods
Page 18: Macroeconomics Gross Domestic Product. Categories of GDP C - Personal Consumption Expenditure Consumer purchases- includes durable & nondurable goods

The basic measure of a nation’s economic growth rate is the percentage change of real GDP over a given period of time.

Measuring Economic GrowthGDP and Population Growth

Real GDP per capita -measure of real GDP divided by the total population.

• Real GDP per capita is considered the best measure of a nation’s standard of living.

GDP and Quality of Life

Measurement of real GDP per capita excludes many factors that affect the quality of life.

Page 19: Macroeconomics Gross Domestic Product. Categories of GDP C - Personal Consumption Expenditure Consumer purchases- includes durable & nondurable goods
Page 20: Macroeconomics Gross Domestic Product. Categories of GDP C - Personal Consumption Expenditure Consumer purchases- includes durable & nondurable goods
Page 21: Macroeconomics Gross Domestic Product. Categories of GDP C - Personal Consumption Expenditure Consumer purchases- includes durable & nondurable goods

Sources of Economic Growth

1. Capital Deepening

2. Savings & Investing

3. Technological Progress

-Increase in efficiency gained by producing more output

without using more inputs.

-Innovation, scale (size) of the market, &

education/experience.

Page 22: Macroeconomics Gross Domestic Product. Categories of GDP C - Personal Consumption Expenditure Consumer purchases- includes durable & nondurable goods

Other Factors Affecting GrowthPopulation Growth• If population grows while the supply of capital remains constant, the amount of capital per worker will actually shrink.

Government• Government can affect the process of economic growth by raising or lowering taxes. Government use of tax

revenues also affects growth: funds spent on public goods increase investment, while funds spent on consumption decrease net investment.

Foreign Trade• Trade deficits, the result of importing more goods than exporting goods, can sometimes increase investment and

capital deepening if the imports consist of investment goods rather than consumer goods.

Page 23: Macroeconomics Gross Domestic Product. Categories of GDP C - Personal Consumption Expenditure Consumer purchases- includes durable & nondurable goods

What is the business cycle?

• With your group members design a poster that explains the business cycle.

• You need to draw the business cycle and include the following: Trough, Peak, Expansion, Contraction. Include a brief description of each.