1. ECONOMIC INDICATORS GROSS DOMESTIC PRODUCT (GDP) & GROSS NATIONAL PRODUCT (GNP) MEASURING ECONOMIC GROWTH

2. GDP – Associated Concepts Intermediate Goods Intermediate Goods Final Goods Final Goods Nominal GDP Nominal GDP Real GDP Real GDP Inflation Inflation GDP per capita GDP per capita GDP adjusted for PPP. GDP adjusted for PPP. (Purchasing Power Parity) (Purchasing Power Parity)

3. UNDERSTANDING GDP GDP – GROSS DOMESTIC PRODUCT What is GDP? The total value of all final goods and services The total value of all final goods and services produced in an economy within one year or a specified period of time. produced in an economy within one year or a specified period of time. The economic growth of a country is measured by the increase or decrease in GDP. The economic growth of a country is measured by the increase or decrease in GDP.

4. GDP – FINAL GOODS GDP – FINAL GOODS What are final goods? Final goods are complete products sold to consumers. For example: a car you purchase from a Holden is a final good. However, the accelerator pedal in the car is an intermediate good. The cost of producing intermediate goods are not included in GDP calculations. Why???

5. DIFFERENCES BETWEEN INTERMEDIATE AND FINAL GOODS Classify each of the following as either an intermediate or final good: Windscreen wiper Windscreen wiper Mobile phone Mobile phone Bulb in a Television Bulb in a Television Computer chip Computer chip Staples Staples Pizza Pizza Aircraft propeller Aircraft propeller

6. What is the total GDP of the United States? The 2015 estimate for US GDP is $18.1 trillion. (Source: International Monetary Fund) The 2015 estimate for US GDP is $18.1 trillion. (Source: International Monetary Fund) An estimate for GDP per capita (2015 CIA Fact Book) is $54,600 for every person living in the USA. An estimate for GDP per capita (2015 CIA Fact Book) is $54,600 for every person living in the USA. Naturally, GDP per capita does not imply, every person has an income of $54,600. Many people earn a lot less and a lot more in the United States. Naturally, GDP per capita does not imply, every person has an income of $54,600. Many people earn a lot less and a lot more in the United States.

7. US GDP GROWTH RATE: 2005 to 2015 Source: http://www.tradingeconomics.com/united-states/gdp-growthhttp://www.tradingeconomics.com/united-states/gdp-growth Date Accessed: August 16 th, 2015

8. US GDP GROWTH: 2014-2015 (Q2) Source: http://www.forbes.com/sites/samanthasharf/2015/07/30/u-s-gdp-gained-2-3-in-second-quarter-2015/

9. US GDP GROWTH BY COMPONENTS

10. Source: http://www.businessinsider.com/q2-2015- gdp-change-components-2015-7

11. COMPARING THE GDP (OUTPUT) OF US STATES WITH OTHER COUNTRIES

12. US GDP Growth Rate: Historical Trends US GDP has averaged 3.26% from 1947 until 2015, reaching an all time high of 16.90% in the first quarter of 1950 and a record low of -10% percent in the first quarter of 1958. GDP Growth Rate in the United States is reported by the U.S. Bureau of Economic Analysis. Source: http://www.tradingeconomics.com/united-states/gdp-growth

13. Four Main Components of US GDP The Bureau of Economic Analysis, divides US GDP into four main components: 1. Personal Consumption Expenditures 2. Business Investment 3. Government Spending 4. Net Exports of Goods & Services

14. Components of GDP Nearly 70% of what the US produces is for personal consumption. Nearly 70% of what the US produces is for personal consumption. The productions of goods is about 25% of total GDP. The productions of goods is about 25% of total GDP. Services are a much larger component of personal consumption. Services are about 45% of GDP. Services are a much larger component of personal consumption. Services are about 45% of GDP. Government spending is about 18% of GDP. Government spending is about 18% of GDP.

15. How does US GDP compare to the rest of the world? The US is still the largest economy in the world despite the GFC (Global Financial Crisis) The US is still the largest economy in the world despite the GFC (Global Financial Crisis) It position as the world largest economy is based on official exchange rates. It position as the world largest economy is based on official exchange rates. By using another exchange rate measure (PPP – Purchasing Power Parity) China is just head of the United States. By using another exchange rate measure (PPP – Purchasing Power Parity) China is just head of the United States. China overtook Japan (mid 2010), to become the world’s second largest economy. China overtook Japan (mid 2010), to become the world’s second largest economy.

16. THE WORLD’S LARGEST ECONOMIES AT THE OFFICIAL EXCHANGE RATE INTERNET ACTIVITY Go to the following website: http://knoema.com/nwnfkne/world-gdp-ranking-2015-data-and-charts

17. 10 Largest Economies in the World at Official Exchange Rates Country (GDP at Current Prices) or Nominal GDPGDP 2015 1 2. 3 4 5 6 7 8 9 10. Source: IMF 2015

18. THE WORLD’S LARGEST ECONOMIES AT PURCHASING POWER PARITY (PPP) At official exchange rates (current prices), the US is still the largest economy in the world. At official exchange rates (current prices), the US is still the largest economy in the world. However, a number of economics institutions and leading publications (eg: CIA World Fact Book) are citing PPP statistics. However, a number of economics institutions and leading publications (eg: CIA World Fact Book) are citing PPP statistics. Based on PPP data, China is the largest economy in the world. Based on PPP data, China is the largest economy in the world.

19. What is a Purchasing Power Parity (PPP) Exchange rate? Go to your online Cambridge Textbook. Type Purchasing Power Parity (in the search box) Select the 2 nd returned section. Write a definition for PPP:

20. Definition of PPP (Purchasing Power Parity)

21. Country Rank (Order) (Source: IMF 2015) Total GDP At PPP Exchange Rates 1. 2. 3. 4. 5. 6. 7 8 9 10 10 LARGEST ECONOMIES AT PPP (PURCHASING POWER PARITY)

24. CHINA’S GDP PER CAPITA IN COMPARISON TO THE WORLD

25. Source: http://statisticstimes.com/economy/world-gdp-capita-ranking.php What are the richest countries in the world per capita?

26. Gross National Product (GNP) GNP is often confused with GDP. GNP is often confused with GDP. They are calculated differently. They are calculated differently. For some countries there is a significant difference between GNP and GDP figures. For some countries there is a significant difference between GNP and GDP figures. For other countries, there is very little difference in the specific figures. For other countries, there is very little difference in the specific figures.

27. Gross National Product (GNP An estimated value of the total worth of production and services, by citizens of a country, on its land and on foreign land, calculated over the course on one year.

28. GROSS NATIONAL PRODUCT (GNP) Gross National Product is GDP + Gross National Product is GDP + Net Foreign Income from Abroad. Net Foreign Income from Abroad. For example, GNP for the US would be GDP + (plus) US company/individual income from overseas – (minus). – (minus). Foreign company/individual income from the US

29. Which is greater GDP or GNP? When Americans receive more income from their overseas investments than foreigners receive from their investments in the United States, American GNP will be somewhat larger than GDP in that year. If Americans receive less income from their overseas investments than foreigners receive from their US investments, on the other hand, American GNP will be somewhat smaller than GDP. When Americans receive more income from their overseas investments than foreigners receive from their investments in the United States, American GNP will be somewhat larger than GDP in that year. If Americans receive less income from their overseas investments than foreigners receive from their US investments, on the other hand, American GNP will be somewhat smaller than GDP.investments GDPinvestments GDPinvestments GDPinvestments GDP

30. What is US GNP? The United States, stopped using GNP statistics in its national accounts in 1992, although these figures are still collected by statistical agencies. The United States, stopped using GNP statistics in its national accounts in 1992, although these figures are still collected by statistical agencies. US GNP and GDP have been similar for a number of years. US GNP and GDP have been similar for a number of years. However, for many countries their GNP is significantly less than their GDP. However, for many countries their GNP is significantly less than their GDP.

31. GDP – A VITAL ECONOMIC INDICATOR Why is GDP a very important economic indicator? It helps to measure the size of a country’s economy relative to other countries. It helps to measure the size of a country’s economy relative to other countries. All government spending can be expressed as a percentage of GDP for global comparison purposes. All government spending can be expressed as a percentage of GDP for global comparison purposes. GDP can be expressed on a per capita (person basis) – to further assist our understanding of global differences between nations & regions. GDP can be expressed on a per capita (person basis) – to further assist our understanding of global differences between nations & regions.

32. GDP – A VITAL ECONOMIC INDICATOR Countries can be classified into different income groups based on GDP figures. Countries can be classified into different income groups based on GDP figures. For example the high income, middle income, and low income countries. For example the high income, middle income, and low income countries. GDP figures are used in all reference books, and business/ economic journals. GDP figures are used in all reference books, and business/ economic journals.

33. GDP – A MEASURE OF ECONOMIC GROWTH A country’s growth rate is determined by the percentage increase or decrease in GDP. A country’s growth rate is determined by the percentage increase or decrease in GDP. For example if GDP was $10 billion in 2007 and increased to $10.5 billion in 2008, the growth rate for the country would be 5% per annum. However it is necessary to distinguish between Real and Nominal GDP. (future slides) For example if GDP was $10 billion in 2007 and increased to $10.5 billion in 2008, the growth rate for the country would be 5% per annum. However it is necessary to distinguish between Real and Nominal GDP. (future slides)

34. What is a recession? Negative GDP Growth Two quarters of negative economic growth. Two quarters of negative economic growth. or 6 months of negative economic growth. or 6 months of negative economic growth. What does negative economic growth mean? GDP went backwards (declined from the previous period) Expansion: increase in GDP / economic growth Contraction: decrease in GDP / economic growth

35. The Latest Economic Data: Economist.com Go to economist.com Go to economist.com Click on economics (top tab) Click on economics (top tab) Click on market & data. Click on market & data. Stroll down to output, markets and jobs. Stroll down to output, markets and jobs.

36. Economic Growth Rates High Income Advanced Economies CountryGDP Growth Rates Economist Magazine Prediction Full Year 2015 Economist Magazine: August 2015 Singapore South Korea Canada Australia Japan United States Germany France Britain Greece

37. Economic Growth Rates Developing Countries CountryGDP Growth Rates Economist Magazine Prediction Full Year 2015. August 2015. China India Brazil Argentina Vietnam Indonesia Chile Colombia Mexico South Africa Venezuela

38. Nominal GDP vs Real GDP Nominal GDP GDP which is not adjusted for inflation. GDP which is not adjusted for inflation. As a consequence nominal GDP figures are distorted by inflation and are not accurate. As a consequence nominal GDP figures are distorted by inflation and are not accurate. Real GDP GDP which is adjusted for inflation. GDP which is adjusted for inflation. As consequences these GDP figures are more accurate, than nominal figures. As consequences these GDP figures are more accurate, than nominal figures.

39. NOMINAL & REAL GDP Case Study Example In economy XYZ GDP increased from $10 billion in 2007 to $10.5 billion in 2008. Therefore our growth rate was 5% per annum. We can call this figure the nominal increase in GDP or the nominal growth rate. However, what if the inflation rate for this same period was 3%. Therefore 3% of our increase in GDP was not due to real growth, but rather to an increase in prices. Real GDP or the real growth rate is only 2% per annum. In economy XYZ GDP increased from $10 billion in 2007 to $10.5 billion in 2008. Therefore our growth rate was 5% per annum. We can call this figure the nominal increase in GDP or the nominal growth rate. However, what if the inflation rate for this same period was 3%. Therefore 3% of our increase in GDP was not due to real growth, but rather to an increase in prices. Real GDP or the real growth rate is only 2% per annum.

40. Real GDP Basic Exercises (Calculations) Waxland Economy Waxland had a total GDP of $550 billion at the end of 2007. At the end of 2008, GDP was calculated to be $660 billion. However, the inflation rate during 2008 was 15%. Calculate the real GDP growth rate for 2008 in dollar and percentage terms.

41. Waxland Economy (Proposed Solution to Question)

42. Real GDP Exercises Swaziland Economy Swaziland had a total GDP of $850 billion at the end of 2007. At the end of 2008, GDP was calculated to be $910 billion. However, the inflation rate during 2008 was 5%. Calculate the real GDP growth rate for 2008 in percentage terms.

43. Swaziland Economy (Proposed Solution to Question)