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Chapter 12, Section 1. Used to think the economy would automatically correct itself Great Depression- 1929- World War II Must find a way to monitor the.

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Presentation on theme: "Chapter 12, Section 1. Used to think the economy would automatically correct itself Great Depression- 1929- World War II Must find a way to monitor the."— Presentation transcript:

1 Chapter 12, Section 1

2 Used to think the economy would automatically correct itself Great Depression World War II Must find a way to monitor the economys performance to predict downturns and try to prevent them

3 National Income Accounting: collects statistics on production, income, investment, and savings National Income and Product Accounts (NIPA) Used to determine economic policies

4 One of the measures included in the NIPA The dollar value of all final goods and services produced within a countrys borders in a given year Lets break it down...

5 The total of the selling prices of all goods and services produced in a country in one calendar year added up Products in the form sold to consumers Not intermediate goods- used in the production of final goods

6 Cars produced in America and sold by a Japanese company Cars produced in Brazil and sold in America

7 Sarah sells her house, which was built in What years GDP is that house included in? What about the realtor fees?

8 James buys a brand new house. Is this included in GDP? What about the costs of the lumber, nails, windows, doors, and shingles?

9 Add together the amounts spent to produce goods and services during the year 4 categories: Consumer goods and services Business goods and services Government goods and services Net exports or imports of goods and services

10 Calculate this countrys GDP using the expenditure approach. This year, the country produced: 750 big screen televisions at $1,000 each 500 coffee tables at $50 each Exported 75 sofas at $250 each

11 More accurate Add up all the incomes in the economy The prices goods are sold for is equal to the amount of income earned by all of the people who helped, however indirectly, to produce the product

12 Calculate this countrys GDP using the income approach. This country produces houses and employs: 2 architects at $20,000 each 15 contractors at $18,000 each 4 interior designers at $15,000 each

13 Nominal GDP: use the current years prices to calculate the value of the current years output 750 big screen TVs at $1,000 each = $750, coffee tables at $50 each = $25,000 Total = $775,000

14 The next year, prices rise but productivity does not. This falsely inflates the GDP measure. 750 big screen TVs at $1,050 each = $787, coffee tables at $75 each = $37,500 Total = $825,000

15 To correct for this increase in prices, economists choose one year as a base year and use the prices from that year to calculate real GDP. 750 big screen TVs at $1,000 each = $750, coffee tables at $50 each = $25,000 Total = $775,000

16 750 big screen TVs at $1,000 each = $750, coffee tables at $50 each = $25,000 Total = $775, big screen TVs at $1,000 each = $745, coffee tables at $50 each = $25,650 Total = $770,650

17 Nonmarket activities: goods or services people make or do themselves Underground economy: black market, illegal gambling, selling a car to a friend, etc. Negative externalities: value of clean environment not counted in GDP Quality of life: additional goods and services to not necessarily make people any happier

18

19 Aggregate supply As price levels rise, there is an incentive for firms to increase their output (more profit) As price levels drop, firms reduce their output (less profit) Aggregate supply shows the relationship between prices and output supplied How does this affect GDP?

20 Aggregate demand As price levels go up and down, individuals and businesses change how much they buy Lower price level = greater purchasing power [falling prices increase wealth and demand] Higher price level = less goods and services demanded How does this affect GDP?

21 Aggregate supply/aggregate demand equilibrium See book: p. 308


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