1. Chapter 12SectionMain Menu Gross Domestic Product What is gross domestic product (GDP)? How is GDP calculated? What is the difference between nominal and real GDP?

2. Chapter 12SectionMain Menu What Is Gross Domestic Product? Economists monitor the macroeconomy using national income accounting, a system that collects statistics on production, income, investment, and savings.

3. Chapter 12SectionMain Menu Gross domestic product (GDP) is the dollar value of all final goods and services produced within a country’s borders in a given year. GDP does not include the value of intermediate goods. Intermediate goods are goods used in the production of final goods and services.

4. Chapter 12SectionMain Menu Intermediate vs. Final Goods Final Good $500,000 Included in GDP Intermediate Goods Not included in GDP

5. Chapter 12SectionMain Menu Consumer goods include durable goods, goods that last for a relatively long time like refrigerators, and nondurable goods, or goods that last a short period of time, like food and light bulbs. Calculating GDP

6. Chapter 12SectionMain Menu Durable Goods vs. Nondurable Goods Durable GoodsNondurable Goods

7. Chapter 12SectionMain Menu GDP - Handout

8. Chapter 12SectionMain Menu Formula to Calculate GDP C + I + G + (X-M) = GDP Where –C = Consumer Goods (Consumption) –I = Investment Spending (Business Goods) –G = Government Spending –X = Exports –M - Imports

9. Chapter 12SectionMain Menu C + I + G + (X-M) = GDP Where: C = + 4,390.6 I = + 892.0 G = + 1157.1 X = + 660.1 M - - 725.8 GDP = 6374.0

10. Chapter 12SectionMain Menu United States GDP – (in billions of dollars)

11. Chapter 12SectionMain Menu Per Capita GDP (GDP Divided by the Population ) is often used to compare the economies of countries and the well-being of their citizens. This is the best measure of how well people live in a given country. Real GDP per capita is the best measure of a nation’s standard of living.

12. Chapter 12SectionMain Menu List the top 5 most populated countries 12

13. Chapter 12SectionMain Menu GDP Per Capita 13

14. Chapter 12SectionMain Menu Video Virtual Economics - GDP

15. Chapter 12SectionMain Menu How can you figure out which is the most popular movie of all time? What is the problem with this method? Nominal Box Office Receipts 15

16. Chapter 12SectionMain Menu How can you figure out which is the most popular movie of all time? Real Box Office Receipts (adjusted for inflation)

17. Chapter 12SectionMain Menu Video – Virtual Economics Real vs. Nominal GDP

18. Chapter 12SectionMain Menu Nominal GDP is GDP measured in current prices. It does not account for price level increases from year to year. Real GDP is GDP expressed in constant, or unchanging, dollars. (Inflation adjusted dollars) Real GDP is best measure of Economic Growth!

19. Chapter 12SectionMain Menu Gross Domestic Product-How to Measure It Activity Choropleth Map Comparing Per Capita GDP in South America On the back answer the following question: What assumptions can you make about how well the people live in Guyana versus how well people live in Suriname?

20. Chapter 12SectionMain Menu Real vs. Nominal GDP Example 2008 10 cars at $15,000 each = $150,000 10 trucks at $20,000 each = $200,000 Nominal GDP = $350,000 2009 10 cars at $16,000 each = $160,000 10 trucks at $21,000 each= $210,000 Nominal GDP = $370,000 The GDP in year 20048 shows the dollar value of all final goods produced. The nominal GDP in year 2009 is higher which suggests that the economy is improving. But how much is the REAL GDP? How do you get it? Use 2008 Prices. The Real GDP for 2009 is the same as 2008 after we adjust for inflation. 2009 10 cars at $15,000 each = $150,000 10 trucks at $20,000 each= $200,000 REAL GDP = $350,000 20

21. Chapter 12SectionMain Menu Influences on GDP Aggregate Supply – the total amount of goods and services in the economy available at all possible price levels Aggregate Demand – the amount of goods and services in the economy that will be purchased at all possible price levels Price level – the average of all prices in the economy

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23. Chapter 12SectionMain Menu Want to connect to the PHSchool.com link for this section? Click Here!Click Here! Section 1 Assessment 1. Real GDP takes which of the following into account? (a) changes in supply (b) changes in prices (c) changes in demand (d) changes in aggregate demand 2. Which of the following is an example of a durable good? (a) a refrigerator (b) a hair cut (c) a pair of jeans (d) a pizza

24. Chapter 12SectionMain Menu Want to connect to the PHSchool.com link for this section? Click Here!Click Here! Section 1 Assessment 1. Real GDP takes which of the following into account? (a) changes in supply (b) changes in prices (c) changes in demand (d) changes in aggregate demand 2. Which of the following is an example of a durable good? (a) a refrigerator (b) a hair cut (c) a pair of jeans (d) a pizza

25. Chapter 12SectionMain Menu 1.Define Macroeconomics 2.What are the 3 economic goals that all countries have 3.Identify the 3 key parts of the definition of GDP 4.How do we use GDP 5.Identify what is NOT included in GDP 6.List the 4 components of GDP 7.Define Inflation 8.Explain the difference between Nominal and Real GDP 9.Explain the usefulness of Real GDP per Capita 10.Name 10 Disney Movies QUIZ

26. Chapter 12SectionMain Menu Business Cycles What is a business cycle? What keeps the business cycle going? How do economists forecast business cycles? How have business cycles fluctuated in the United States?

27. Chapter 12SectionMain Menu Virtual Economics Video – Business CyclesBusiness

28. Chapter 12SectionMain Menu A business cycle is a macroeconomic period of expansion followed by a period of contraction. What Is a Business Cycle? A modern industrial economy experiences cycles of goods times, then bad times, then good times again. Business cycles are of major interest to macroeconomists, who study their causes and effects.

29. Chapter 12SectionMain Menu Four Phases of the Business Cycle Expansion An expansion is a period of economic growth as measured by a rise in real GDP. Economic growth is a steady, long-term rise in real GDP. Peak When real GDP stops rising, the economy has reached its peak, the height of its economic expansion. Contraction Following its peak, the economy enters a period of contraction, an economic decline marked by a fall in real GDP. A recession is a prolonged economic contraction. ( Two consecutive quarters or 6 month of a decline in GDP) An especially long or severe recession may be called a depression. Trough The trough is the lowest point of economic decline, when real GDP stops falling.

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31. Chapter 12SectionMain Menu What Keeps the Business Cycle Going? Business cycles are affected by four main economic variables: 1 Business Investment 2.Interest Rates and Credit 3.Consumer Expectations 4. External Shocks

32. Chapter 12SectionMain Menu Forecasting Business Cycles Economists try to forecast, or predict, changes in the business cycle. Leading indicators are key economic variables economists use to predict a new phase of a business cycle. Examples of leading indicators are stock market performance, interest rates, new home sales, and manufacturers new orders of capital goods.

33. Chapter 12SectionMain Menu Lagging Indicator A lagging indicator follows the performance of the economy – an example would be the unemployment rate.

34. Chapter 12SectionMain Menu Leading Indicators Economy Lagging Indicators

35. Chapter 12SectionMain Menu 1.Why is the business cycle like a roller coaster? 2.How do wars affect the economy? 200 Years of the Business Cycle 35

36. Chapter 12SectionMain Menu Want to connect to the PHSchool.com link for this section? Click Here!Click Here! Section 2 Assessment 1. A business cycle is (a) a period of economic expansion followed by a period of contraction. (b) a period of great economic expansion. (c) the length of time needed to produce a product. (d) a period of recession followed by depression and expansion. 2. A recession is (a) a period of steady economic growth. (b) a prolonged economic expansion (6 month decline in GDP). (c) an especially long or severe economic contraction. (d) a prolonged economic contraction.

37. Chapter 12SectionMain Menu Want to connect to the PHSchool.com link for this section? Click Here!Click Here! Section 2 Assessment 1. A business cycle is (a) a period of economic expansion followed by a period of contraction. (b) a period of great economic expansion. (c) the length of time needed to produce a product. (d) a period of recession followed by depression and expansion. 2. A recession is (a) a period of steady economic growth. (b) a prolonged economic expansion. (c) an especially long or severe economic contraction. (d) a prolonged economic contraction.

38. Chapter 12SectionMain Menu Economic Growth How do economists measure economic growth? What is capital deepening? How are saving and investing related to economic growth? How does technological progress affect economic growth? What other factors can affect economic growth?

39. Chapter 12SectionMain Menu Vocabulary Real GDP Per Capita Capital Deepening Saving Savings Rate Technological Progress

40. Chapter 12SectionMain Menu 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 Growth GDP and Population Growth In order to account for population increases in an economy, economists use a measurement of real GDP per capita. It is a 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.

41. Chapter 12SectionMain Menu What is Economic Growth? 1.An increase in real GDP over time 2.An increase in real GDP per capita over time (usually used to determine standard of living) Why is economic growth the goal of every society? Provides better goods and services Increases wages and standard of living Allows more leisure time Economy can better meet wants 41

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43. Chapter 12SectionMain Menu Capital Deepening The process of increasing the amount of capital per worker is called capital deepening. Capital deepening is one of the most important sources of growth in modern economies. Firms increase physical capital by purchasing more equipment. Firms and employees increase human capital through additional training and education.

44. Chapter 12SectionMain Menu How Saving Leads to Capital Deepening Shawna’s income: $30,000 $25,000 spent$5,000 saved Mutual-fund firm makes Shawna’s $3,000 available to firms Bank lends Shawna’s money to firms in forms such as loans and mortgages $3,000 in a mutual fund (stocks and corporate bonds) $2,000 in “rainy day” bank account Firms spend money on business capital investment The Effects of Savings and Investing The proportion of disposable income spent to income saved is called the savings rate. When consumers save or invest, money in banks, their money becomes available for firms to borrow or use. This allows firms to deepen capital. In the long run, more savings will lead to higher output and income for the population, raising GDP and living standards.

45. Chapter 12SectionMain Menu The Effects of Technological Progress Besides capital deepening, the other key source of economic growth is technological progress. Technological progress is an increase in efficiency gained by producing more output without using more inputs.

46. Chapter 12SectionMain Menu Want to connect to the PHSchool.com link for this section? Click Here!Click Here! Section 3 Assessment 1. Capital deepening is the process of (a) increasing consumer spending. (b) selling off obsolete equipment. (c) decreasing the amount of capital per worker. (d) increasing the amount of capital per worker. 2.How does capital deepening increase the standard of living in a country? a. It increase per capita GDP b. It decreases per capita GDP c. It lowers the inflation rate d. It increases the cost of living.

47. Chapter 12SectionMain Menu Want to connect to the PHSchool.com link for this section? Click Here!Click Here! Section 3 Assessment 1. Capital deepening is the process of (a) increasing consumer spending. (b) selling off obsolete equipment. (c) decreasing the amount of capital per worker. (d) increasing the amount of capital per worker. 2.How does capital deepening increase the standard of living in a country? a. It increase per capita GDP b. It decreases per capita GDP c. It lowers the inflation rate d. It increases the cost of living.