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?

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.

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.

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

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

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

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

Chapter 12SectionMain Menu C + I + G + (X-M) = GDP Where: C = + 4,390.6 I = G = X = M GDP =

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

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.

Chapter 12SectionMain Menu List the top 5 most populated countries 11

Chapter 12SectionMain Menu GDP Per Capita 12

Chapter 12SectionMain Menu Video Virtual Economics - GDP

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 14 RankTitleUSA Box Office 1.AvatarAvatar (2009)$760,505,847 2.TitanicTitanic (1997)$658,672,302 3.The AvengersThe Avengers (2012)$623,279,547 4.The Dark KnightThe Dark Knight (2008)$533,316,061 5.Star Wars: Episode I - The Phantom MenaceStar Wars: Episode I - The Phantom Menace (1999)$474,544,677 6.Star WarsStar Wars (1977)$460,935,665 7.The Dark Knight RisesThe Dark Knight Rises (2012)$448,130,642 8.Shrek 2Shrek 2 (2004)$436,471,036 9.E.T. the Extra-TerrestrialE.T. the Extra-Terrestrial (1982)$434,949, The Hunger Games: Catching FireThe Hunger Games: Catching Fire (2013)$424,532,478

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

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

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!

Chapter 12SectionMain Menu GDP and How We Measure It GDP Per Capita In South America 1) What assumptions can we make about how well the people live in Guyana as opposed to in Suriname? 2) What doesn’t this chart tell you? Is there any reason why you might prefer to live in Brazil rather than Venezuela? Source: IMF, via by_GDP_%28PPP%29_per_capita by_GDP_%28PPP%29_per_capita

Chapter 12SectionMain Menu Real vs. Nominal GDP Example cars at $15,000 each = $150, trucks at $20,000 each = $200,000 Nominal GDP = $350, cars at $16,000 each = $160, trucks at $21,000 each= $210,000 Nominal GDP = $370,000 The GDP in year 2008 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 cars at $15,000 each = $150, trucks at $20,000 each= $200,000 REAL GDP = $350,000 19

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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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

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

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

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?

Chapter 12SectionMain Menu Virtual Economics Video – Business CyclesBusiness

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.

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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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

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.

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

Chapter 12SectionMain Menu Leading Indicators Economy Lagging Indicators

Chapter 12SectionMain Menu 1.Why is the business cycle like a roller coaster? 2.How do wars affect the economy? History of the Business Cycle 34

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.

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.

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?

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

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.

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 40

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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.

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.

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.

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.

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.

Chapter 12SectionMain Menu Chapter 12 Review

Chapter 12SectionMain Menu 1 The dollar value of all final goods and services produced in a country in a given year

Chapter 12SectionMain Menu 1 Gross Domestic Product

Chapter 12SectionMain Menu 2 Which of the following is a DURABLE good? 1)A television 2)A t-shirt 3)A pound of bacon 4)Post-it notes

Chapter 12SectionMain Menu 2 The television

Chapter 12SectionMain Menu 3 Why is nominal GDP not a good measurement of economic growth?

Chapter 12SectionMain Menu 3a Because it does not account for inflation

Chapter 12SectionMain Menu 4 What is the best measurement of a nation’s standard of living?

Chapter 12SectionMain Menu 4 Real GDP per capita

Chapter 12SectionMain Menu 5 Draw and label all parts of the business cycle (I will call you up the whiteboard)

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Chapter 12SectionMain Menu 6 What do economists use to predict changes in the business cycle

Chapter 12SectionMain Menu 6 Leading Indicators

Chapter 12SectionMain Menu 7 Give an example of a lagging indicator

Chapter 12SectionMain Menu 7 Unemployment

Chapter 12SectionMain Menu 8 When people gain education and firms build new capital, this causes ___________________ which will lead to a/an ______________ in real GDP per capita

Chapter 12SectionMain Menu 8 Capital deepening; increase

Chapter 12SectionMain Menu 9 What effect would an increase in aggregate demand have on GDP? Be prepared to demonstrate it graphically

Chapter 12SectionMain Menu 9 An increase in AD  An increase in GDP

Chapter 12SectionMain Menu 10 What effect do higher savings rates have on GDP (be prepared to explain the entire process)

Chapter 12SectionMain Menu 10 Higher savings rates  more money available for borrowing  Capital Deepening  an increase in GDP

Chapter 12SectionMain Menu 11 For each of the following, explain what component of US GDP it is C, G, I, X, M (if any) and calculate the US GDP accordingly. $3 spent on a cookie $6000 spent on a 1999 Buick LeSabre $15,000 spent on a 2013 Ford Focus $1MM spent on a new fighter jet for the Navy $10MM spent by Intel building a factory $5MM spent on Intel Stock A $100,000 toothbrush made in Oregon and sold in Japan A $200,000 toilet (it’s a really nice toilet) made in Belgium and sold in California $1 spent on eggs used to make a cookie

Chapter 12SectionMain Menu 11 $3 spent on a cookie ===C $6000 spent on a 1999 Buick LeSabre NOTHING $15,000 spent on a 2013 Ford Focus -----C $1MM spent on a new fighter jet for the Navy----G $10MM spent by Intel building a factory-----I $5MM spent on Intel Stock----NOTHING A $100,000 toothbrush made in Oregon and sold in Japan---X A $200,000 toilet (it’s a really nice toilet) made in Belgium and sold in California---M $1 spent on eggs used to make a cookie----NOTHING TOTAL: $10,915,003