NEXT WEEK: Analyzing demographic and economic data of first, second and third world countries Today: Gross Domestic Product and Population Growth (Chapter 12.1 and 12.2) Next Time Quiz

Gross National Product and Growth National Income Accounting System: system that collects statistics on production, income, investment, and savings. Consolidated into National Income and Product Accounts (NIPA) Most important measure in NIPA (GDP) An economic measurement of a country's productivity (output)

What Is Gross Domestic Product? 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.

Calculating GDP The Expenditure Approach The expenditure approach totals annual expenditures on four categories of final goods or services. 1. Consumer goods and services 2. Business goods and services 3. Government goods and services 4. Net exports or imports of goods or services. The Income Approach The income approach calculates GDP by adding up all the incomes in the economy. 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.

Real and Nominal GDP Nominal GDP prices for goods and services measured in current prices. It does not account for price level increases from year to year. Real GDP prices for goods and services expressed in constant, or unchanging, dollars. Q4 Difference between NGDP and RGDP-NGDP is measured in current prices; RGDP is expressed in a constant, or unchanging, prices.

Limitations of GDP (Q5-8) GDP does not take into account certain economic activities, such as: Nonmarket Activities GDP does not measure goods and services that people make or do themselves, such as caring for children, mowing lawns, or cooking dinner. Negative Externalities Unintended economic side effects, such as pollution, have a monetary value that is often not reflected in GDP. The Underground Economy There is much economic activity which, although income is generated, never reported to the government. Examples include black market transactions and "under the table" wages, illegal activities. Quality of Life Although GDP is often used as a quality of life measurement, there are factors not covered by it. These include leisure time, pleasant surroundings, and personal safety.

Other Income and Output Measures Gross National Product (GNP) GNP is a measure of the market value of all goods and services produced by Americans in one year. (Q9) GNP is calculated using GDP figures and adding income earned outside of the U.S. firms and individuals minus income earned by foreign firms and residents located in the U.S. Net National Product (NNP) NNP is a measure of the output made by Americans in one year minus adjustments for depreciation. Depreciation is the loss of value of capital equipment that results from normal wear and tear.

Factors Influencing GDP Aggregate Supply Aggregate supply is the total amount of goods and services in the economy available at all possible price levels. As price levels rise, aggregate supply rises and real GDP increases. Aggregate Demand Aggregate demand is the amount of goods and services that will be purchased at all possible price levels. Lower price levels will increase aggregate demand as consumers’ purchasing power increases. Price level: The average of all prices in the economy. (Q10) Aggregate supply is the real GDP; aggregate demand is made up of the same types of spending used to calculate GDP using the expenditure approach.

BUSINESS CYCLES PHASES OF A BUSINESS CYCLE (Questions 1-4): period a macroeconomic expansion followed by a period of macroeconomic contraction 1. EXPANSION: period of economic growth as measured by a rise in real GDP ECONOMIC GROWTH: steady, long-term increase in real GDP plentiful jobs, falling unemployment rate, and business prosperity 2. PEAK: when real GDP stops rising, the economy has reached its peak, the height of an economic expansion. 3. CONTRACTION: economic decline marked by falling real GDP causing unemployment to rise. 4. TROUGH: lowest point in an economic contraction CONTRACTIONS WITH DIFFERENT CHARACTERISTICS ~ RECESSION prolonged economic contraction 6-18 months unemployment 6-10% ~ DEPRESSION refers to a deep recession with features such as high unemployment and low factory output (lower production) STAGFLATION: decline in real GDP (output) combined with a rise in the price level (inflation)

BUSINESS CYCLES WHAT KEEPS A BUSINESS CYCLE GOING? Affected by 4 main economic variables (5-8): 1. business investment 2. interest rates and credit 3. consumer expectations 4. external shocks BUSINESS INVESTMENT everything is expanding in the economy, firms expect sales and profits to keep rising and invest heavily in new plants and equipment. All investment spending creates additional output and jobs, helping to increase GDP and maintain the expansion. SOME POINT firms decide expansion has ended or demand for their products is dropping. They cut back on investment spending aggregate demand falls (amount of goods and services in the economy that will be purchased at all possible price levels) Economists look at the leading indicators (9-11)-a set of key economic variables (such as the stock market, interest rates, and manufacturers’ new orders of capital goods) used to predict a new phase in a business cycle.