The Strength of the National Economy GDP The Strength of the National Economy

Essential Standards The student will explain that overall levels of income, employment, and prices are determined by the spending and production decisions of households, businesses, government and net exports. The student will define Gross Domestic Product (GDP), economic growth, unemployment, aggregate supply and aggregate demand. The student will explain how economic growth is calculated. The student will define the stages of the business cycle as well as recession and depression.

What is GDP?

GDP GDP stands for… Gross Domestic Product. It measures: The total dollar value… Of all FINAL goods and services… Produced WITHIN a country… In ONE year. It is used to compare economic performance among countries… And also to compare current economic performance with past performance.

US GDP in 2017: $19,390,000,000,000 Per Capita GDP: $59,500

China GDP, 2017 $23.16 trillion Per Capita GDP: $16,700

GDP DOESN’T INCLUDE 1. Intermediate Goods 2. Non-production transactions Non-market activities.

GDP Calculation Remember, GDP measures FINAL OUTPUT ONLY. Which of these would be included in GDP calculation? Industrial plastic used to make children’s toys… NO. The frosting used on a wedding cake… The ink in a ball-point pen… We would only count the TOYS, the CAKE and the PEN— Because does the value of the pen also include the value of the ink? YES. If we count both, we are double counting.

Limits of GDP Calculation Items must be made WITHIN the country your are measuring. What nationality is the Coca Cola Corporation? American. What about a case of Coke that is made in a Russian plant—whose GDP will be affected? RUSSIAN GDP. What nationality is the Nissan Corporation? Japanese. What about a Nissan pickup truck made in Tennessee— whose GDP? American GDP.

The GDP Formula GDP= C+I+G+(X-M) C= Consumer expenditures. This includes all durable goods (a lifetime of more than one year)… Non-durable goods (a lifetime of less than one year), and… Services.

GDP= C+I+G+(X-M) I= Gross Investment. This is the total value of all capital goods produced during one year. Gross investment includes: Physical capital (tools, factories, etc.)…and… Human capital (hiring workers, paying for workers to be trained, etc.)

GDP= C+I +G+(X-M) G=Government purchases. Government spending… Schools, highways, national defense, etc. X=Net Exports. Goods and services PRODUCED HERE but sold in other countries. M=Net Imports. Goods and services produced in other countries, but bought HERE.

Aggregate Demand Aggregate demand is TOTAL demand for: C + I + G + (X-M) It is the SUM TOTAL of ALL DEMAND for ALL PRODUCTS in an economy.

Shifts in AD Just like demand, AD shifts to the left and right. When determining the direction of a shift, ask yourself this question: Is this situation likely to lead people to want to buy MORE or FEWER products. If the answer is “more”, AD will shift… RIGHT. If the answer is “less”, AD will shift… LEFT.

Shifts in AD An increase in consumer optimism? AD RIGHT. An increase in tax rates? AD LEFT. An increase in business investment?

Aggregate Supply AS is the SUM TOTAL of ALL PRODUCTS that are AVAILABLE in an economy. Just like AD, AS shifts left and right. When determining a shift in AS, ask yourself this question: Is this situation likely to lead to MORE or FEWER products AVAILABLE to consumers?

Shifts in AS An increase in the price of RESOURCES (oil, for example)— AS LEFT. Advances in manufacturing productivity (the assembly line, for example)— AS RIGHT. Expanding government regulation (limits on pollution)—

Business Cycles AD has a huge effect on the BUSINESS CYCLE— Sometimes the economy is on the UPSWING: The Roaring 20’s— The Tech-Boom of the 90’s— Sometimes the economy is in BAD SHAPE— The Great Depression— Or the Great Recession.

Phases of the Business Cycle Expansion—a period of economic growth (rising GDP)… Peak—when real GDP stops rising… Contraction—a period of falling GDP… Trough—bottoming out. When GDP stops falling.

Types of Contractions A RECESSION is measurable— Two quarters of falling GDP. How long is two quarters? Six months. A DEPRESSION is not measurable— It is defined as a long and severe recession— With persistently nonexistent economic growth and high levels of unemployment. STAGFLATION occurs when the GDP declines (economy collapses) and prices RISE (inflation). We had this in the late 1970’s— And it caused Jimmy Carter to LOSE his reelection campaign.