HOW DO WE MEASURE ECONOMIC GROWTH? GDP Calculation and the Business Cycle

Gross Domestic Product (GDP) GDP is the market value of all final goods and services produced within a nation’s borders “Intermediate” does not include intermediate goods “Finisher” = YES GDP MEASURES : AGGREGATE SPENDING INCOME OUTPUT

What’s the difference?  Good or service produced for its final user  Good or service produced by one firm, bought by another firm, and used as an input into a final good or service. Raw materials FINAL GOOD: YES! INTERMEDIATE GOOD: NO!

GDP DOES NOT INCLUDE…  ANYTHING WITHOUT A MARKET TRANSACTION  Intermediate goods  Nonmarket transactions Household chores  Underground economy: Babysitting  Black market Drugs, etc.

How DO YOU CALCULATE AGGREGATE SPENDING? THIS IS HOW YOU DO IT: GDP = C + I + G+ X-M (NX)

CONSUMPTION : 70%  Household spending on  Durable goods Cars and appliances  Nondurable goods food  Services College degree Haircuts

I and G  New capital machinery  New trucks for UPS  New construction  ZARA building a new store  Unsold inventory  2008 Porsche Carrera  Law enforcement  policemen  Infrastructure  Highways, airports  *Does not include transfer payments because no dollars are spent Investment: spending in order to increase output Government Spending: purchase of final goods

X – M (Net Exports)  Sold to other countries  Money flows to the United States  Bought from other countries  Money flows away from the U.S. in exchange for foreign production X = Exports M = Imports

Nominal vs. Real GDP  Nominal:  Value of current production at current prices  Overvalued due to inflation Ex: Price of movie 1930: $.05 Price of movie 2010: $9  *Real *  Value of current production using fixed prices  Takes out inflation  Does not overvalue Used to compare GDP between different time periods

WHICH OF THE FOLLOWING ARE CALCULATED IN GDP? QUICK GAME OF GDPARDY

The Expenditure/Aggregate Approach: (C+I+G+X-M) The Income Approach: (R:W+I+P) Two ways to calculate GDP

THE INCOME APPROACH Resource SuppliedIncome Received LandRent LaborWages CapitalInterest EntrepreneurshipProfit R + W+ I + P = Y + Indirect Income Taxes + Consumption of Fixed Capital+ Net foreign factor income = GDP

EXPENDITURE = INCOME

How can we use real GDP?

1. To compare GDP/Capita across the world

BUSINESS CYCLES TIME 2. To Compare GDP through Time

REAL GDP GROWTH The shaded areas show recessions during our economy which is a period of 6 months with limited growth.

THE BUSINESS CYCLE DEFINED  Peak:  The top of the cycle where Real GDP is at a maximum Unemployment is low Inflation may be high  Contraction:  Real GDP is falling for two consecutive quarters Unemployment rate is increasing Inflation falls, might have deflation

THE BUSINESS CYCLE DEFINED  Trough:  The bottom of the Cycle where a contraction has stopped Unemployment is very high  Expansion:  A period where real GDP is growing and returning to Full Employment Unemployment is decreasing Inflation is increasing

Business Cycles in the U.S.

US Recession Status: 2009 

US Recession Status: 2010, from the Dismal Scientist

Global Economy Map Click on the link below to see how the global economy is doing.  The Dismal Scientist, Global Economy The Dismal Scientist, Global Economy