Gross Domestic Product & Growth Macroeconomics – Part 1

Economic Indicators The government has broad economic goals for the economy: Full employment Price stability Economic growth

Economic indicators are used to measure the overall well being of economic activity and how we stand in relation to our goals. Unemployment rate Price stability Economic growth

Gross Domestic Product Gross Domestic Product, or GDP, is used to measure economic growth GDP is defined as “The dollar value of all final goods and services produced within a country’s borders in a given year.” Let’s break that down, piece by piece.

Gross Domestic Product is The dollar value of all final goods and services produced within a country’s borders in a given year.  To get Dollar value we look at the total of the selling prices  We don’t look at what they were “worth”

Gross Domestic Product is The dollar value of all final goods and services produced within a country’s borders in a given year. Final goods and services means products sold to consumers It does not mean intermediate goods OR goods that have been resold

Gross Domestic Product is The dollar value of all final goods and services produced within a country’s borders in a given year.  The goods must have been made in the country’s border by anybody So, a Toyota plant in the USA counts A Chevrolet plant in Japan does not.

Calculating GDP – Two Methods 1. The Expenditure Approach: counting up the total amount spent on all goods and services. 2. The Income Approach: Add up all income earned in the economy In method 1, we are adding up all the goods and services purchased. In method 2 we are looking at incomes that were used to buy the things in method 1. Thus, they should come out the same.

Famous Economic Formula GDP= C+I +G+(X-M) C= Personal Consumption expenditures (consumer spending). This includes all durable goods (a lifetime of more than one year), non-durable goods ( a lifetime of less than one year), and services.

I I = Gross Investment. This is the total value of all Private business investment on capital goods. ( this does NOT include your investment in an education, or the stock market. It does NOT include Government investment) only private business investment

G G = Government purchases. This is the dollar amount that federal, state, and local governments spend on things like highways, education, defense, etc. Note that “government purchases” does NOT include all government spending. Transfer payments or payments that are not for a good or a service are excluded.

Net Exports X = Exports. This is the value of goods and services produced domestically but sold in other countries. M = Imports. This is the value of goods and services produced in other countries, but bought domestically Therefore net Exports is equal to the value of Exports MINUS the value of Imports. Xn (X-M) NX F

GDP as an indicator of standard of living Per capita GDP : GDP/ population Criticism of GDP as a measure for SoL: Doesn’t account for many of the things that we consider important for quality of life: Happiness Literacy Divorce rate Environmental degradation Improved or weakened quality of production, etc.

Nominal vs Real GDP Nominal GDP is a GDP measured in current prices Thus if a country produced $4,000,000 worth of goods last year, it’s nominal GDP is $4,000,000) Real GDP is a GDP measured by a fixed or constant price. Because prices might have risen and because we are measuring Product (or items produced) and not their price, we have to adjust for those price changes.

Economic Growth A steady, long-term increase in a nation’s real GDP that tends to raise living standards. Primary Causes: Capital Deepening: increasing the amount of capital per worker Saving and Investing Advances in Technology Improved human capital

Measuring Economic Growth Take Real GDP from the later Year (GDP2) Subtract Real GDP from the earlier Year (GDP1) from it Divide by Real GDP1 Multiply by 100 ((GDP2 – GDP1) ÷ GDP1) x 100

Measuring Economic Growth So if the Real GDP in 1994 was $7.8 billion And Real GDP in 2004 was $10.8 billion What was the economic growth? ((10.8 – 7.8) ÷ 7.8) x 100 = (3 ÷ 7.8) x 100 =.384 x 100 = 38.4%

Supply and Demand Revisited 1. Price Level: An average of all the goods and services made in one year. 2. Aggregate Demand: the Demand for all goods and services in the Country’s economy 3. Aggregate Supply: the Supply of all goods and services in the Country 4. Aggregate Supply/Aggregate Demand Equilibrium: the Equilibrium price for a Country’s economy

Business Cycles 1.A period of macroeconomic expansion followed by a period of contraction. 2.Has Four Stages: Expansion, Peak, Contraction and Trough

Business Cycle (Continued) 3. Three more terms: A. Recession: a period in which GDP falls for at least 2 consecutive quarters (minimum 6 months) B. Depression: a long and severe recession C. Stagflation (Stagnant + Inflation): a decline in Real GDP and a rise in the price level