1.  How do we know if the economy is healthy?  How do you think the health of the economy is related to your own opportunities?

2. Objectives 1.Explain how gross domestic product (GDP) is calculated. 2.Distinguish between nominal and real GDP. 3.List the main limitations of GDP. 4.Identify other output and income measures.

3. 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. In short, GDP tracks exchanges of money. GDP is a measurement of how well a nation’s economy is doing for a particular year. Current U.S. GDP (nominal): $16.8 trillion Google’s World Development Indicators

5. Expenditure Approach One method used to calculate GDP is to use the expenditure approach. This approach estimates the annual expenditures on all final goods and services.

6. Expenditure Approach

7. Income Approach Another method calculates GDP by adding up all the incomes in the economy. The income approach and the expenditure approach give the same answer for GDP. Why? Total expenditures on final goods and services are eventually received by households and firms in the form of wages, profits, rent, and other income.

8. Income Approach

9. Nominal vs. Real GDP Nominal GDP is measured in current prices. – To calculate nominal GDP, we use the current year’s prices to calculate the value of the current year’s output. – The problem with nominal GDP is that it does not account for the rise in prices. Your output might be the same from year to year, but the prices won’t be and nominal GDP would be different. Real (or Adjusted) GDP is measured in constant prices based on a particular year.

10. Nominal GDP If we wanted to look at the GDP for 1990 by itself, we would use nominal GDP. We are looking at the GDP for 1990 based on the prices in 1990. **SNAPSHOT** Real GDP If we wanted to compare the GDP for 1990 with the GDP for 1995, we would use real GDP. To calculate real GDP for 1995, we would take the quantities of all goods and services purchased in 1995 and adjust them for 1990 prices. **PANORAMIC**

11. Real GDP = Nominal GDP adjusted for inflation

12. What is NOT included in GDP? Intermediate Goods (components of the final good) – Steel, corn syrup, car engines, etc. Second-hand sales Purely financial transactions (stocks & bonds) Goods produced by U. S. firms overseas The “Underground Economy” – Tips, royalties, under-the-table work The Black Market

13. What Counts for GDP? Money paid by shoppers in NYC for corn grown in Iowa Fees charged to patients by a dentist in Texas Cost of processing wood pulp into paper at a factory in Maine Money paid by buyers in Indiana for cars made by a Japanese company at a factory in Ohio Money paid by a computer factory in New Mexico for computer chips produced in California Money paid by shoppers in Florida for jeans manufactured in Mexico by a company based in North CarolinaYESYESNOYESNONO

14. What Counts for GDP? Your friend began a fashion design company in 2013. She produces and independently distributes her work. The year she started, she purchased all the necessary supplies and fabric used in producing her designs. Her supplies were made in China, and her fabrics were made in the United States. She bought used desks and stools that were made in New Mexico and new mannequins that were made in Canada. She also paid a local advertising company $10,000 to create ads and promote her company in fashion magazines. At the end of the year, she had $2,200 worth of clothing still in inventory.

15. What Counts for GDP? Which items would be counted in determining U.S. GDP for 2013? Explain your answer. 1.The clothing she sells in 2013. 2.The desks and stools. 3.The mannequins. 4.The advertising she purchases. 5.Her inventory of remaining clothing.

16. Gross National Product In addition to GDP, economists use other ways to measure the economy. Another leading measure is the gross national product (GNP). GNP is the market value of all goods and services produced by Americans in one year. Current U.S. GNP = $16.1 trillion

17. Other Measures Some economists argue that we shouldn’t measure a country’s value on its wealth alone. The Social Progress Index measures a country’s Basic Human Needs (food, clean water), Foundations of Wellbeing (education, health care), and Opportunity (civil rights, freedom).

18. Key Terms gross domestic product: the dollar value of all final goods and services produced within a country’s borders in a given year intermediate goods: products used in the production of final goods nominal GDP: GDP measured in current prices real GDP: GDP expressed in constant, or unchanging, prices gross national product: the annual income earned by U.S.-owned firms and citizens

19. Bell Ringer recoverydecline Based off what you’ve heard from me, other people, or the news, do you think the U.S. economy is in a period of recovery or decline? How do you know this to be true? How do other people know this to be true?

20. Objectives 1.Identify the phases of a business cycle. 2.Describe four key factors that keep the business cycle going. 3.Explain how economists forecast fluctuations in the business cycle. 4.Analyze the impact of business cycles in U.S. history.

21. Introduction What is a business cycle? – The business cycle is the upward and downward movements of the GDP. – It refers to periods of expansion and contraction in the economy over several months or years.

22. Phases of a Business Cycle The business cycle consists of four phases: – Expansion – Peak – Contraction – Trough

23. Phases of a Business Cycle

24. Contractions There are three types of contractions: – A recession is a long economic contraction (6 to 18 months) and is marked by a high unemployment rate. – A depression is a prolonged and severe recession that is characterized by high unemployment and low economic output. – Stagflation is a decline in real GDP combined with inflation.

25. Business Cycle Forecasting Why do business cycles happen? – No single answer, but it has to do with imbalances between supply and demand. What affects business cycles? – Negative external shocks (war) and positive external shocks (drop in the price of oil) – Consumer confidence in the economy

27. Quick Activity 1.Copy the business cycle graphic. 2.Where was the economy in 2007 (just before the economic meltdown)? 3.Where was it in 2010? 4.Where do you think it is in 2015?

28. The Great Depression Before the 1930s, many economists believed that when an economy declined, it would recover quickly on its own. Declining GDP and high unemployment were two major signs of the Great Depression, the longest recession in U.S. history. Not until World War II, more than a decade later, did the economy achieve full recovery.

30. Recent U.S. Recessions 1973-1975 – Cause: Oil embargo by Middle Eastern countries. 1981-1982 – Cause: Inflation combined with rising gas prices. 1991 – Cause: First Iraq War; rising gas prices. 2001 – Cause: 9/11; Dot-Com bubble

31. The Great Recession 2007-2009 Cause: High gas prices; sub-prime mortgage crisis

32. Key Terms business cycle: a period of macroeconomic expansion followed by one of macroeconomic contraction expansion: a period of growth as measured by a rise in real GDP contraction: a period of economic decline marked by falling real GDP recession: a prolonged economic contraction depression: a recession that is especially long and severe stagflation: a decline in real GDP combined with a rise in the price level

33.  What ideas/images/thoughts do you associate with unemployment?  The current unemployment rate is 5.5 percent. How long do you think the average person remain unemployed?  A: 27 weeks Bell Ringer

34. Objectives Define unemployment and the labor force Describe how the government measures the economy’s rate of unemployment Identify the problems in interpreting unemployment data

35. Identifying Unemployment Natural Rate of Unemployment (Long Term) – The amount of unemployment that the economy normally experiences and does not go away on its own even in the long run. Cyclical Unemployment (Short Term) – Associated with short-term ups and downs of the business cycle and refers to the year-to- year fluctuations in unemployment around its natural rate.

36. How Is Unemployment Measured? Unemployment is measured by the Bureau of Labor Statistics (BLS). – It surveys 60,000 randomly selected households every month. – The survey is called the Current Population Survey. Based on the answers to the survey questions, the BLS places each adult (over 16) years old into one of three categories: – Employed – Unemployed – Not in the labor force

37. Employment Definitions Employed: A person is considered employed if he or she has spent most of the previous week working at a paid job. Unemployed: A person is unemployed if he or she is on temporary layoff, is looking for a job, or is waiting for the start date of a new job. Labor Force: the total number of available workers; the sum of the employed and the unemployed. Not in the Labor Force: A person who fits neither of these categories, such as a full-time student, homemaker, disabled person, retiree, etc., is not in the labor force.

38. The Breakdown of the Population

39. Unemployment Rate Since 1960 10 8 6 4 2 0 19701975196019651980198519902005 Percent of Labor Force 19952000 Natural rate of unemployment Unemployment rate

40. Labor Force Participation Rates for Men and Women Since 1950 100 80 60 40 20 0 1950195519601965197019751980198519902000 Labor-Force Participation Rate (in percent) Women Men 1995

41. Issues in Measuring Unemployment It is difficult to distinguish between a person who is unemployed and a person who is not in the labor force. – Discouraged workers, people who would like to work but have given up looking for jobs after an unsuccessful search, don’t show up in unemployment statistics. – Other people may claim to be unemployed in order to receive financial assistance, even though they aren’t looking for work.

42. “America’s Increasingly Irrelevant ‘Unemployment Rate’” Work with a partner to complete questions 1-6 on the worksheet.