Ch8. Gross Domestic Product

1. Ch8. Gross Domestic Product • Chapter Objectives * What is GDP? * How is GDP measured? * What are the national income accounts? * What is the difference between GDP and real GDP? * How does our GDP compare to those of other nations? * How is per capita GDP calculated? * What are the shortcomings of GDP as a measure of national economic well-being? * How do we graph the C+I+G+X line?

2. Ch8. Gross Domestic Product What is GDP? It is the nation’s expenditure on all the final goods and services produced during the year at market prices. A Summing up: C + I +G +X How GDP Is Measured? The flow-of-income approach, The expenditures approach

3. Ch8. Gross Domestic Product The difference b/w GNP and GDP: GDP measures the value of all the final goods and services produced within the borders of the United States, while GNP measures the output of all Americans, whether the goods and services are produced here or abroad.

4. Ch8. Gross Domestic Product The advantages of using GDP over using GNP: GDP corresponds more closely than GNP to many important series of economic data, such as employment and industrial production. It is also more useful for making international comparisons , because most other nations now express their output in terms of GDP.

5. Ch8. Gross Domestic Product The Expenditures Approach GDP = C + I + G + X The Flow-of-Income Approach GDP - Depreciation = NNP NNP-Indirect business taxes & subsidies = National Income National Income is the sum of compensation to employees, corporate profits, net interest, rental income and proprietors’ income.

6. Ch8. Gross Domestic Product Two Things to Avoid When Compiling GDP Multiple counting * we counts only what we spend on final goods and services- not those of an intermediate nature. *Value-added approach to measure GDP * We don’t include intermediate goods and used goods in GDP. Treatment of Transfer Payments *Social Security, unemployment insurance check Medicare, Medicaid, public assistance and other government transfer payment

7. Ch8. Gross Domestic Product GDP vs. Real GDP Real GDP(current year) =GDP(current year) x [GDP deflator(base year)/GDP deflator(current year)] GDP measures changes in output and prices, Real GDP measures just changes in output. Explain what happen if GDP rises and real GDP fall? (GDP deflator rose, real GDP fall)

8. Ch8. Gross Domestic Product Per Capita Real GDP per capita GDP = GDP/Population per capita real GDP = real GDP/Population Shortcomings of GDP as a Measure of National Economic Well-Being Household Production Illegal Production The Underground Economy Treatment of Leisure Time Human Costs and Benefits

9. Ch8. Gross Domestic Product Exercise: Do ch8 multiple choice questions and problems.

10. Ch9. Economic Fluctuations, Unemployment, and Inflation • Chapter Objectives • Consider various business cycle theories • Show how economic forecasting is done • Measure the GDP gap • How to calculate the unemployment rate • The types of unemployment • Construct a consumer price index

11. Ch9. Economic Fluctuations, Unemployment, and Inflation • The Conventional Three-Phase Business Cycle • recession, recovery and prosperity • Business Cycle Theories • Endogenous Theories • innovation theory • psychological theory(optimism/pessimism of businessowners) • inventory cycle theory • monetary theory(inflation, decrease money supple, go to recession…) • underconsumption theory

12. Ch9. Economic Fluctuations, Unemployment, and Inflation • Business Cycle Theories • Exogenous Theories • sunspot theory • Perhaps no single explanation, whether exogenous or endogenous can explain each of the cycles we have experienced.

13. Ch9. Economic Fluctuations, Unemployment, and Inflation • Business Cycle Forecasting • Analytic Forecasting • Barometric Forecasting • The GDP Gap • the gap is the difference between the potential GDP and actual GDP. • Unemployment • Unemployment rate=number of unemployed/labor force

14. Ch9. Economic Fluctuations, Unemployment, and Inflation • Types of Unemployment • Frictional unemployment(persons who are between jobs or just entering or reentering the labor market) • Structural unemployment(out of job for a long period of time, say, a couple of years) • Cyclical unemployment • Seasonal unemployment

15. Ch9. Economic Fluctuations, Unemployment, and Inflation • Inflation • Inflation is a rise in the price level. • Consumer Price Index(CPI) measures changes in our cost of living. • Deflation and Disinflation • Deflation is a decline in the price level. • (just a little deflation can be very bad news to business firms; but deflation is good news to consumers, it means that they will be paying lower prices)

16. Ch9. Economic Fluctuations, Unemployment, and Inflation • Disinflation • Disinflation occurs when the rate of inflation declines. • The construction of the CPI • please refer text book page 202 Advanced work. You need to know how to calculate CPI.

17. Ch9. Economic Fluctuations, Unemployment, and Inflation • Anticipated and Unanticipated Inflation • Inflation has hurt creditors and helped debtors • Those who are hurt by unanticipated inflation are people who live on fixed incomes, particularly retired people, and those who hold long-term bonds. • Some people gain and others lose, the gains and losses re exactly equal.

18. Ch9. Economic Fluctuations, Unemployment, and Inflation • Anticipated and Unanticipated Inflation • when inflation is fully anticipated, there are no winners or losers. • Example: if the real rate of interest were 7 percent, and there was an expected rate of inflation of 3 percent, how much the creditors would charge? • If nominal interest rate is 6, the expected rate of inflation is 10, how much is the real rate of interest?

19. Ch9. Economic Fluctuations, Unemployment, and Inflation • Anticipated and Unanticipated Inflation • nominal interest rate +/- inflation = real interest rate • Theories of the Causes of Inflation • Demand-Pull Inflation • too many dollars chasing too few goods(during the war period) • Cost-Pull Inflation(1973-74, 1979) • higher prices raise everyone’s cost of living, engendering further wage increase