Measuring the Economy

1. Measuring the Economy Business Cycle and Economic Indicators

2. Gross Domestic Product • The total dollar value of all the goods and services produced within a country during one calendar year.

3. Gross Domestic Product Formula GDP=C+G+I+(x-m) C = Consumption G = Government Spending I = Investment (business spending) X = Exports M = Imports

6. What’s included in GDP? • Final goods and services produced in a country in a year

7. What’s excluded from GDP? 1. Double counting /intermediate goods • Parts necessary to produce the final product 2. Public Transfer Payments a. Social Security b. Welfare Payments c. Veteran’s Pensions 3. Private transfer payments gifts of money scholarships

8. What’s excluded from GDP? • 4. Security Transactions • Buying/selling stocks/bonds • Brokers services are included • 5. Second hand sales • 6. Underground Economy (7% in U.S.) • - illegal gambling, illegal drugs, illegal immigrants, prostitution, under the table cash payments

9. Adjusting GDP for Price Increases • Nominal GDP- in current dollars • Real GDP – in constant dollars; adjusted for inflation • GDP per capita – amount of g&s produced per person; compares one country to another • What is Real GDP per capita?

13. Business Cycle • 3 types of fluctuations in economic activities • Seasonal : changes take place at different times of the year. Examples are produce sales and retail sales • Secular: Changes that take place because of non-economic changes that impact on the economy. Examples are technology, weather, political events • Cyclical: Changes in business activity over periods of up to 5 years.

14. Business Cycle

15. Causes of changes in Business Cycle • The money supply & credit: The amount of money in circulation and available • Business investments • Public expectations & changes in demand: momentum and psychological factors • External Factors: Changes in the world’s economic and political climate. Weather and natural disasters can affect communities

16. Business Cycle Phases Peak: period of general prosperity Contraction: a slowdown marked by declining GDP for 2 quarters Trough: a prolonged low point of the business cycle. Expansion: Economic growth

17. Business Cycle Phases

18. Expansion • Employment, income, output begins to rise • Prices begin to rise • Profits up, consumer spending increasing, More credit available • Optimism Peak • Prices rise faster than costs; worry about inflation • Employment is up & Incomes are up • Consumers are spending • Stock Prices are up

19. Contraction • Costs are rising faster than prices • Slowing of investment in new plants • Bank credit is harder to get & Interest rates are up • Inventories higher than sales • Recession – 2 quarters of negative GDP • Average Recession last 11 months. • 10 since WWII Trough • Prices fall (or stabilize) • Employment, output, income going down • Credit contracts • Pessimism prevails

22. THIS IS A BIASED SLIDE

25. Predicting the Business Cycle • Leading indicators: Anticipate the direction in which the economy is headed • Housing starts and Producer Price Index • Coincidental indicators: Provide information about the current economy • Personal income, GDP, Retail sales • Lagging indicators: Identifies changes that occur after the economy changes. They are used to predict the duration of the phase. • Unemployment rate, business capital investment