Gross Domestic Product & Growth

1. Gross Domestic Product & Growth Chapter 12 Section 1 Gross Domestic Product

2. G. D. P. • Early economists believed that a national economy would help regulate itself. • Periods of high unemployment and low income and output would be temporary and short-lived and would be corrected automatically. • These ideas about the economy lasted until the Great Depression of 1929.

3. G. D. P. • In 1929, a severe economic decline that lasted over a decade (10 years). • This economic avalanche touched off by the Great Crash of the Stock Market in October of 1929. • This crash devastated the economy of the United States.

4. G. D. P. • The Depression convinced many economists that they must find a way to monitor the macro-economy’s performance so that they could predict economic downturns and try to prevent them.

5. G. D. P. • National Income and Product Accounts… • Keeping track of the U.S. economy is an enormous task. • Economists monitor the macro-economic data using national income accounting – a system that collects statistics on production, income, investment, and savings. The data are compiled and presented in the form of National Income and Product Accounts (NIPA) – which are maintained by the US Department of Commerce.

6. G. D. P. • NIPA data is used determine economic policy on the national level.

7. G. D. P. • Gross Domestic Product… • The dollar value of all final goods and services produced within a country’s border in a given year. • This is the most important of the measures in NIPA. • Dollar Value is the total of the selling prices of all goods and services produced in a country in one calendar year. • Final Goods and Services – are products in the form to consumers.

8. G. D. P. • Fin. G&S is opposed to intermediate goods – which are used in the production of final goods. These are goods produced within a country’s borders. • i.e. US GDP includes cars made in Ohio by a Japanese car company. • It does not include cars made in Brazil by an American company.

9. G. D. P. • Another Example… • A house that is sold this year by your neighbor. It was built in 1982 and it was counted on the GDP for 1982. We cannot count it again this year. But the fees paid to the real estate agent who handled the resale of the house if included on this year’s GDP. • If you build a house this year. Do you count the lumber, nails, shingles, windows, and other items used to produce this house in the country’s GDP?

10. G. D. P. • Answer … N O. • Those are intermediate goods and their value would be included in the price of the completed house. • So we really only count the price of the house in the GDP.

11. G. D. P. • Expenditure Approach: • One way government economists calculate GDP is by using the expenditure approach sometimes called the output-expenditure approach. • It works this way… • 1st economists estimate the annual expenditures (amount spent) on four categories of final G & S. a. Consumer Goods & Services b. Business Goods & Services c. Government Goods & Services d. New export or imports of goods and services

12. G. D. P. • Consumer Goods include Durable Goods – those goods that last for a relatively long time under general use. DVD Player, cars, and etc. • Consumer Goods also include Nondurable Goods – those goods that last a short period of time. Sneakers, light bulbs, food, and etc. • Economists total up all four columns and that equals GDP. This is a practical way to measure GDP.

13. G. D. P. • Income Approach… • It calculates GDP by adding up all the incomes in the economy. • The house example (a house built by you) the price of that house would be divided up among all the people that contributed things to build that house.

14. G. D. P. • Government policymakers measure gross domestic product to find out how well the economy is performing. • Economists distinguish between two measures of GDP. • Nominal GDP – GDP measured in current prices. • We calculate by the current year’s prices by adding up all the products sold.

15. G. D. P. • The only problem with nominal GDP is a general rise in prices appears to make GDP rise, when in fact output has not risen. • Real GDP – GDP expressed in constant or unchanging dollars. • Year 1 – 10 cars @ $ 15,000/each = $ 150,000 10 trucks @ $ 20,000/each = $ 200,000 This is the base year.

16. G. D. P. • Limitations of GDP…{This is not a perfect system} • Non-market Activities • Does not calculate the goods and services that people make or do for themselves. • The Underground Economy • A large production and income is never recorded or reported to the government. i.e. black market for illegal drugs, etc. Selling your car to your best friend is not reported as well. • Negative Externalities • Unintended economic side effects have a monetary value that often is not reflected in GDP. i.e. a power plant spends money to reduce damage caused by pollution.

17. G. D. P. • Quality of Life • Politicians and some Economists interpret rising GDP as a sign of rising well-being. This does not mean that economy is doing so well.

18. G. D. P. • Other Income & Output Measures • Gross National Product • The annual income earned by U.S.-owned firms and U.S. citizens. • Depreciation • The loss of the value of capital equipment that results from normal wear and tear. This is not counted in GDP. • The loss of replacing these items reduces the value of what we produce. • Net National Product (NNP) • Measure of Net Output for one year. Output made after adjustments for depreciation.

19. G. D. P. • National Income – Subtracting sales and excise taxes from NNP we get NI. • Personal Income – money people make from working at a job. • Disposable Personal Income (DPI) – what is left after we take out personal income taxes and subtract individual income taxes.

20. G. D. P. • Influences on GDP: • Economists add up the total supply of goods and services produced for sale in the economy. • Price Level – the average of all prices on the economy. • Aggregate Supply – the total amount of goods and services in the economy available at all possible price levels. With rising price levels, business is enticed to produce more goods or services.

21. G. D. P. • Aggregate Demand – the amount of goods and services in the economy that will be purchased at all possible price levels. • Lowering price level translate into greater purchasing power for the consumer and they will buy more of that good or service.

22. G. D. P. • Aggregate Supply and Aggregate Demand Equilibrium. Just like when we did Supply and Demand to find out equilibrium Price and Quantity. It happens to the Aggregate Supply and Demand. This is the AS/AD Equilibrium. Either curve can shift and cause the Equilibrium to move as well.