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Week 3 Class 1 Chapter 2: GDP

Week 3 Class 1 Chapter 2: GDP. GDP: Gross Domestic Product. The total monetary value of all newly finished goods and services produced within a country's borders.

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Week 3 Class 1 Chapter 2: GDP

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  1. Week 3 Class 1Chapter 2: GDP

  2. GDP: Gross Domestic Product • The total monetary value of all newly finished goods and services produced within a country's borders. GDP is a general way countries can keep track of their economic health and keep track of how fast the economy is growing or developing it’s productivity.

  3. Expansion/Growth: the period between recessions where GDP grows Recession: a decline in economic activity that lasts at least six months How recessions many on the chart?

  4. Growth Fluctuation Influenced by Aggregate Supply: Influenced by Aggregate Demand: Labor, Capital, Technology consumers, businesses, government, and foreigners Long-Term GDP Growth vs. Short-Term Fluctuation

  5. Labor, Capital, Technology GDP = (labor, capital, technology) Fiscal Policy: what the government does with taxing the country, spending(giving money to private companies, building roads, military), and borrowing. **Government wants to encourage people to invest in labor, capital, and technology.(eg. Require less taxes from a company who invests in new capital.) Government Encouraging Economic Growth (growing the aggregate supply) Monetary Policy: what the government does to control the money supply and inflation in a country. **Inflation causes uncertainty and loss of value of money, and therefore less people will invest in capital, labor, and technology. Governments will try to lower inflation in order to encourage investment in aggregate supply.

  6. Fluctuation: a change Aggregate Demand: total demand for goods and services by consumers, businesses, government, and foreigners. consumers, businesses, government, and foreigners Fiscal Policy: what the government does with taxing the country, spending(giving money to private companies, building roads, military), and borrowing. **Government wants to encourage and manage demand. (eg. lower taxes to encourage spending or spend money on building new roads) Government Managing GDP Fluctuations (changing aggregate demand) Monetary Policy: what the government does to control the money supply and inflation in a country. **eg. If inflation is too high foreigners won’t buy goods, so the government will try to lower inflation.

  7. GDP is a measure of all NEWLY produced goods and services WITHIN a country during a period of time. • Spending Method • Income Method • Value Added/Production Method Three Ways to Measure GDP

  8. What is the GDP year one and year two? Did the GDP increase? What item in the island’s GDP is more important? The most expensive. The larger the price the greater it’s weight in the GDP. $10 $1 Year 1: 750 KG 750 KG $8250 $6000 Year 2: 500 KG 1000 KG

  9. The Spending Approach Consumption spending: the purchases of final goods and services by individuals. Examples of consumption spending: • Purchase of a new car or new toys • A weekend vacation • College tuition, hospital fees • An oil change

  10. Figure1: Consumptionas a Share of GDP in 2006

  11. Intermediate good Final good $20 $400 Total = $420 • To avoid double counting, never include intermediate goods; only final goods are part of GDP.

  12. Intermediate Goods vs. Final Goods Intermediate good: a good that undergoes further processing before it is sold to consumers; a good that is an input to the production of other goods or services. Examples of intermediate goods: A bicycle tire that is sold to a bicycle manufacturing company Crude oil

  13. Intermediate Goods vs. Final Goods Final good: a new good that undergoes no further processing before it is sold to consumers; a good that is not an input to the production of other goods or services. Examples of final goods: • Bicycles sold at a bicycle shop • Gasoline sold at a gas station

  14. The Spending Approach Investment spending: the purchases of final goods and services by firms and the purchases of newly produced houses. Examples of investment spending: • A business buys a new car • A company builds a new factory • Someone buys a new house

  15. Figure 2: Investment and Consumption as a Share of GDP in 2006 • Investment spending fell in 2008 because only $488 billion of housing was constructed compared to $757 billion the year before!

  16. The Spending Approach Government purchases: purchases by governments of new goods and services. Examples of government spending: • Roads, education, military, police *Does not include things like retirement payments (these are not new good or services)

  17. Figure 3: Government Purchases, Investment, and Consumption as a Share of GDP in 2006

  18. The Spending Approach Exports(out):the total value of goods and services that people in one country sell to people in other countries. minus (-) Imports(in): the total value of goods and services that people in one country buy from people in other countries. = Net Exports (trade balance)

  19. The Spending Approach Y(GDP) = C + I + G + X For the United States in 2006 (billions of dollars): $13,245 = 9,269 + 2212 + 2527 + (-763)

  20. The Spending Approach The last time the United States experienced a trade surplus was in of 1980.* Trade Deficit *Source: the Bureau of Economic Analysis

  21. Consumption:purchasesof final goods and services by individuals (even imported Toyota cars bought in USA but not made in USA) + Investment: purchases of final goods by firms (companies) + Government purchases of new goods and services + Net Exports: (the value of exports) – (the value of imports) __________________________________________________ = GDP Spending Method Why is net exports added in?

  22. 2. Income Method (more complex) Page 36 Compare with spending method Page 39 3. Production Method (Value Added Method)

  23. The Income Method

  24. The Production Method (Value Added)

  25. Calculate GDP using Spending Method: -Government Purchases $65 Billion -Exports $21 Billion -Imports $17 Billion -Consumption $140 Billion -Business Investments $27 Billion • Y(GDP) = C + I + G + X • = 140 + 27 + 65 + (21 – 17) • = $236 Billion

  26. GDP is a measure of all NEWLY produced goods and services WITHIN a country during a period of time. • Spending Method • Income Method • Value Added/Production Three Ways to Measure GDP

  27. Inflation = a change inNominal GDP compared to Real GDP

  28. Does this prove that economy has grown because the GDP has ？ $10 $1 $100 $100 Year 1: 100 KG 100 KG $1100 Year 2: 100 KG 100 KG $20000

  29. Nominal vs. Real GDP Nominal GDP: gross domestic product without any correction for inflation; the value of all goods and services produced in a country during some period of time, usually a year. Real GDP: the value of all goods and services produced in a country during some period of time, adjusted for changes in prices over time. • Inflation: the percentage increase in the average price of all goods and services from one year to the next.

  30. Read page 42 “Calculating Real GDP”

  31. Calculating Real GDP Growth Suppose that total production consists entirely of the production of audio CDs and DVDs and we want to compare production in two different years: 2006 and 2007.

  32. Nominal GDP growth rate (percentage change) = Nominal GDP grows by 63 percent between 2006 and 2007. Calculating Real GDP Growth Nominal GDP in 2006 = ($15× 1,000) + ($10× 2,000) = $35,000 Nominal GDP in 2007 = ($20× 1,200) + ($15× 2,200) = $57,000

  33. Calculating Real GDP Growth Nominal GDP is not a good measure for the increase in production. Nominal GDP increases by 63 percent, a much greater increase than the 20 percent increase in the production of DVDs and the 10 percent increase in the production of CDs. To calculate Real GDP, we must use the same price for both years, adjusting for inflation.

  34. Using 2006 prices, growth in real GDP between 2006 and 2007 Calculating Real GDP Growth Real GDP using 2006 prices: Real GDP in 2006, = ($15× 1,000) + ($10× 2,000) = $35,000 Real GDP in 2007, using 2006 prices = ($15× 1,200) + ($10× 2,200) = $40,000 =

  35. Calculating Real GDP Growth Real GDP using 2007 prices: Real GDP in 2006, using 2007 prices = ($20× 1,000) + ($15× 2,000) = $50,000 Real GDP in 2007, using 2007 prices = ($20× 1,200) + ($15× 2,200) = $57,000

  36. Using 2007 prices, growth in real GDP between 2006 and 2007 Calculating Real GDP Growth Real GDP using 2007 prices: Real GDP in 2006, using 2007 prices = ($20× 1,000) + ($15× 2,000) = $50,000 Real GDP in 2007, using 2007 prices = ($20× 1,200) + ($15× 2,200) = $57,000

  37. Calculating Real GDP Growth Different growth rates using different base years are unavoidable. Economists usually use the average of the two growth rates. (14.3% + 14%) /2 = 14.15%

  38. Figure 6: Real GDP versus Nominal GDP The base year is 2000, so real GDP equals nominal GDP in 2000. Before 2000, real GDP is larger than nominal GDP. After 2000, nominal GDP is larger than real GDP.

  39. The GDP Deflator GDP deflator: the nominal GDP divided by the real GDP. It measures the price level of goods and services included in real GDP relative to the given base year. GDP Deflator = nominal GDP/real GDP 2007 = $115/$100 =1.15 2008 = $120/$103 =1.17 Inflation = (1.17-1.15)/1.15 = 2% • Note: The growth rate in the real GDP deflator is a measure of inflation.

  40. Inflation = a change in Nominal GDP compared toReal GDP

  41. Alternative Inflation Measures Consumer price index (CPI): a price index equal to the current price of a chosen goods and services that everyone purchases. **Not everything in the GDP deflator affect the cost of your living.

  42. Figure 7: Comparison ofMeasures of Inflation

  43. CPI vs. GDP Deflator Differences Between the CPI and the GDP Deflator • The GDP deflator includes all domestically produced goods and services, whereas the CPI includes only goods bought by consumers. For example, the GDP deflator includes the price of heavy machinery and truck engines.

  44. CPI vs. GDP Deflator • The CPI measures the price of a fixed collection of goods and services, whereas the GDP basket varies with the GDP. • The CPI may include foreign-made goods, whereas the GDP deflator includes only domestically produced goods.

  45. *A problem with CPI it doesn’t follow supply and demand and thus overstates inflation. It assumes you will always buy the same amount of goods no matter the change in the goods’ prices.

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