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10/08/13 Economics Journal

10/08/13 Economics Journal. Warm-up: Contrast the following with your partner: Aggregate Markets vs. Individual Markets Constant $$ vs. Current $$ Final Goods vs. Intermediate Goods Cycle– Expansionary vs. Contractionary Boom vs. Trough Formula for Calculating GDP TAKE QUIZ

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10/08/13 Economics Journal

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  1. 10/08/13 Economics Journal • Warm-up: Contrast the following with your partner: • Aggregate Markets vs. Individual Markets • Constant $$ vs. Current $$ • Final Goods vs. Intermediate Goods • Cycle– Expansionary vs. Contractionary • Boom vs. Trough • Formula for Calculating GDP • TAKE QUIZ • SWBAT: Define GDP; explain three methods for calculating GDP; identify transactions that do and do not contribute to U.S. GDP.

  2. In 2012 U.S. GDP was approximately $15.7 trillion!

  3. Gross Domestic Product Also Known As Aggregate Output or National Income

  4. Gross Domestic Product (GDP) (Y) • GDP: the total value of all final goods and services produced in the economy during a given period (usually a year) • Three ways to measure GDP • Measure value of production of final goods & services (value added) • Measure spending on final goods & services • Measure factor income

  5. Method #1: Value Added Approach • includes only domestically produced final goods & services • Excludes intermediate goods & services • In essence we are only considering each producer’s value added (the value of a producer’s sales minus the value of its purchases of inputs)

  6. Method #2: Expenditure Approach • Consumer Spending + Investment Spending + Government Spending + Net Exports = GDP • GDP = C + I + G + (X-M) • GDP = C + I + G + NX

  7. Consumer Spending (C) • Approximately 70% of GDP • Tangible goods – food, clothing, cars, etc. • Intangible services – haircuts, doctor visits, concerts, etc.

  8. Investment Spending (I) • Approximately 12% • Investment: spending on capital equipment, inventories, and structures (including purchases of new housing) • Durable goods produced but not sold in the year count as investment spending • Does not include stocks, bonds, mutual funds

  9. Government Purchases (G) • Approximately 21% • Local, state, & federal • Salaries of gov’t workers • Military, infrastructure, education • Does not include transfer payments

  10. Net Exports (X-M) (NX) • Value of exports minus the value of imports • Negative for the U.S. – large trade deficit • Approximately -3%

  11. What’s In, What’s Out Included Not Included • Domestically produced final goods & services including • Capital goods • New construction • Changes to inventories • Intermediate goods and services • Inputs • Used goods • Transfer payments • Financial assets • Foreign-produced goods & services • Purchases of illegal substances • Housework

  12. Method #3: Income Approach • Wages earned by labor • Interest earned by those who lend savings to firms and the government • Rent earned by those who lease land or structures to firms • Profit earned by shareholders (the owners of the firm’s physical capital) - dividends

  13. Circular Flow Magic • All three methods (value added, expenditure, income) all come to (roughly) the same figure • Total output = total expenditure = total income

  14. Quiz Time! Determine if each of the following would contribute to U.S. GDP. • Coca-Cola builds a new bottling plant in the U.S. • Delta sells one of its existing airplanes to Korean Air. • Ms. Moneybags buys an existing share of Disney stock. • A California winery produces a bottle of Chardonnay and sells it to a customer in Montreal, Canada. • An American buys a bottle of French perfume in Tulsa. • A book publisher produces too many copies of a new book; the books don’t sell this year, so the publisher adds the surplus books to inventories.

  15. What GDP Tells Us • Size of the economy, aggregate output • But not a good measure of growth over time – unless we account for inflation • To measure aggregate output we need to know real GDP

  16. A Simple Economy Nominal GDP: the total value of all final goods and services produced in the economy in a year, calculated with current prices Real GDP: the total value of all final goods and services produced in the economy in a year, calculated using constant prices

  17. Nominal v. Real GDP in the U.S.

  18. Real GDP in the U.S. Since 1945

  19. Changes in Real GDP 2008-2012

  20. GDP Cautions • In order to make comparisons between countries we need to take population into account • GDP per capita: GDP divided by the size of the population • Only a very rough estimate of human welfare in a country • Doesn’t include important factors related to happiness – leisure, volunteerism, housework, natural beauty • GDP increases with spending on divorce, crime, natural disasters • GDP doesn’t measure how a society uses its output

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