6. Which Country Is Better Off?
Country A Country B Country C
GDP $1,500 $2,500 $3,000
7. Which Country Has the Highest
Standard of Living?
Country A Country B Country C
GDP $1,500 $2,500 $3,000
Population 5 10 15
8. GDP per Capita
Country A Country B Country C
GDP $1,500 $2,500 $3,000
Population 5 10 15
GDP/capita $300 $250 $200
9. GDP per Capita, 2012
(current U.S. Dollars)
Country GDP/Capita
United States $51,749
Mexico $9,749
China $6,091
India $1,489
Russian Federation $14,037
Zimbabwe $714
Spain $28,624
Germany $41,863
Greece $22,083
11. Factors Contributing to Long-Term Economic
Growth
• Technological innovation
• High investment in human capital and capital goods
• High level of economic freedom
• Strong incentives to save and invest
• Political stability
• Free trade
• Slower rates of population growth
• Low inflation
14. What Is Gross Domestic Product?
● Gross domestic product (GDP) is the
total market value of all final goods and
services produced annually in a country.
15. Why Count Only Final Goods?
● An intermediate good is a good that is not ready for use
or purchase. It could be a good that is partially assembled.
It could even be the components that are used in
producing a final product.
● Suppose economists counted both final and intermediate
goods and services when they computed GDP. Then they
would be double counting, or counting goods more than
once.
16. Does GDP Omit Anything?
● We do not count illegal goods and services in GDP
because we do not have any records of their sale or
purchase.
● Any legal transaction that is not recorded also cannot be
counted. If someone is paid in cash, with no sales receipt,
the transaction is not likely to be recorded.
● We do not count goods and services that are traded
outside official market settings. Cutting your friends hair
would be an example.
17. ● The sale of used goods is not counted in GDP.
● Stock transactions and other financial transactions are
also not included in GDP.
● Government payments, such as social security checks,
are not exchanged for goods or services, and are also not
counted in GDP.
(All About GDP Worksheet part A)
18. GDP vs. GNP
●GDP= Total market value of final goods and
services produced within the borders of the United
States (by both citizens and noncitizens)
●GNP=Total market value of final goods and
services produced by U.S. citizens (wherever they
reside- US, France, Mexico, etc.)
20. How Is GDP Measured?
● The GDP of the United States in 2014 was more than
$17 trillion.
● Economists determined this number by adding up the
amount spent by four sectors: household, business,
government, and foreign.
● Amounts spent by the household sector are called
consumption.
● Amounts spent by the business sector are called
investment.
21. ● Amounts spent by the government sector are called
government purchases. As mentioned before,
government purchases do not include government transfer
payments.
● Spending by residents of other countries on goods
produced in the United States is called export spending.
Spending by Americans on foreign-produced goods is
called import spending.
(Worksheet All About GDP Part B)
22. ●All goods produced in the economy must be bought
by someone in one of the four sectors of the
economy. Summing the spending of the four sectors
and subtracting import spending will give a good
estimate of GDP.
23. Calculating GDP
Gross domestic product (GDP) is the total market value of all
final goods and services produced annually in a country.
GDP = C + I + G + EX – IM
Note that import spending is subtracted when calculating GDP.
25. GDP Per Capita vs GDP
● Greater production of goods and services is only
one of the many factors that contribute to being
better off or possessing greater well-being.
● All other things being equal, greater production
may result in reduced leisure time or reduced
family time.
● Population must be considered when comparing
the GDP of two different nations
26. Latest GDP per capita ranking
https://www.cia.gov/library/publications/the-world-
factbook/rankorder/2004rank.html
27. Do you get it?
Categorize GDP event Worksheet
Work with your partner.
29. The Two Variables of GDP:
P and Q
● GDP is calculated by multiplying the price of goods
produced (P) by the quantity produced (Q).
● If either price OR quantity rises, the GDP will rise.
● To get an accurate assessment we need to look at
each variable separately.
● If price is held constant, then any rise in GDP must
be due to a rise in quantity.
● This measurement is called Real GDP
30. Real GDP
● How do we keep price constant? Economists do
it by choosing the price in a base year and
then comparing it with prices in all other years.
GDP is equal to price in the current year multiplied by
quantity in the current year.
Nominal GDP = P current year X Q current year
Real GDP is equal to price in the base year multiplied by
quantity in the current year.
Real GDP = P base year X Q current year
32. To sum it up….
GDP is the VALUE of all final goods and services produced
GDP (nominal GDP) measures these values using current
prices (not adjusted for inflation)
Real GDP measures these values using the price of a base
year (adjusted for inflation)
33. Measuring the Cost of
Living
Using the Consumer Price Index we can
see if we have to spend more or less
dollars to maintain our standard of living.
34. The Consumer Price Index
●The consumer price index is a measure of the
overall cost of the goods and services bought by a
typical consumer. It is taken monthly.
● A price index is a measure of the price level, or the
average level of prices.
● The most widely used price index is the consumer
price index (CPI).
● The consumer price index is calculated using a sampling
of thousands of households. The Bureau of Labor
Statistics surveys what consumers paid for a group of
goods that represent all the types of goods they might
purchase in a year. This group of goods is called the
market basket.
35. Inflation rate (percentage change in CPI):
The inflation rate is the percentage change in
the price index from the preceding period
37. Unemployment Rate
●Unemployment is measured by the Bureau of Labor
Statistics (BLS).
● It surveys 60,000 randomly selected households every
month.
● The survey is called the Current Population Survey
●Based on the answers to the survey questions, the
BLS places each adult into one of three categories:
● Employed
● Unemployed
● Not in the labor force
38. Who’s who??
●Adult or Not? Military or Institutionalized?
● The BLS considers a person an adult if he or she is over 16
years old.
● We don’t count people in the military or institutions
●Employed or Not?
● A person is considered employed if he or she has spent most
of the previous week working at a paid job.
● A person is unemployed if he or she is on temporary layoff, is
looking for a job, or is waiting for the start date of a new job.
39. Labor Force
●Labor Force or Not?
● A person who fits neither of these categories, such
as a full-time student, homemaker, or retiree, is not
in the labor force.
● The labor force is the total number of workers,
including both the employed and the unemployed.
● The BLS defines the labor force as the sum of the
employed and the unemployed.
41. The unemployment rate is calculated as the
percentage of the labor force that is unemployed
●Unemployment rate = (# unemployed/labor force)X100
The employment rate is calculated as the percentage
of the adult population that is employed
●Employment rate = (# employed/adult population) X100
42. ●It is difficult to distinguish between a person who is
unemployed and a person who is not in the labor
force.
●Discouraged workers, people who would like to work
but have given up looking for jobs after an
unsuccessful search, don’t show up in unemployment
statistics.
●Other people may claim to be unemployed in order to
receive financial assistance, even though they aren’t
looking for work
43. September 2014 Stats (#’s in the thousands)
●(Civilian noninstitutional) Adult population
247,947
●(Civilian) Labor force 155,922
●Unemployed 9,617
●Employed 146,306
● You do the math. Find the unemployment and
employment rates.
44. Homework: The Current Unemployment Rate
Find a recent article that discusses the current unemployment
rate in the economy. Explain the main topics of the article
and the information it provides on the current unemployment
rate. Discuss how the unemployment rate in general influences
economic performance.
Provide the title of the article, date it was published, and
where it was a published (magazine name, newspaper, web
address)
1 paragraph minimum
46. Business Cycles (Fluctuations)
●Economic fluctuations are irregular and unpredictable
●GDP and CPI fluctuate together
●When GDP declines, unemployment increases
●When production and incomes fall, and
unemployment rises it is known as a recession when
it’s mild and a depression when it’s severe.
47. TRANSPARENCY 12-3: The Phases of the Business Cycle
● Changes in money
supply
● Changes in business
investment, residential
construction, and
government spending
● Politics
● Innovation
● Dramatic changes to
supply
Business cycles can be caused by several types of events:
48. Explaining Short-run Fluctuations
●We use aggregate supply and aggregate
demand to explain economic fluctuations.
● The aggregate-demand curve shows the
quantity of goods and services households,
firms, and government wish to buy at each price
level. It slopes negatively.
● The aggregate-supply curve shows the quantity
of goods and services that firms produce and sell
at each price level. It slopes positively.
● The price level and production adjust to balance
aggregate supply and demand.
49. Aggregate Demand Curve
●The reason it slopes downward has to do
with the effect of price levels on consumption,
investment, and net exports.
●If there is a change in C, I, G, or NX the
curve will shift.
●When aggregate demand shifts left it will
create a recession.
50. Aggregate Supply Curve
●The reason it slopes upward has to do with the
amount of production at each price level.
●If there is a change in labor, capital, natural
resources, or technology the curve will shift.
●If aggregate supply shifts left it will create a
recession.
53. How Do We Measure Inflation?
●One way of determining inflation is to look for
changes in the consumer price index (CPI).
● For example, if the CPI increases from 180 in
one year to 187 in the next year, the inflation rate
is 3.89 percent.
● Between 1960 and 2006, the United States
experienced wide fluctuations in inflation rates.
Approximately what was the highest rate during
those years? (Answer: 13.25 percent)
Approximately what was the lowest rate?
(Answer: 0.5 percent)
55. Demand-Side Versus Supply-Side
Inflation
●Inflation can originate on either the demand side of
the economy or the supply side of the economy. If
aggregate demand increases and aggregate supply
stays the same, inflation will occur.
● Demand-side inflation occurs when an increase in
the price level originates on the demand side of the
economy. Demand-side inflation can be caused by
an increase in the money supply.
● Supply-side inflation occurs when an increase in
the price level originates on the supply side of the
economy.
56. The Simple Quantity Theory of
Money
●The simple quantity theory of money presents a clear
picture of what causes inflation.
●To understand this theory, you need to understand
velocity and the exchange equation.
● Velocity is the average number of times a dollar is spent to
buy final goods and services in a year.
● The exchange equation says that the money supply
multiplied by velocity equals the price level (or average price)
multiplied by the quantity of output.
●The simple quantity theory of money predicts that
changes in the price level will be strictly proportional to
changes in the money supply.
57. TRANSPARENCY 12-2: The Exchange Equation
M x V = P x Q
M = Money supply
V = Velocity
P = Price level
Q = Quantity of
output
58. ●According to this theory, if the money supply doubles
from $500 to $1,000, the price level will double from
$10 to $20—assuming that velocity and quantity of
output remain constant.
●In reality, the change will not be perfectly proportional.
A 100 percent increase in the money supply may
result in a 50 percent increase in the price level.
●Nevertheless, in the real world, we see that the
greater the change in the money supply, the greater
the change in the price.
59. The Effects of Inflation
●Inflation increases the amount that people must spend
on particular goods or services. It can affect people on
fixed incomes, savers, and partners in contracts.
● Inflation reduces the buying power of people on fixed
incomes, such as social security or investment proceeds.
● If the inflation rate is greater than the interest rate earned on
savings accounts, the money in those accounts loses value.
As time goes on, savers will be able to buy fewer goods with
the same amount of money.
60. ● Over time, inflation can eat up the profits factored
into a long-term contract. As the costs of supplies
and labor increase during the length of the project,
the profit that was factored into the contract begins to
disappear.
● To hedge against inflation is to try to avoid or
lessen a loss by taking some counterbalancing
action. People try to figure out the best protection
against inflation by investing in items such as gold,
real estate, and art.
61. What Is Deflation?
●Deflation is the opposite of inflation. Deflation is a
decrease in the price level, or the average level of
prices.
● A downward change in the CPI indicates deflation.
Demand-Side Deflation Versus Supply-Side
Deflation
● Like inflation, deflation can result from a change in price or a
change in supply. For example, if aggregate demand
decreases and aggregate supply stays the same, deflation
will occur.
62. Simple Quantity Theory of Money
and Deflation
● The simple quantity theory of money can be used to
explain deflation, just as it was used to explain
inflation.
● According to this theory, if the money supply drops
from $1,000 to $500, the price level will drop from
$20 to $10—assuming that velocity and quantity of
output remain constant.
63. A Major Effect of Deflation
●When prices fall, they do not all fall at the
same time. When prices do not fall at the same
time, deflation can lead to firms going out of
business and workers being laid off. These are
common results during times of deflation.
