GDP

1. Gross Domestic
Product and
Growth
Chapter 12

2. What makes a nation
wealthy?
• Rank the countries based on what you perceive makes
the nations wealthy according to the decsriptions.

3. Why Measure Growth?
After the Great Depression, economists felt it was
important to measure macroeconomic status to predict
and prevent future economic downturns.
Established NIPA

4. NIPA
National Income and Product Accounts
o Collects data on production, income, investment, and savings
o Maintained by the Department of Commerce
o This data is reported and used to influence government policy

5. GDP (Gross Domestic
Product)
• Most important measure of wealth
• GDP is the dollar value of all FINAL goods and services
produced within a country’s borders in a given year.
o Final goods are those sold to consumers
o Intermediate goods are those used in the production process (not calculated)

6. “Within a Country’s
Borders”
GDP does not include products made by a US company
overseas
GDP does include a car made in the US by Toyota
(Japanese company)

7. What do you think? (Included in
GDP or no)
A new house?
A used house?
The realtor's fee on the used house?
All the products used to produce the new house? (nails,
shingles, siding etc...)

8. What is included...
A new house?...Yes
A used house?...No
The realtor's fee on the used house?...Yes
All the products used to produce the new house (nails,
shingles, siding etc...)?...No (secondary goods)

9. Nominal vs. Real GDP
Nominal GDP is GDP measured in current prices
o Does not always measure an increase in output
To measure growth from year to year, economists
measure Real GDP
o Real GDP is measured by calculating GDP with constant price (accounts for
inflation).

10. Limitations of GDP
Nonmarket Activities
GDP does not measure goods and
services that people make or do
themselves, such as caring for
children, mowing lawns, or cooking
dinner.
Negative Externalities
Unintended economic side effects,
such as pollution, have a monetary
value that is often not reflected in
GDP.
The Underground Economy
There is much economic activity
which, although income is
generated, never reported to the
government. Examples include
black market transactions and
"under the table" wages.
Quality of Life
Although GDP is often used as a
quality of life measurement, there
are factors not covered by it. These
include leisure time, pleasant
surroundings, and personal safety.

11. Influences on GDP
Aggregate Supply
o The total amount of goods and services available in an economy at all price
levels
Aggregate Demand
o The total amount of goods and services demanded in an economy at all price
levels

12. Is it Accurate?
Many things to calculate in GDP and much is missed or
overlooked
However, it does provide us with a baseline of stats and
over time, shows important trends
The meausrment may not be accurate but t is constant

13. Review
1. Real GDP takes which of the following into
account?
(a) changes in supply
(b) changes in prices
(c) changes in demand
(d) changes in aggregate demand
2. Which of the following is reflected in GDP?
(a) The underground economy
(b) Non-market activities
(c) Mr. Klein’s extraordinary teaching at WHS
(d) Negative externalities

14. Business Cycles
Chapter 12, Section 2

15. Business Cycles
• Period of macroeconomic expansion followed by
contraction
• Phases of Business Cycles
o Expansion…period of economic growth measured by a rise in real GDP
• Growth being a steady, long term rise in GDP
• Plentiful jobs, falling unemployment

16. Phases of Business Cycles (cont.)
• Peak…height of economic expansion
• Contraction…economic decline marked by falling real
GDP
• Trough…bottom of contraction

17. Contractions with Different
Characteristics
• Recession…real GDP falls for two straight quarters
o Prolonged period of economic contraction
o Usually a rise in unemployment
• Depression…a severe recession
• Stagflation…decline in real GDP, combined with a rise in
price level

18. Keeping the Cycle
Typically, a sharp rise or fall in a key indicator sparks a
series of events
4 main indicators
o Business investment
o Interest rates and credit
o Consumer expectations
o External shocks

19. Business Investment
Spending by business or non spending will change the
cycle

20. Interest Rates and Credit
Low interest rates will lead to spending
High interest rates will lead to savings

21. Consumer Expectations
• Consumers may spend or save
• Like other things, consumer’s choices drive the economy

22. External Shocks
Unpredictable and disrupt aggregate supply
o Wars
o Floods
o Natural disasters
o Oil shortage
Can be positive
o Discoveries
o Good weather

23. Review
1. A business cycle is
(a) a period of economic expansion followed by a period of
contraction.
(b) a period of great economic expansion.
(c) the length of time needed to produce a product.
(d) a period of recession followed by depression and expansion.
2. A recession is
(a) a period of steady economic growth.
(b) a prolonged economic expansion.
(c) an especially long or severe economic contraction.
(d) a prolonged economic contraction.

24. Economic
Growth
Chapter 12, Section 3

25. Economic Growth
A change in GDP over time illustrates growth
For economic growth to occur, it should change with
population
Real GDP per capita measures such growth and the
standard of living

26. Quality of Life
GDP measures standard of living but not quality of life
o Pollution
o Stress
o Nutrition
Also does not tell how GDP is distributed
o Poor sections of the country
o Poor percentage of population

27. Capital Deepening
• The process of increasing capital per worker
o Goal is to increase productivity
o Savings and investing lead to capital deepening

28. Population
Increased population without capital deepening will lower
the standard of living
Increased population without increase in production will
lower the standard of living

29. Government
Taxes can increase or decrease capital deepening
o It is dependent upon what the taxes are spent on

30. Foreign Trade
• Foreign trade and running a trade deficit can actually be
good in some ways
o If the goods being traded enhance capital deepening
o In the long run…this capital deepening can increase productivity and help to pay
back debt that results from a trade deficit

31. Technological Progress
An increase in efficiency gained by producing
more output from more inputs
o Technology
o Realignment
o Knowledge
Technological progress is measured by looking
at the amount of GDP that increases from
technology and not labor

32. Review
1. Capital deepening is the process of
(a) increasing consumer spending.
(b) selling off obsolete equipment.
(c) decreasing the amount of capital per worker.
(d) increasing the amount of capital per worker.
2. Taxes and trade deficits can contribute to
economic growth if the money involved is spent
on
(a) consumer goods.
(b) investment goods.
(c) additional services.
(d) farming.