Unit 6: GDP and Economic Challenges


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Unit 6: GDP and Economic Challenges

  1. 1. Unit 6 Notes
  2. 2. Unit 6, Lesson 1 Notes
  3. 3.  Economists monitor economic data of the country using national income accounting – collects statistics on production, income, investments, and savings This data is collected and presented to the government and maintained by the Department of Commerce
  4. 4.  The MOST IMPORTANT measure that is collected is GDP – the dollar value of all final goods and services produced within a country’s borders in a given year. The definition itself is worded that each piece must be looked at individually
  5. 5.  Dollar value is the total selling prices of all goods and services produced in a country in a given year Final goods and services are the products sold to consumers in a given year Produced within a country’s borders means that anything produced in the U. S. is counted (Kia plant in Ohio)
  6. 6. 1. Intermediate goods – products/services used to make final products. a. Ex: Car tires (intermediate good) aren’t counted if they are going onto a brand new car (final good). b. Avoids multiple counting2. Nonproduction Transactions a. Transfer Payments (public or private) – money is given for no service/product. Ex: $ as a gift, welfare, social security. b. Stocks & Bonds transactions3. Sale of USED goods4. Non-market Transactions Ex: Time & effort you spend fixing up your car.5. Underground Economy – no record exists of the transaction. Ex: babysitting, lawn mowing, maid services, drug trade
  7. 7. GDP Basics:  Always expressed in terms of $.  Primary measure of economy’s performance.  Calculated using either the expenditure approach or the income approach.  Increases in GDP are desirable  When the government looks at GDP, the measurement must be as accurate as possible
  8. 8.  To calculate GDP, one way is the Expenditure approach Economists estimate the annual expenditures ($ spent) on four categories:  Consumer  Business  Government  Net imports/exports  This total equals GDP – practical approach
  9. 9.  Another way to measure GDP is the income approach – provides better accuracy This approach adds up all the incomes in the economy (ex. Income from selling a house for $115,000)
  10. 10. Unit 6, Lesson 2 Notes
  11. 11.  Nominal GDP is GDP measured in current prices - GDP unadjusted for inflation or deflation of prices.  Uses current year’s prices Real GDP is GDP expressed in constant, or unchanging, prices - GDP that has been adjusted for inflation/deflation.  Reflects price changes so that you may compare if production increased or if higher prices simply caused a higher nominal GDP. (Remember: GDP measures the goods/service produced in one year.)
  12. 12.  Even though GDP is the primary economic measure, others are also taken GDP is used to determine 5 other economic measures including:  GNP  Depreciation
  13. 13.  GNP is the annual income earned by U. S.-owned firms and U. S. citizens It is calculated by: GDP + income earned outside the U. S. – income earned by foreign firms and citizens inside the U. S. = GNP GNP does not account for depreciation – the loss of the value of capital equipment that results from normal wear and tear  So, GNP – Depreciation = Net National Product (NNP)  NNP is the output made after the adjustment for depreciation
  14. 14.  NNP does not account for another factor that reflects the cost of doing business – taxes So NNP – taxes (sales and exercise) = National Income (NI) We can then figure out how much individuals make that they can then spend, called Personal Income (PI) So PI = Other household income + Money business pays out (SS, Income taxes, etc.) – National Income Then, we look at how much a person actually has to spend after taxes, called Disposable Personal Income (DPI) = Personal income – taxes  Personal Taxes include income, property, estate, etc.
  15. 15. Unit 6, Lesson 3 Notes
  16. 16. (Reading and Discussion)
  17. 17. A business cycle is a period of economic expansion followed by a period of economic contraction These are not minor ups and downs – they are major changes to GDP There are typically 4 phases of a business cycle:  Expansion  Peak  Contraction  Trough
  18. 18.  Expansion is a period of economic growth measured by a rise of in real GDP In this phase the economy as a whole enjoys plentiful jobs and a falling unemployment rate Economic growth is a steady, long-term increase in GDP
  19. 19.  Peakoccurs when GDP stops rising – it has reached the pinnacle of economic expansion
  20. 20.  Contraction occurs after a peak, when the economy enters a period of economic decline marked by falling GDP Other conditions may like unemployment and price may vary Economists have different terms to describe the severity of a contraction:  Recession – exists if real GDP falls for 2 consecutive quarters (6 months) – unemployment normally 6 to 10 months  Depression – exists if a recession is esp. long and severe – high unemployment and low output  Stagflation – exists if real GDP declines (output) and prices rise (inflation)
  21. 21.  When the economy has “bottomed-out” it has reached the trough. This is the lowest point of economic contraction GDP stops falling
  22. 22.  Business investment: When the economy is good, businesses invest in new capital. When economy isn’t so good, businesses stop investing and this creates a drop in the output of other sectors of the economy – can also begin firing workers Interest rates and credit: When interest rates are low, consumers and business are inclined to make purchases. When interest rates are high, they are less likely to spend money, lowering GDP
  23. 23.  Consumer Expectations: When expectations are that we are in a “good” economy, they expect higher wages and available jobs – increase in spending. When expectations are poor, consumers don’t spend money because they expect lay-off and lower incomes – can start a contraction External Shocks: Negative shocks (drought, hurricane, oil supply) can cause increase in prices and a decline in GDP. Positive shocks (good growing season, finding of new oil supply) can increase GDP and decrease prices
  24. 24. Unit 6, Lesson 4 Notes
  25. 25.  The basic measure of a nation’s economic growth rate is the percentage of change of GDP over a given period time GDP must also keep up with population growth in order for it to keep being positive Taking into account population, most economist prefer to rely on real GDP per capita into account  This is the GDP per person in the country
  26. 26.  Real GDP per capita is considered the best measure of a nation’s standard of living If GDP rises faster than population, the standard of living will go up Factorssuch as population, government and foreign trade are taken under consideration.
  27. 27.  Population Growth  If the population grows while the supply of capital remains constant, the amount of capital per worker will shrink.  Leads to lower living standards Government  If a government raises tax rates to pay for a war, households will have less money and people will reduce savings.  This reduces the money available for businesses. Foreign Trade  Trade Deficit- situation where the value of goods a country imports is higher than the value of goods it exports.
  28. 28.  An increase in efficiency gained by producing more output without using more inputs.  New inventions  New ways of performing a task  New scientific knowledge  New methods for organizing production Increased productivity means producing more output with the same amounts of land, labor and capital. This equals higher rates of GDP per capita, and thus higher standards of living!
  29. 29. Unit 6, Lesson 5 Notes
  30. 30.  Economists can measure the strength of the economy at any given time by counting the number of unemployed people There are 4 kinds of unemployment:  Frictional  Seasonal  Structural  Cyclical
  31. 31.  Unemployment always exists, even in a good economy Frictional unemployment occurs when people take time to find a job For example: changing jobs, time to find job after finishing school, etc. In an economy as large as the U. S., economists expect to find a large number of unemployed falling into this category
  32. 32.  Seasonal unemployment occurs when industries slow or shut down for a season or make a seasonal shift in production schedules For example, summer jobs, harvests, etc. Economists expect to see people in this category as well
  33. 33.  When the type of economy shifts from one sector to another, the skills workers need to have a job also changes Workers who lack the necessary skills will lose their jobs – this is structural unemployment There are 5 causes of structural unemployment:  New technology  New resources  Changes in consumer demand  Globalization  Lack of education
  34. 34.  Unemployment that rises when the economy is down and falls when the economy is good is called cyclical unemployment For example – Great Depression (1 out of 4 unemployed) and today’s recession (10% unemployment)
  35. 35.  The amount of unemployment in the nation is an important clue to the nation’s health Each month, the Bureau of Labor and Statistics polls a portion of the population that tracks unemployment They compute the unemployment rate: percentage of nation’s labor force that is unemployed The unemployment rate is a national average and doesn’t take into account regional or local differences
  36. 36.  0% unemployment rate is not possible in a market economy – 4-6% is normal Full employment can occur if there is no cyclical unemployment