Chapter 12: GDP and Growth

PART I: THE GDP

Welcome to the world of Macroeconomic

s!

Examine the economy of the nation from quarter to quarter

To measure growth

To formulate policies

THE BIG FOUR:1.Gross Domestic Product (GDP)

2.Consumer Price Index (CPI)

3.Unemployment4.Leading Economic Indicators

PEAK

CONTRACTION

TROUGH

EXPANSION

• Leading Indicators:• Predict the future of the Business Cycle

• Coincident Indicators:• Parallel Indicators (happening right now!)

• Lagging Indicators:• Tell the past

Gross: Total Domestic: Within our country Product: Goods & Services

The total market value of all final goods & services produced within a country’s borders

during a Fiscal Year.

All durable goods (stoves; cars; etc)

All nondurable goods (pencils; Taco Bell; etc)

All final sales (the whole car; not the tires)

All exports sold abroad Spending by foreigners in the USA

Intermediate Goods (the tires on the car you bought)

Used/Second Hand Goods Stocks/Bonds Transfer Payments (Welfare; Food Stamps; SS)

Imports Nonmarket Activity Illegal Goods Bartered Goods

The “Expenditures Approach:”

GDP=C + Ig + G + Xn

•Durable goods (autos/stoves)•Non-durable goods (food/gas)•Services (doctors/mechanics)

Ex: You buy a movie ticket. Ex: You buy a new refrigerator.

Ex: You buy a coffee on your way to school.

Has to do with BUSINESS• Construction

• New machinery, equipment• Current inventories (even if not

sold!)

• Ex: Starbucks buys new espresso machines

• Ex: Wal-Mart repaves their parking lot

Local/State/Federal Purchases

Ex: Lawrence builds an addition on LHS

Ex: NJ builds a new bridge for Rt. 195

Ex: The USA purchases more fighter jets

Xn=Net Exports

Exports-Imports=Net Exports

EX: A German man purchases a US-made Ford truck

EX: You purchase an airline ticket on Air France (import)

May underestimate the GDP Does not measure economic “welfare”

Doesn’t take inflation into account

“Double counting”

REAL NOMINAL Expresses the

actual # of $ being spent regardless of how many items each dollar can purchase

Expressed in constant dollars

Expresses the value of dollars in terms of what they can purchase rather than the actual # of $ spent

Expressed in current dollars

Q: How do we accurately measure the GDP from year to year if the value of the dollar keeps changing?

A: Current Dollars do not take inflation into account (year to year)

Comparisons of the GDP can be misleading if we use current dollars

GDP figures that are adjusted mathematically for inflation have current dollars

Each year’s GDP is converted to dollars before they are compared another year

Per Capita (per person) GDP used to compare the output of 2 or more nations in order to estimate standard of living

A nation’s GDP is divided by all of its inhabitants to calculate the Per Capita GDP…$43,600 in 2006

Measuring the Economy by Looking at Price Change

What is it and how many kinds are there? Inflation: When price, in general,

increase

This means that the purchasing value of the dollar decreases

50% IR means that the purchasing value of the dollar is cut in half

PRODUCER PRICE INDEX (PPI)

CONSUMER PRICE INDEX (CPI)

Measures pricespaid by the

consumer

Measure a “market basket” of goods from year to year

Increase in cost of raw materials and labor force sellers/producers to raise price of goods/services

Rise in key commodities often signal rise in inflation

Wage-price Spiral: (a real danger); wage and price controls are sometimes used to combat cost-push inflation

Debtors: The money they pay back is worth less than the money they borrowed 25 years ago

Savings Account – if the cost of living is higher than your rate of interest

Retired Persons and People on Fixed Incomes (with no cola)

Lenders

STAGNATION + INFLATION Worst of all possible economic

worlds 0% economic growth High Inflation Double Digit Inflation Double Digit Unemployment Double Digit Interest Rates 1970’s Oil Crisis

Another measure of the economic health of the country

Goal: 5% Unemployment 5% Unemployment = Full Employment??

Why???- Seasonal Unemployment- Frictional Unemployment- Structural Unemployment- Cyclical Unemployment (Only serious

one)

Over 16 an looking for a job during the last month

Measured by the BLS (Dept of Labor Statistics) which scientifically selects 60,000 people to ask

Not unemployed,

but will begetting a job

soon

A “mismatch” between worker and “skills needed”

or location

Requires new training

More workers are being laid-off??

Signals a downturn in the economy

Underemployment often leads to “discouraged worker” syndrome

Will unemployment #s be inflated or deflated?

Deflated – there are really more people unemployed

Bartering Services Under the Counter

Illegal Gambling Prostitution Drug Dealing

Underground workers are employed…just not officially

Official unemployment statistics may actually be inflated