Gross Domestic Product (GDP) and Growth

Gross Domestic Product (GDP) and Growth

Chapter 12Chapter 12

National Income and Product Accounts

National Income and Product Accounts

National income accountingA system that collects macroeconomic

statistics on production, income, investment and savings

Department of CommerceBegan with Great Depression (1929)

Samuel KuznetsExpanded with WWII

National income accountingA system that collects macroeconomic

statistics on production, income, investment and savings

Department of CommerceBegan with Great Depression (1929)

Samuel KuznetsExpanded with WWII

Gross Domestic Product (GDP)

Gross Domestic Product (GDP)

The dollar value of all final goods and services produced within a country’s borders in a given yearDollar value: selling price of g/sFinal g/s: sold to consumers (not

intermediary goods or services)Within a country: geographic area,

even if foreign owned

The dollar value of all final goods and services produced within a country’s borders in a given yearDollar value: selling price of g/sFinal g/s: sold to consumers (not

intermediary goods or services)Within a country: geographic area,

even if foreign owned

Two ApproachesTwo Approaches

Expenditure or Output - ExpenditureConsumer g/s ( C )

Durable + nondurableBusiness g/s (I)Government g/s (G)Exports - imports (Ex - Im)

IncomeRentInterestWages

Expenditure or Output - ExpenditureConsumer g/s ( C )

Durable + nondurableBusiness g/s (I)Government g/s (G)Exports - imports (Ex - Im)

IncomeRentInterestWages

Circular Flow of Output and Income

Circular Flow of Output and Income

Output = ExpenditureAggregate Output = Aggregate

ExpenditureAO = AE

Output = ExpenditureAggregate Output = Aggregate

ExpenditureAO = AE

Nominal v. Real GDPNominal v. Real GDP

Nominal GDP: in current dollarsReal GDP: correct for

inflation/deflation in prices

Nominal GDP: in current dollarsReal GDP: correct for

inflation/deflation in prices

Limits of GDPLimits of GDP

Non-market activities not countedHouse work

Underground economyBlack marketIllegal activitiesUnder the table paymentsbarter

Negative externalitiesQuality of life

Non-market activities not countedHouse work

Underground economyBlack marketIllegal activitiesUnder the table paymentsbarter

Negative externalitiesQuality of life

Influences on GDPInfluences on GDP

AS = AD - equilibrium = Real GDPAggregate Supply = AS

GDP increases = AS increasesGDP decreases = AS decreasesPrice level increase AS decreasesPrice level decreases AS increases

Aggregate Demand = ADPrice level decreases = AD increasesPrices level increases = AD decreases

AS = AD - equilibrium = Real GDPAggregate Supply = AS

GDP increases = AS increasesGDP decreases = AS decreasesPrice level increase AS decreasesPrice level decreases AS increases

Aggregate Demand = ADPrice level decreases = AD increasesPrices level increases = AD decreases

AD/ASAD/AS

AS Aggregate Supply

AD Aggregate Demand

Real GDP or Aggregate Output (AO)

Price Level

Business CycleBusiness Cycle

PhasesExpansion

upswing

PeakContractionTrough

RecessionDepressionstagflationSlowdown / down turn

PhasesExpansion

upswing

PeakContractionTrough

RecessionDepressionstagflationSlowdown / down turn

Business Cycle GraphBusiness Cycle Graph

What keeps the Business Cycle Changing?

What keeps the Business Cycle Changing?

Business investmentInterest ratesConsumer spending - expectationsExternal shocksCreative destruction (Joseph

Schumpater)

Business investmentInterest ratesConsumer spending - expectationsExternal shocksCreative destruction (Joseph

Schumpater)

Forecasting Changes in the Business Cycle

Forecasting Changes in the Business Cycle

Government watches and responds to changesFiscal policyMonetary policyLimits degree of flexuations

Leading indicators (variables)UnemploymentInventory changesStock market Confidence indexesInterest rates

Government watches and responds to changesFiscal policyMonetary policyLimits degree of flexuations

Leading indicators (variables)UnemploymentInventory changesStock market Confidence indexesInterest rates

Economic GrowthEconomic Growth

Increased productivity that allows each generation to be better off then the previous generationNominal v. real

Increased productivity that allows each generation to be better off then the previous generationNominal v. real

Measuring Economic Growth

Measuring Economic Growth

GDP / population = per capita GDPQuality of life

EnvironmentFamily timenutrition

GDP / population = per capita GDPQuality of life

EnvironmentFamily timenutrition

Economic Growth & Productivity

Economic Growth & Productivity

Capital deepening: increasing the amount of capital per workerHuman capitalPhysical capitalSavings

Capital deepening: increasing the amount of capital per workerHuman capitalPhysical capitalSavings

Saving & InvestmentSaving & Investment

Saving: income not consumed is saved (Y - C = Saving)

Saving rate

Saving: income not consumed is saved (Y - C = Saving)

Saving rate

Population, Government, and Trade

Population, Government, and Trade

Population growthTechnology

Innovationinvention

GovernmentTaxes = public savings

TradeExports = increases aggregate demandImports = increases aggregate supply

Population growthTechnology

Innovationinvention

GovernmentTaxes = public savings

TradeExports = increases aggregate demandImports = increases aggregate supply

TechnologyTechnology

Scientific researchInnovationScale of the marketEducation and experienceNatural resources

Scientific researchInnovationScale of the marketEducation and experienceNatural resources