10/08/13 Economics Journal
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Transcript of 10/08/13 Economics Journal
10/08/13 Economics Journal
Warm-up: Contrast the following with your partner: Aggregate Markets vs. Individual Markets Constant $$ vs. Current $$ Final Goods vs. Intermediate Goods Cycle– Expansionary vs. Contractionary Boom vs. Trough
Formula for Calculating GDP
TAKE QUIZ
SWBAT: Define GDP; explain three methods for calculating GDP; identify transactions that do and do not contribute to U.S. GDP.
IN 2012 U.S. GDP WAS
APPROXIMATELY $15.7 TRILLION!
Gross Domestic Product
Also Known As Aggregate Output or National Income
Gross Domestic Product (GDP) (Y)
GDP: the total value of all final goods and services produced in the economy during a given period (usually a year)
Three ways to measure GDP Measure value of production of final goods &
services (value added) Measure spending on final goods & services Measure factor income
Method #1: Value Added Approach
includes only domestically produced final goods & services
Excludes intermediate goods & services
In essence we are only considering each producer’s value added (the value of a producer’s sales minus the value of its purchases of inputs)
Method #2: Expenditure Approach
Consumer Spending + Investment Spending + Government Spending + Net Exports = GDP
GDP = C + I + G + (X-M)
GDP = C + I + G + NX
Consumer Spending (C)
Approximately 70% of GDP
Tangible goods – food, clothing, cars, etc.
Intangible services – haircuts, doctor visits, concerts, etc.
Investment Spending (I)
Approximately 12% Investment: spending on
capital equipment, inventories, and structures (including purchases of new housing)
Durable goods produced but not sold in the year count as investment spending
Does not include stocks, bonds, mutual funds
Government Purchases (G)
Approximately 21% Local, state, & federal Salaries of gov’t
workers Military,
infrastructure, education
Does not include transfer payments
Net Exports (X-M) (NX)
Value of exports minus the value of imports
Negative for the U.S. – large trade deficit
Approximately -3%
What’s In, What’s Out
Included Not Included
Domestically produced final goods & services including Capital goods New construction Changes to
inventories
Intermediate goods and services
Inputs Used goods Transfer payments Financial assets Foreign-produced goods
& services Purchases of illegal
substances Housework
Method #3: Income Approach Wages earned by labor
Interest earned by those who lend savings to firms and the government
Rent earned by those who lease land or structures to firms
Profit earned by shareholders (the owners of the firm’s physical capital) - dividends
Circular Flow Magic
All three methods (value added, expenditure, income) all come to (roughly) the same figure
Total output = total expenditure = total income
Quiz Time! Determine if each of the following would contribute to U.S. GDP.
A. Coca-Cola builds a new bottling plant in the U.S.B. Delta sells one of its existing airplanes to Korean
Air.C. Ms. Moneybags buys an existing share of Disney
stock.D. A California winery produces a bottle of
Chardonnay and sells it to a customer in Montreal, Canada.
E. An American buys a bottle of French perfume in Tulsa.
F. A book publisher produces too many copies of a new book; the books don’t sell this year, so the publisher adds the surplus books to inventories.
What GDP Tells Us
Size of the economy, aggregate output
But not a good measure of growth over time – unless we account for inflation
To measure aggregate output we need to know real GDP
A Simple Economy
Year Q Apples
P Apples
Q Oranges
P Oranges
Nominal GDP
Real GDP (Year 1 Base)
1 2000 $0.25 1000 $0.50 $1000 $1000
2 2400 $0.30 1200 $0.70 $1560 $1200
3 2200 $0.50 1100 $1.00 $2200 $1100
Nominal GDP: the total value of all final goods and services produced in the economy in a year, calculated with current prices
Real GDP: the total value of all final goods and services produced in the economy in a year, calculated using constant prices
Nominal v. Real GDP in the U.S.
Nominal GDP (trillions of current
dollars)
Real GDP (trillions of 2005 dollars)
2001 $10.3 $11.3
2005 $12.7 $12.6
2009 $14.2 $13.0
Real GDP in the U.S. Since 1945
Changes in Real GDP 2008-2012
GDP Cautions In order to make comparisons between countries
we need to take population into account GDP per capita: GDP divided by the size of the
population Only a very rough estimate of human welfare in a
country Doesn’t include important factors related to
happiness – leisure, volunteerism, housework, natural beauty
GDP increases with spending on divorce, crime, natural disasters
GDP doesn’t measure how a society uses its output