Finishing up GDP Real and Nominal AND Economic

Finishing up GDP: Real and Nominal AND Economic Growth

Review: Remember: Macroeconomics is the BIG PICTURE of our nation, or other nations – not individual decisions How do we Measure the Economy? We look at the GDP, the Economic Growth and the Business Cycle THE GDP is the: total market (or dollar) value of all final goods and services produced in a country during a given period of time and DOES NOT INCLUDE: work in homes, criminal activity or underground economy

Is it part of GDP? (more practice) • A parent that stays home to care for a baby – No • Dinner at a restaurant – Yes • Dinner at home – No, but yes on the groceries • A social security check – No • A haircut – Yes, unless you did it yourself • The construction of an office building – Yes • The sale of a ten-year-old house – No • An oil change – Yes, unless you did it yourself • Interest on a CD at your bank – No • A new car – Yes • Tires purchased by Ford to put on a new car – No

How much of GDP is each component? Average Percent of GDP since 2003 Component GDP % of Government 19% Investment 16% Consumption (PCE) 70 % Net Exports GDP -5% 100% Source: Bureau of Economic Analysis

Per Capita GDP Per capita GDP = GDP ÷ population • Average level of income in a nation • Not income distribution

Nominal GDP vs. Real GDP • Nominal GDP – is NOT adjusted for inflation. It is the current production at current prices • Real GDP – is the dollar price of GDP in a base year’s price used to compare changes in GDP from one year to the next and is adjusted for inflation. An increase in real GDP is an increase in economic growth. (we will only deal with the REAL GDP, although you need to know what Nominal GDP is)

Economic Growth

Economic Growth is an increase in the total output of the economy. It occurs when a society acquires new resources or when it learns to produce more by using existing resources.

Historical Record of US Economic Growth

And to compare the US to other countries

BENEFITS OF ECONOMIC GROWTH 1. Economic growth raises a country’s overall standard of living. o. This provides people with goods and time for enjoyable leisure activities.

BENEFITS OF ECONOMIC GROWTH 2. Economic growth enlarges the tax base, or the income and properties that may be taxed. o A larger tax base lets government supply more public services and/or lower taxes.

BENEFITS OF ECONOMIC GROWTH 3. Economic growth creates jobs and economic security for more people.

BENEFITS OF ECONOMIC GROWTH 4. Economic growth can benefit the economies of other countries through increased trade. o A successful growing economy can be a role model for developing nations.

FACTORS OF ECONOMIC GROWTH Economic growth depends on the nature of the factors of production and how well they are used. Factors of Economic Growth include: o natural resources o human capital o capital goods o entrepreneurship 15

FACTORS OF ECONOMIC GROWTH Natural resources are the raw materials a country has that make life and production of goods possible. Natural resources affect economic development. Nations rich in natural resources will use them to produce revenue. 16

FACTORS OF ECONOMIC GROWTH How valued a nation’s natural resources are determines how much revenue they produce and how much foreign investment they attract. 17

FACTORS OF ECONOMIC GROWTH Human capital refers to investments in the welfare and training of workers. An increase in human capital enables an economy to produce more of everything that uses human capital. Providing health care, family benefits, and more training and education are all investments in human capital. 18

FACTORS OF ECONOMIC GROWTH An increase in human capital enables an economy to produce more of everything that uses human capital. The more skills and education workers have, the better they are able to work with mistakes and to learn new jobs as technology changes. More developed nations often invest more in human capital than less-developed nations. 19

FACTORS OF ECONOMIC GROWTH Capital goods are goods used to produce things. The ability to invest in capital goods influences a country’s economic growth. An increase in capital goods enables an economy to produce more of everything that uses these capital goods. 20

FACTORS OF ECONOMIC GROWTH For example, an increase in capital goods can result in more factories, office buildings, tractors, or high-tech medical equipment. Producing more goods for sale in a quicker and more efficient way leads to economic growth and greater profit. 21

FACTORS OF ECONOMIC GROWTH Entrepreneurs are creative, original thinkers who are willing to take risks to create new businesses and products. Entrepreneurs think of new ways to combine natural, human, and capital resources to produce goods and services that they expect to sell for a price high enough to cover production costs. 22

FACTORS OF ECONOMIC GROWTH Entrepreneurs risk their money to produce new goods and services in the hope of making a profit. If a new product or service does not become popular, the entrepreneur may not make a profit. This is the risk he or she takes. Economic growth depends on entrepreneurs willing to take chances and introduce new ideas. 23