Gross Domestic Product COACH SIMS AP MACROECONOMICS GROSS

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Gross Domestic Product COACH SIMS AP MACROECONOMICS

Gross Domestic Product COACH SIMS AP MACROECONOMICS

GROSS DOMESTIC PRODUCT (GDP) � GDP is the market value of all final goods

GROSS DOMESTIC PRODUCT (GDP) � GDP is the market value of all final goods and services produced within a nation in a year. � GDP measures Aggregate Spending, Income and Output. � Just to put a number to it, in a press release from the BEA, current dollar GDP = $17. 555 trillion (q 3 2014) � How accurate do you think that is?

COUNTED OR NOT COUNTED? � GDP counts all final, domestic production for which there

COUNTED OR NOT COUNTED? � GDP counts all final, domestic production for which there is a market transaction in that year. � Used and intermediate goods are not counted in order to avoid double-counting. � Non-market production is not counted. � Underground or ‘black market’ activity is not counted.

COUNTED OR NOT COUNTED? � Excluded �Financial �Public transactions transfer payments � Welfare, �Private

COUNTED OR NOT COUNTED? � Excluded �Financial �Public transactions transfer payments � Welfare, �Private transfer payments � Giving �Stock social security, etc. children money for Christmas market transactions � Buying or selling stock

COUNTED OR NOT COUNTED? � Which of the following are counted or not counted

COUNTED OR NOT COUNTED? � Which of the following are counted or not counted in U. S. GDP and why? � New U. S. manufactured Goodyear tire sold to the General Motors Corporation � New U. S. manufactured Goodyear tire sold to Coach Sims � Child care services provided by my daughter for the neighbor’s kid � A new Airbus A 380 (made up #) � A new Boeing 787 � New Tundra pick-up truck manufactured in San Antonio by Japanese firm Toyota.

AGGREGATE SPENDING � GDP �C = C + IG + XN = Consumption �

AGGREGATE SPENDING � GDP �C = C + IG + XN = Consumption � IG = Gross Private Investment � G = Government Spending � XN= Net Exports = Exports (X) – Imports (M)

CONSUMPTION � Consumer spending on � Durable goods (cars, appliances…) � Non-durable goods (food,

CONSUMPTION � Consumer spending on � Durable goods (cars, appliances…) � Non-durable goods (food, clothing…) � Services (plumbing, college…) � Consumer spending is the largest component of U. S. GDP. (67%) � (news always hypes G and Xn, but those only make up about 20%

GROSS PRIVATE INVESTMENT � Spending in order to increase future output or productivity �

GROSS PRIVATE INVESTMENT � Spending in order to increase future output or productivity � Business spending on capital � New construction � Change in unsold inventories

GOVERNMENT SPENDING � All levels of government spending on final goods and services and

GOVERNMENT SPENDING � All levels of government spending on final goods and services and infrastructure count toward GDP. � Government transfer payments do not count toward GDP

NET EXPORTS � Exports �X – Imports –M � Exports create a flow of

NET EXPORTS � Exports �X – Imports –M � Exports create a flow of money to the United States in exchange for domestic production. � Imports create a flow of money away from the United States in exchange foreign production.

AGGREGATE INCOME � GDP measures spending and income. � Income = r + w

AGGREGATE INCOME � GDP measures spending and income. � Income = r + w + i + p = factor payments � r = rent (payment for natural resources) � w = wages (payment for labor) � i = interest (payment for capital) � p = profits (payment for entrepreneurship)

NOMINAL V. REAL GDP � Nominal GDP is current GDP measured at current market

NOMINAL V. REAL GDP � Nominal GDP is current GDP measured at current market prices � Nominal GDP may overstate the value of production because of the effects of inflation � Real GDP is current GDP measured with a fixed dollar � Real GDP holds the value of the dollar constant and is useful for making year to year comparisons � Real GDP is the IMPORTANT ONE!!!

CHANGES IN GDP � GDP is a measure of a nation’s prosperity and economic

CHANGES IN GDP � GDP is a measure of a nation’s prosperity and economic growth � GDP per capita provides a better measure of individual well-being than GDP

THE BUSINESS CYCLE � The United States’ GDP is not constant from year to

THE BUSINESS CYCLE � The United States’ GDP is not constant from year to year. � Instead, the GDP grows most years and then shrinks in some years. � The ups and downs in GDP over time is referred to as the business cycle.

THE BUSINESS CYCLE ILLUSTRATED:

THE BUSINESS CYCLE ILLUSTRATED:

BRIEF SIDE NOTES � Notice the graph said “growth trend” � Book also says

BRIEF SIDE NOTES � Notice the graph said “growth trend” � Book also says “growth” � Current terminology is “secular trend” � For future reference, if it comes up, use secular � Expansion to count � Why? and contraction takes 2 quarters

THE BUSINESS CYCLE ILLUSTRATED: � Peak � temporary maximum in Real GDP. At this

THE BUSINESS CYCLE ILLUSTRATED: � Peak � temporary maximum in Real GDP. At this point the unemployment rate (u%) is probably below the natural rate of unemployment, and the inflation rate (π%) is probably increasing. � Recession � The contractionary phase of the business cycle. A period of decline in Real GDP accompanied by an increase in u%. To be classified as a recession, the economic decline must be at least 6 months long.

THE BUSINESS CYCLE ILLUSTRATED: � Trough �The bottom of the business cycle. The u%

THE BUSINESS CYCLE ILLUSTRATED: � Trough �The bottom of the business cycle. The u% is probably high and π% is probably low. � Recovery �The phase of the business cycle where the economy is returning to full employment.

THE BUSINESS CYCLE ILLUSTRATED: � Important note � The various phases of the business

THE BUSINESS CYCLE ILLUSTRATED: � Important note � The various phases of the business cycle last for different amounts of time. � In recent history, expansions have lasted years longer than have recessions. � Average cycle= 5 -7 years � Average recession = 15 months � The Great Depression is the most notable example of a long recession/trough

THE BUSINESS CYCLE ILLUSTRATED: � Causes Irregularity of Investment � Changes in productivity �

THE BUSINESS CYCLE ILLUSTRATED: � Causes Irregularity of Investment � Changes in productivity � Changes in total spending (aggregate demand) � Durable goods manufacturing is most susceptible to the effects of the business cycle � Business cycle has become less severe because of technological advancements in supply-chain management and structural changes in U. S. economy. �

UNEMPLOYMENT � Population � Number � Labor of people in a country force �

UNEMPLOYMENT � Population � Number � Labor of people in a country force � Number of people in a country that are classified as either employed or unemployed � Labor Force Participation Rate �% of working age population in the labor force (U. S. is approx 66%) � Employed � People 16 years and older that have a job. � It doesn’t matter if it’s part-time or full-time, as long as they work at least 1 hour every 2 weeks

UNEMPLOYMENT � Unemployed � People 16 years and older that don’t have a job,

UNEMPLOYMENT � Unemployed � People 16 years and older that don’t have a job, but have actively searched for a job in the last 2 weeks � Unemployment rate = # of unemployed / # of people in labor force � Not in Labor Force � Kids, military personnel, retired people, stay at home Moms and Dads, full-time students, your 40 year old uncle who sleeps on the couch all day, most of the homeless.

CALCULATIONS � Labor force participation rate � Population 100 � Employed 60 � Unemployed

CALCULATIONS � Labor force participation rate � Population 100 � Employed 60 � Unemployed 20 � Not in the labor force 20 � Labor force participation rate is 80% � Unemployment rate is 33%

TYPES OF UNEMPLOYMENT � Frictional � � Structural � � Associated with lack of

TYPES OF UNEMPLOYMENT � Frictional � � Structural � � Associated with lack of skills or declining industry (ex. High school dropouts, type-writer repairmen). Think “Creative Destruction” Cyclical � � “between jobs”, voluntary, good for individuals and society Associated with downturns in business cycle. Bad for society and individuals. Seasonal � Mall Santas, NRH 2 O Life-guards, Ride operators at Six Flags, Golf-pros in Alaska

FULL EMPLOYMENT � Occurs when there is no cyclical unemployment present in the economy

FULL EMPLOYMENT � Occurs when there is no cyclical unemployment present in the economy � Associate with the Natural Rate of Unemployment (NRU). � The level of unemployment experienced when the economy is producing at its full potential. � The United States’ NRU is approx. 3%-5% � Associate Full Employment (FE) with the PPC, the long-run aggregate supply (LRAS) and the long-run Phillips curve (LRPC) (IMPORTANT!***)

WHY UNEMPLOYMENT IS BAD � Okun’s Law- Every 1% increase in the u% causes

WHY UNEMPLOYMENT IS BAD � Okun’s Law- Every 1% increase in the u% causes a 2% decline in Real GDP. � The burden of unemployment is not equally shared in society. � It causes social unrest and is hard on individuals and families.

THE MISERY INDEX �Add the unemployment percent to the inflation percent. �How miserable are

THE MISERY INDEX �Add the unemployment percent to the inflation percent. �How miserable are we?