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Economy
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structure of economic activity in a locality, region, country, countries, or the world
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Gross Domestic Product (GDP)
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measures market value of all final goods and services produced in a country during a given period; used to rack/compare economies
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What does GDP include and exclude?
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includes: production carried out by foreign firms in the U.S. (money is circulated in the U.S.)
excludes: foreign production by the U.S.
excludes: foreign production by the U.S.
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National Income Accounts
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-organize huge quantities of data collected from sources across the U.S.
-track the value of FINAL goods and services
-track the value of FINAL goods and services
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Double Counting
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-counting an item's value more than once in the calculation of GDP
-is not allowed!!
-is not allowed!!
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Intermediate Goods and Services
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-purchased for additional processing and resale
-not included in GDP
-ex: price of a used car is not included in GDP
-not included in GDP
-ex: price of a used car is not included in GDP
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Calculating GDP
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can be measured by total spending or total income
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GDP Based on Expenditure Approach
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-add up the money SPENT on all final goods and services produced in the economy
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Consumption
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-household purchases of final goods and services
-makes up 70% of all spending in U.S.
-makes up 70% of all spending in U.S.
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Investment
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-spending on new capitals and other additions to inventories
-invest in physical capital (buildings and machinery)
-15% of all spending in U.S.
-invest in physical capital (buildings and machinery)
-15% of all spending in U.S.
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Government Purchases
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-spending by all levels of government for goods and services
-makes up 19% of spending in U.S.
-excludes welfare programs
-makes up 19% of spending in U.S.
-excludes welfare programs
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Net Exports
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-the value of a country's exports minus imports
-negative net export = more imports than exports
-negative net export = more imports than exports
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Aggregate Expidenture
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sum of consumption, investment, government purchases, and net exports (exports - imports)
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GDP Based on Income Approach
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-add up the money MADE as a result of production
1) value of the product when it's sold
2) calculate the value added at each stage of production (revenue - intermediate goods)
-the sum of value added for all final goods and services = GDP
1) value of the product when it's sold
2) calculate the value added at each stage of production (revenue - intermediate goods)
-the sum of value added for all final goods and services = GDP
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Aggregate Income
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sum of all income earned by resource suppliers
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What GDP Misses
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household production, underground economy, leisure, quality, variety, and deprecation
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Household Production
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-childcare, meal preparation, house cleaning, home repair, etc.
-more household production = lower GDP
-U.S. has little household production = higher GDP
-more household production = lower GDP
-U.S. has little household production = higher GDP
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Underground Economy
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-economic activity that goes unreported
-illegal or want to evade taxes
-illegal or want to evade taxes
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Leisure, Quality, and Variety
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-inaccurate picture of standard of living
-quality and improvements of goods is not captured
-can't use GDP as a basis on whether or not citizens are happy
-quality and improvements of goods is not captured
-can't use GDP as a basis on whether or not citizens are happy
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Depreciation
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-value of the capital stock that is used up or becomes obsolete in production GDP during the year
-GDP is an overestimate because it excludes depreciation
-GDP is an overestimate because it excludes depreciation
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Net Domestic Product
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GDP - depreciation
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Net Investment
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Gross investment - depreciation
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GDP Does Not Reflect All Costs
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-excludes negative externalities (costs that fall on those not involved in the transaction i.e. environment)
-large GDP = large negative externalities
-large GDP = large negative externalities
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Green GDP
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reflects the impact of production on air pollution, water, and loss of other natural resources
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Adjust GDP for Price Changes
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-GDP measures the value of output in current dollars
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Nominal GDP
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-output based on prices at the time of transaction
-distorts true picture of economy due to inflation
-change in GDP could be due solely to inflation, not actual price change
-distorts true picture of economy due to inflation
-change in GDP could be due solely to inflation, not actual price change
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Real GDP
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-output measure in dollars of constant purchasing power
-adjusted to exclude inflation
-adjusted to exclude inflation
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Price Indexes/Index #
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-compares the value of something in a particular year to base year
-price in a particular year / price in base year x100
-price in a particular year / price in base year x100
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Base Year
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point of reference that prices are compared to
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Consumer Price Index (CPI)
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-measures changes over time in cost of buying a "market basket" of goods and services
-total cost in current year / total cost in base year x100
-total cost in current year / total cost in base year x100
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GDP Price Index
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-includes all goods and services produced
-nominal GDP / real GDP x100
-nominal GDP / real GDP x100
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Business Cycle
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reflects the rise and fall of economic activity relative to the long-term growth trend of the economy
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Recession
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decline in total production lasting 2 consecutive quarters
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Depression
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-sharp reduction in nation's total production and employment
-severe recession
-lasts 1 year
-severe recession
-lasts 1 year
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Long Term Growth
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-look at economy to see if it has grown in the long-run
1) increase in the amount and quality of resources
2) better technology
3) improvements in rules of the game
1) increase in the amount and quality of resources
2) better technology
3) improvements in rules of the game
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Expansion
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when the economy's total output increases
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History of U.S. Business Cycle
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-33 business cycles between 1854 - 2011
-expansions last 5x longer than recessions
-expansions last 5x longer than recessions
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Recessions and Expansions Have Different Impacts on States
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-recessions hurt regions that produce durable goods and home construction
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Peak
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-the most expansion before economy starts to recede
-determined after they happen
-determined after they happen
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Trough
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-most recession before economy starts to expand
-determined after they happen
-determined after they happen
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Business Cycles Around the Globe
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-economies are interrelated/follow similar cycles
-bad because they make each other worse
-bad because they make each other worse
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Leading Indicators
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-measures that predict or lead to recessions or expansions
-10 of them
-ex: stock market, manufacturing activity, inventory levels, retail sales, housing market
-10 of them
-ex: stock market, manufacturing activity, inventory levels, retail sales, housing market
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Coincident Indicators
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-measures that reflect peaks and troughs as they happen
-ex: personal income, personal employment, total production
-4 of them
-ex: personal income, personal employment, total production
-4 of them
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Lagging Indicators
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-measures what already happened - follow changes in overall economic activity
-ex: interest rates, amount of loans, unemployment rates
-7 of them
-ex: interest rates, amount of loans, unemployment rates
-7 of them
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Index of Leading, Coincident, and Lagging Indicators
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-closely followed measure of economic activities
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Aggregate Output
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composite measure of all final goods and services produced in an economy during a given period; REAL GDP
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Aggregate Demand
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-relationship between average price of aggregate output and quantity of aggregate output demanded
-sum of demands of households, firms, government, and the world
-sum of demands of households, firms, government, and the world
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Price Level
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-measure reflecting the prices of all goods and services in the economy relative to prices in a base year
-price level = index number
-price level = index number
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Aggregate Demand Curve
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-curve representing the relationship between price level and real GDP demanded
-inverse relationship
-households are richer as price level decreases -> quantity demanded increases
-inverse relationship
-households are richer as price level decreases -> quantity demanded increases
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Aggregate Supply Curve
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-curve representing the relationship between price level and real GDP supplies per period
-how much U.S. producers are willing and able to supply at each price level
-positive relationship
-firms expand output when their income is larger than cost of production
-how much U.S. producers are willing and able to supply at each price level
-positive relationship
-firms expand output when their income is larger than cost of production
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Equilibrium
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-intersection of Aggregate supply and demand
-high real GDP = more goods and services available, more jobs available
-high real GDP = more goods and services available, more jobs available
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Real GDP and Prices Since 1929
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-substantial growth (3-4% increase per year)
-employment, education, technology, and capital all increased or improved
-employment, education, technology, and capital all increased or improved
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Real GDP per Capita
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-how much economy produces on average per resident
-real GDP / total population
-real GDP / total population
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