Transcript Gross domestic product phase 3 notes

The BIG Picture
GDP : Gross Domestic
Product
Textbook – pages 216-228
What is GDP?
Total market value of a
nation’s final output of
goods and services
Why do we use GDP?
It helps measure the wellbeing of a country’s
economy
What length of time is
GDP calculated?

1 Year
– 4 business quarters
1st quarter – January to March
 2nd quarter – April to June
 3rd quarter – July to September
 4th quarter – October to December

Calculating GDP
Expenditure Approach
– Total spending for new goods and
services produced in a year.
– Four categories for spending
Consumer Spending
 Business Investments
 Government Spending
 Net Foreign Spending (difference between
exports and imports)

Consumer Spending
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Total spending on all durable goods,
nondurable goods, and services
Toothpicks to Homes
– Nondurable = do not last a long time,
consumed as soon as purchased, ex: food
– Durable = last for a long time, used over
again, ex: cars, homes, appliances

Biggest part of GDP; takes up about
2/3
Business Investments

The physical investment in capital
(imputs) to make business better
– Buying a new factory or office building
– Buying new technologies to improve
research and development
– Buying new tools/machines for production
Government
Spending

GUNS vs. BUTTER
– Guns = military
spending
– Butter = social policy
spending
War on Terror
Net Foreign Exports
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
The difference between exports and
imports
Trade Deficits occur when you import
more than you export
– This will give you a negative number for
Net Exports

US Balance of Trade 1970-2006
GDP is not perfect
…problems with the calculation
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Double Counting
Underground Economy
Inflation
Double Counting
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Occurs when the value of a contributor
is counted more then once into GDP
Buying a used car – the value of that
car should not be added to GDP
because the value of its production
was already counted
Underground Economy

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Unpaid house work
Barter
Black market
Inflation
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Inflation – A rate of increase in the
general price level of all goods and
services
Makes figures appear higher than they
really are
Nominal vs. Real (constant dollar) GDP
– Nominal does not consider inflation
– Real adjusts for inflation
Historical look at US inflation
For the past 20 years, inflation in the US has been less than 5%,
typically falling between 2-3%.
The Business Cycle


Draw the phases of the business cycle
in your notes (pg. 226)
Describe the phases of the cycle
– Expansion
– Peak
– Contraction
– Trough
Expansion
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Economic recovery
People begin spending money and
opening businesses
Demand brings more production
Employment rises
People begin to invest
Peak
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A period of prosperity
People are spending money on both
elastic and inelastic goods
Economy is very productive
Unemployment is relatively low
People are investing
Contraction
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Prosperity begins to wear off – economy
begins to shrink
Production begins to slow
People aren’t buying as much as they
normally do
Unemployment is on the rise
If contractions last long enough they can be
considered recessions and potentially
become depressions
Recession

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Any period of at least 6 months (2
business quarters) in which the
economy does not grow
Characterized by slowing business,
consumption, and investment
Depression
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A severe and prolonged decline in the
level of economic activity
Characterized by falling prices,
business failures, surpluses, and high
unemployment
Trough
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Extreme slowing of the economy
People are not typically spending
money on elastic goods; demand in
general is down
Productivity is at its lowest
Unemployment is higher than normal