Transcript contract - frickman

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Gross Domestic Product Basics: GDP
The measures were created in the 1930’s.
Up until the 1990’s GNP was the main federal measure of the economy.
Key terms to know:
“Gross” = Totals before adjustments (inflation’s effect)
“National Product” = Production owned by US companies
“Domestic Product” = Production in the US, even if foreign owned
GDP is officially measured in “quarters” of years:
Quarter 1 = Jan/Feb/Mar
Quarter 2 = Apr/May/June
Quarter 3 = July/Aug/Sep
Quarter 4 = Oct/Nov/Dec
The main form used is the “Expenditures” Approach: C + Ig + G + Xn
C = Personal Consumption in the economy: (67% of the Economy !!!)
The purchases of finished goods and services (but not houses)
Ig = Gross Private Business Investment monies:
Factory equipment maintenance,
New factory equipment,
Construction of housing,
Unsold inventory of products built in a year
G = Government Spending:
Government purchases of products and services
Xn = Net Foreign Factor of Trade: Exports minus Imports
Exports = Dollars in, Imports = Dollars out
(Post WWII, Xn has usually been a negative number: Trade Deficit)
Items that DO NOT Count in GDP:
Used goods/Second-Hand goods
Gifts or “Transfers” (Private or
Public) (note COLAs)
Stock/Equity/Securities purchases
(places like the NYSE, NASDAQ)
Unreported business activities
conducted in “cash” (unreported tips...)
Illegal activities (underground
markets)
Financial transactions between
banks and businesses
“Intermediate goods” (no double
counting) (see “value added”)
“Non market” activities like
volunteer and family work
Business Cycle
Is the economy getting better or
worse?
Micro vs. Macro
• Microeconomics: The study of personal, or
small finances.
– Individuals, families or businesses
• Macroeconomics: The study of economic
systems on a large scale
– National or Global economies
Gross Domestic Product
• Def. The total value, in dollars, of all final
goods and services produced within the
nation each year
• Abbreviated as the GDP
What does the GDP tell us?
• If the GDP is larger than last year the
economy is expanding (getting bigger)
• If the GDP is smaller, the economy is
shrinking (getting smaller)
Business Cycle
• The Business Cycle allows people to
understand the direction the economy
(GDP) is going (growing or shrinking) and
plan accordingly.
• The economy follows the Business Cycle
regularly.
Phases of the Business Cycle
Expansion (Growing)
Peak (Top)
Contraction (Shrinking)
Trough (Bottom)
Business Cycle
Peak
Peak
Trough
Expansion
• During a period of expansion:
– Wages increase
– Low unemployment
– People are optimistic and spending money
– High demand for goods
– Businesses start
– Easy to get a bank loan
– Businesses make profits and stock prices
increase
Peak
• When the economic cycle peaks:
– The economy stops growing (reached the top)
– GDP reaches maximum
– Businesses can’t produce any more or hire
more people
– Cycle begins to contract
Contraction
• During a period of contraction:
– Businesses cut back production and layoff
people
– Unemployment increases
– Number of jobs decline
– People are pessimistic (negative) and stop
spending money
– Banks stop lending money
Trough
• When the economic cycle reaches a
trough:
– Economy “bottoms-out” (reaches lowest point)
– High unemployment and low spending
– Stock prices drop
But, when we hit bottom, no where to go but
up!
UNLESS….
Recession/Depression
• A prolonged contraction is called a
recession (contraction for over 6 months)
• A recession of more than one year is
called a depression
• Who decides when we’re in a recession?
– National Bureau of Economic Research
traditionally declares recessions
– Private research organization, not a federal
agency
• Recession dates from peak of business
Post-World War II Recessions*
*The February 1945–October 1945 recession began before the war ended in August 1945.
Note: These recessions were of varying duration and severity.
Another Look at Expansions
and Recessions
Can you find a pattern? Neither can economists! That’s why
recessions are hard to predict.
What keeps the Business Cycle
Going?
•
4 variables cause changes in the
Business Cycle:
1. Business Investment
When the economy is expanding, sales and
profit keep rising, so companies invest in
new plants and equipment, creating new
jobs and more expansion. In contraction, the
opposite is true
What Keeps the Business Cycle
Going?
2. Interest Rates and Credit
Low interest rates, companies make new
investments, adding jobs. When interest
rates climb, investment dries up and less job
growth
3. Consumer Expectations
Forecasts of an expanding economy fuels more
spending, while fear of a recession
decreases consumer spending
What keeps the Business Cycle
Going?
4. External Shocks
External Shocks, such as disruptions of the oil
supply, wars, or natural disasters greatly
influence the output of the economy
Ex. 1992-2000 was the longest period of
expansion in U.S. history. Early in 2001,
signs of contraction appeared, though the
Bush administration denied it. The Sept. 11th
2001 terrorist attacks quickly caused the
business cycle to shift into a contraction.
Business Cycle Theories
• Endogenous theories:
– Innovation theory: innovation leads to saturation.
– Psychological theory: alternating optimism and
pessimism
– Inventory cycle theory: inventory and demand not
in sync
– Monetary theory: changes in money supply by
Federal Reserve
– Underconsumption theory: or overproduction
Business Cycle Theories
• Exogenous theories:
– The external demand shock theory: effect of
foreign economies
– War theory: war stimulates economy; peace
leads to recession
– The price shock theory: fluctuations in oil
prices
Who Cares?????
• Why should you care about the business
cycle and economy?
• Lots of reasons!
“Don’t quit that job!”
• If the economy is going into a contraction,
jobs will become more scarce. If you quit,
you may not find another job!
• But, if the economy is in a period of
expansion, jobs are readily available. It
may be a good time to switch careers.
“Should I make a big purchase?”
• Only if you know that you won’t lose your
job in a contraction. So, buy your house
during an expansion.
HOWEVER,
• When the economy starts to slow down
(contraction), interest rates will decrease.
Wait to buy a house until the rates drop to
a low point, if you are sure you won’t lose
your job.