Transcript Introduction to Economics: Social Issues and Economic

Introduction to
Economics:
Social Issues
and Economic
Thinking
Wendy A . Stock
CHAPTER 6
MEASURING ECONOMIC
ACTIVITY
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Po w e r Po i n t
P r e p a r e d by
Z. Pan
AFTER STUDYING THIS CHAPTER, YOU
SHOULD BE ABLE TO:
 Explain the circular
flow model
 Define gross
domestic product
 Describe differences
in GDP across
countries and time
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 Describe what
business cycles are
and how they occur
 Illustrate the
workings of the
aggregate
demand/aggregate
supply model
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THE CIRCULAR FLOW MODEL
The Circular Flow Model shows the
movement of income and spending between
households and businesses in the economy.
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THE CIRCULAR FLOW MODEL WITH
GOVERNMENT AND FOREIGN SECTOR
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FOREIGN SECTOR
 Exports are the sale of goods and services to
foreign buyers.
 Imports are the purchases of goods and
services from foreign producers.
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GROSS DOMESTIC PRODUCT
 Gross Domestic Product (GDP) measures the
dollar value of all final goods and services
produced in an economy in a given time period.
 “dollar value”
 “final goods”
 “in an economy”
 “in a given time period”
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MEASURING GDP
 The income approach uses incomes earned by
producers to measure GDP.
The value-added approach uses total sales
minus the value of inputs to measure GDP.
The expenditures approach uses total
expenditures on final goods and services to
measure GDP.
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MEASURING GDP: AN EXAMPLE
 Income approach GDP = farmer’s income + miller’s income + baker’s
income
GDP = $2 + $3 + $4 = $9 per period
 Value-added GDP = (farmer’s sale revenue - farmer’s input cost) +
(miller’s revenue - miller’s cost) + (baker’s revenue - baker’s cost)
GDP = ($2 - $0) + ($5 - $2) + ($9 - $5) = $9 per period
 The expenditures approach GDP = total expenditures on final goods and
ser vice = $9
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FOUR COMPONENTS OF EXPENDITURE




Consumption Expenditure (C) by households
Private Investment (I) by businesses
Government Expenditure (G) by government
Net Exports (X – M)
GDP = C + I + G + (X – M)
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U.S. GROSS DOMESTIC PRODUCT IN 2011
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FOUR COMPONENTS OF EXPENDITURE
Consumption (C) is household spending on final
goods and services.
Purchases of items like TVs, groceries, restaurant
meals, and doctor and lawyer services are
counted in consumption.
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FOUR COMPONENTS OF EXPENDITURE
Private Investment (I) is a measure of business
spending on equipment used in production,
spending on construction, and changes in
business inventories.
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FOUR COMPONENTS OF EXPENDITURE
Government Expenditure (G) includes government
spending on wages for government employees,
government purchases of services, government
purchases of final goods, and government
investment in buildings and other capital.
 Public transfer payments not included ( social
security, debt service, unemployment
insurance, etc.)
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FOUR COMPONENTS OF EXPENDITURE
Net Exports (X – M) is a measure of the
difference between exports and imports.
 Because C, I and G include spending on
imported goods, we subtract off the value of
imports (M) from total expenditure to ensure
that it only includes domestic production.
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U.S. GDP (1929 – 2009)
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INTERNATIONAL GDP COMPARISONS, 2010
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INTERNATIONAL GDP PER CAPITA
COMPARISONS, 2010
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AD/AS MODEL
 Aggregate Demand (AD) is the demand for
all goods and services in an economy, ceteris
paribus.
 Aggregate Supply (AS) is the supply of all
goods and services in an economy, ceteris
paribus.
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AD/AS MODEL
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SHIFTS IN AD AND AS
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FACTORS THAT SHIFT AD CURVE
 Factors that change any of the components
in AD will shift AD curve.
C
I
G
X-M
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FACTORS THAT SHIFT AS CURVE





Prices of inputs
Productivity of inputs
Changes in technology
Cost of financing business activities
Interest rate
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BUSINESS CYCLES
 Business Cycles are recurring expansions
and contractions in the level of aggregate
economic activity.
 Business Cycle Expansions are periods of
increasing economic activity, rising
production, and increasing employment.
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BUSINESS CYCLES
 Business Cycles are recurring expansions
and contractions in the level of aggregate
economic activity.
 Business Cycle Expansions are periods of
increasing economic activity, rising
production, and increasing employment.
 Business Cycle Contractions or Recessions
are periods of decreasing economic activity,
falling production, and falling employment.
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BUSINESS CYCLES
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BUSINESS CYCLES IN AD/AS MODEL
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QUESTIONS/DISCUSSIONS
How will each of the following affect the
GDP and the price level of the U.S. economy?
a) The government drastically cuts its
spending on goods and services.
b) The UK bans all U.S. imports.
c) The United States expands its military
operations after the bombing of Pearl
Harbor in 1941.
d) A large group of oil-producing countries
band together to restrict output and raise
oil prices.
e) The United States bans all imports from
Canada.
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KEY CONCEPTS
• Exports
• Imports
• Gross domestic product
• Aggregate demand
• Aggregate supply
• Price level
• Business cycles
• Business cycle expansions
• Business cycle contractions
• Recessions
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