Gross Domestic

Product and
Growth
Chapter 12
 What makes a nation
wealthy?
• Rank the countries based on what you perceive makes the
nations wealthy according to the decsriptions.
 Why Measure Growth?
After the Great Depression, economists felt it was important to
measure macroeconomic status to predict and prevent future
economic downturns.
Established NIPA
 NIPA
National Income and Product Accounts
o Collects data on production, income, investment, and savings
o Maintained by the Department of Commerce
o This data is reported and used to influence government policy
 GDP (Gross Domestic
Product)
• Most important measure of wealth

• GDP is the dollar value of all FINAL goods and services

produced within a country’s borders in a given year.
o Final goods are those sold to consumers
o Intermediate goods are those used in the production process (not calculated)
 “Within a Country’s
Borders”
GDP does not include products made by a US company
overseas

GDP does include a car made in the US by Toyota (Japanese

company)
What do you think? (Included in
GDP or no)
A new house?
A used house?
The realtor's fee on the used house?
All the products used to produce the new house? (nails,
shingles, siding etc...)
 What is included...
A new house?...Yes
A used house?...No
The realtor's fee on the used house?...Yes
All the products used to produce the new house (nails,
shingles, siding etc...)?...No (secondary goods)
 Nominal vs. Real GDP
Nominal GDP is GDP measured in current prices
o Does not always measure an increase in output

To measure growth from year to year, economists measure

Real GDP
o Real GDP is measured by calculating GDP with constant price (accounts for inflation).
 Limitations of GDP
Nonmarket Activities
GDP does not measure goods and
services that people make or do
themselves, such as caring for
children, mowing lawns, or cooking
dinner.
The Underground Economy
There is much economic activity
which, although income is
generated, never reported to the
government. Examples include
black market transactions and
"under the table" wages.
Negative Externalities
Unintended economic side effects,
such as pollution, have a monetary
value that is often not reflected in
GDP.
Quality of Life
Although GDP is often used as a
quality of life measurement, there
are factors not covered by it. These
include leisure time, pleasant
surroundings, and personal safety.
 Influences on GDP
Aggregate Supply
o The total amount of goods and services available in an economy at all price levels

Aggregate Demand
o The total amount of goods and services demanded in an economy at all price levels
 Is it Accurate?
Many things to calculate in GDP and much is missed or
overlooked
However, it does provide us with a baseline of stats and over
time, shows important trends
The meausrment may not be accurate but t is constant
 Review
1. Real GDP takes which of the following into account?
(a) changes in supply
(b) changes in prices
(c) changes in demand
(d) changes in aggregate demand

2. Which of the following is reflected in GDP?

(a) The underground economy
(b) Non-market activities
(c) Mr. Klein’s extraordinary teaching at WHS
(d) Negative externalities
Business Cycles
Chapter 12, Section 2
 Business Cycles
• Period of macroeconomic expansion followed by contraction
• Phases of Business Cycles
o Expansion…period of economic growth measured by a rise in real GDP
• Growth being a steady, long term rise in GDP
• Plentiful jobs, falling unemployment
 Phases of Business Cycles (cont.)
• Peak…height of economic expansion
• Contraction…economic decline marked by falling real GDP
• Trough…bottom of contraction
 Contractions with Different
Characteristics
• Recession…real GDP falls for two straight quarters
o Prolonged period of economic contraction
o Usually a rise in unemployment

• Depression…a severe recession

• Stagflation…decline in real GDP, combined with a rise in
price level
 Keeping the Cycle
Typically, a sharp rise or fall in a key indicator sparks a series
of events
4 main indicators
o Business investment
o Interest rates and credit
o Consumer expectations
o External shocks
 Business Investment
Spending by business or non spending will change the cycle
Interest Rates and Credit
Low interest rates will lead to spending
High interest rates will lead to savings
 Consumer Expectations
• Consumers may spend or save
• Like other things, consumer’s choices drive the economy
 External Shocks
Unpredictable and disrupt aggregate supply
o Wars
o Floods
o Natural disasters
o Oil shortage
Can be positive
o Discoveries
o Good weather
 Review
1. A business cycle is
(a) a period of economic expansion followed by a period of contraction.
(b) a period of great economic expansion.
(c) the length of time needed to produce a product.
(d) a period of recession followed by depression and expansion.

2. A recession is
(a) a period of steady economic growth.
(b) a prolonged economic expansion.
(c) an especially long or severe economic contraction.
(d) a prolonged economic contraction.
Economic
Growth
Chapter 12, Section 3
 Economic Growth
A change in GDP over time illustrates growth
For economic growth to occur, it should change with
population
Real GDP per capita measures such growth and the standard
of living
 Quality of Life
GDP measures standard of living but not quality of life
o Pollution
o Stress
o Nutrition

Also does not tell how GDP is distributed

o Poor sections of the country
o Poor percentage of population
 Capital Deepening
• The process of increasing capital per worker
o Goal is to increase productivity
o Savings and investing lead to capital deepening
 Population
Increased population without capital deepening will lower the
standard of living

Increased population without increase in production will lower

the standard of living
 Government
Taxes can increase or decrease capital deepening
o It is dependent upon what the taxes are spent on
 Foreign Trade
• Foreign trade and running a trade deficit can actually be good
in some ways
o If the goods being traded enhance capital deepening
o In the long run…this capital deepening can increase productivity and help to pay back
debt that results from a trade deficit
 Technological Progress
An increase in efficiency gained by producing more
output from more inputs
o Technology
o Realignment
o Knowledge
Technological progress is measured by looking at the
amount of GDP that increases from technology and
not labor
 Review
1. Capital deepening is the process of
(a) increasing consumer spending.
(b) selling off obsolete equipment.
(c) decreasing the amount of capital per worker.
(d) increasing the amount of capital per worker.

2. Taxes and trade deficits can contribute to economic

growth if the money involved is spent on
(a) consumer goods.
(b) investment goods.
(c) additional services.
(d) farming.