• Gross domestic product (GDP) is a measure of the income and expenditures of an economy.
• It is the total value of all final goods and services produced within a nation in a year.
• Output is valued at market prices.
• It records only the value of final goods, not intermediate goods (the value is counted only once).
• It includes goods and services currently produced, not transactions involving goods produced in the past.
• It measures the value of production within the geographic confines of a country.
• It measures the value of production that takes place within a specific interval of time,
usually a year or a quarter (three months).
Counted in GDP:
GDP includes: all finished goods and services produced in the economy and sold legally in markets.
Not Counted in GDP:
GDP excludes:
•Intermediate goods – goods that contribute value to a finished good
•Resold goods – goods that were already counted the year they were produced
•Household Goods that are produced and consumed at home but never enter the marketplace
Disposable Income
• Disposable Income
is the income that household and noncorporate
businesses have left after satisfying all their obligations to the government.
•
It equals personal income minus personal taxes and certain nontax
payments.
•
It equals private consumption spending plus private savings.
Components of GDP
GDP (Y ) is the sum of the following:
Consumption (C)
Investment (I)
Government Purchases (G)
Net Exports (NE) = (exports – imports)
Components of GDP
• Consumption (C):
• The spending by households on goods and services, with the exception of purchases of new housing/by far the largest component of GDP
• Investment (I):
• The spending on capital equipment, inventories, and structures, including new housing.
• Government Purchases (G):
• The spending on goods and services by local, state, and federal governments. • Does not include transfer payments because they are not made in exchange for
currently produced goods or services.
• Net Exports (NE):
Net Exports Net Exports Net Exports Net Exports
----4 %4 %4 %4 %
GDP and Its Components
Nominal GDP (or Current $ GDP) vs. Real GDP (or Constant $ GDP)
• Nominal GDP values the production of goods and services at current prices/.thus it can grow over time because of more production/.higher prices/.or a combination of the two
Recessions are shaded
Business Cycle
the non-periodic fluctuation of economic activity over time
1970
1975
1980
1985
1990
1995
3,000
4,000
5,000
6,000
7,000
Real GDP in billions of 1992 dollars
Measuring the Cost of Living
•
Inflation
is a rise in the average (or general) price level over time
•
It can also be viewed as a reduction in the purchasing power of a nation’s
currency.
•
The
inflation rate
is the percentage change in the price level from the
GDP Deflator
•
The
GDP deflator
is a price index that measures the current level of prices
relative to the level of prices in the base year.
•
It tells us the rise in nominal GDP that is attributable to a rise in prices rather
than a rise in the quantities produced.
The GDP deflator is calculated as follows:
100
GDP
Real
GDP
Nominal
=
deflator
The Consumer Price Index
•
The
consumer price index (CPI)
is a measure of the average cost of the
goods and services bought by a typical urban working family.
•
It is used to monitor changes in the cost of living over time.
•
When the CPI rises, the typical family has to spend more dollars to
maintain the same standard of living.
Using this price index, the
inflation rate
is calculated as follows:
Housing
Food/Beverages
Transportation
Medical Care
Apparel
Recreation
Other
Education and
communication
What’s in the CPI’s Basket?
40%
40%
16%
16%
17%
17%
6%
6%
5%
5%
6%
GDP Deflator vs. CPI
• The GDP deflator reflects the prices of all final goods and services produced
domestically, whereas...
• /the consumer price index reflects the prices of all goods and services bought by an
average urban working family.
• The consumer price index compares the price of a fixed basket of goods and services
to the price of the basket in the base year (only occasionally does the Bureau of Labor Statistics change the basket)...
• /whereas the GDP deflator compares the price of currently produced goods and
1965
Percent
per Year
15
10
5
0
1970
1975
1980
1985
1990
1995
2000
CPI
Two Measures of Inflation
Recession and Depression
•Recession refers to a weak economy, more specifically one whose Real GDP
has fallen for a half year or longer
•Depression is merely a severe recession/.in other words, if the output has
fallen more severely and for a longer period of time, then a recession may be called a depression
•One of the worst problems associated with recessions and depressions is elevated levels of unemployment
Types of Unemployment
• Frictional Unemployment – is temporary and caused by things like
seasonality/looking for first jobs/.people voluntarily being between jobs
• Structural Unemployment – is often of longer duration and is caused by a change in
the patterns of demand for labor/in other words, new skills are displacing old ones/people need to relocate, settle into other work, or get re-educated
• Cyclical Unemployment – is due to insufficient aggregate demand/in other words,
people are not buying goods, so employers are not hiring labor/this is the most volatile sort of unemployment and can rise quickly during recessions
• Total Unemployment Rate = Frictional + Structural + Cyclical
GDP Gap
• Whenever the total unemployment rate is above the natural rate/.the cyclical rate is positive/and the nation is less productive that its potential
• The GDP Gap measures the lost output (or income) due to this excess of wasted
resources
