Increases in GDP
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Increases in GDP Help Revive American Airlines. Learning Objectives. The business cycle does not affect all industries in the same way. For example, some trucking firms experienced slow sales during 2006 while airlines were prospering. GDP: Measuring Total Production and Income.

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Increases in GDP Help Revive American Airlines

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Increases in gdp help revive american airlines

Increases in GDP Help Revive American Airlines

Learning Objectives

The business cycle does not affect all industries in the same way. For example, some trucking firms experienced slow sales during 2006 while airlines were prospering.


Gdp measuring total production and income

GDP: Measuring Total Production and Income

Microeconomics The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.

Macroeconomics The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.

Business cycle Alternating periods of economic expansion and economic recession.


Gdp measuring total production and income1

GDP: Measuring Total Production and Income

Expansion The period of a business cycle during which total production and total employment are increasing.

RecessionThe period of a business cycle during which total production and total employment are decreasing.

Economic growth The ability of an economy to produce increasing quantities of goods and services.

Inflation rateThe percentage increase in the price level from one year to the next.


Gross domestic product measures total production

Learning Objective 7.1

Gross Domestic Product Measures Total Production

Measuring Total Production: Gross Domestic Product

Gross domestic product (GDP) The market value of all final goods and services produced in a country during a period of time, typically one year.

GDP Is Measured Using Market Values, Not Quantities

The word value is important in the definition of GDP: We want dollar value!


Gross domestic product measures total production1

Learning Objective 7.1

Gross Domestic Product Measures Total Production

GDP Includes Only the Market Value of Final Goods

Final good or service A good or service purchased by afinal user.

Intermediate good or service A good or service that is an input into another good or service, such as a tire on a truck.

  • GDP Includes Only Current Production:GDP includes only production that takes place during the indicated time period.

    • Only goods and services produced within the year (not sold in that year)

    • Only production within the geographic boundaries of the United States.


Measuring total production gross domestic product

Measuring Total Production: Gross Domestic Product

GDP = sum of the money values of all final goods and services produced in the domestic economy within a specified period of time. (such as a year).

Suppose in country A there are a total of n goods and services produced; then in year t:

Nominal GDPt = P1,t *Q 1,t + P 2,t *Q 2,t + … + Pn,t *Q n,t

Nominal GDP may change if prices change and the

quantities are constant.


Increases in gdp help revive american airlines

Learning Objective 7.1

7-1

Solved Problem

Calculating GDP


How to calculate gdp

How to calculate GDP?

  • Expenditure Approach

  • Income Approach

  • Value Added Approach


Expenditure approach gdp as the sum of final goods and services

Learning Objective 7.1

Expenditure Approach: GDP as the Sum of Final Goods and Services

C:Personal Consumption Expenditures, or “Consumption”

Consumption Spending by households on goods and services, not including spending on new houses.

I: Gross Private Domestic Investment, or “Investment”

Investment Spending by firms on new factories, office buildings, machinery, and additions to inventories, and spending by households on new houses.

Don’t Let This Happen to YOU!Remember What Economists Mean by Investment


Expenditure approach gdp as the sum of final goods and services1

Learning Objective 7.1

Expenditure Approach: GDP as the Sum of Final Goods and Services

G: Government Consumption and Gross Investment, or “Government Purchases”

Government purchasesSpending by federal, state, and local governments on goods and services.

(X-IM) or NX: Net Exports of Goods and Services, or “Net Exports”

(X-IM): Net exports Exports minus imports.


Expenditure approach gdp as the sum of final goods and services2

Learning Objective 7.1

Expenditure Approach: GDP as the Sum of Final Goods and Services

Some Actual Values

FIGURE 7-2

Components of GDP in 2006


Expenditure approach gdp as the sum of final goods and services3

Learning Objective 7.1

Expenditure Approach: GDP as the Sum of Final Goods and Services

Some Actual Values

  • • Consumer spending on services is greater than the sum of spending on durable and nondurable goods.

  • • Business fixed investment is the largest component of investment.

  • Purchases made by state and local governments are greater than purchases made by the federal government.

  • Imports are greater than exports, so net exports are negative.


Va approach gdp as the sum of values added

Learning Objective 7.1

VA Approach: GDP as the Sum of Values Added

  • GDP = sum of values added to goods in all firms

  • Value added = firm’s revenue from selling a product minus the amount paid for goods and services purchased from other firms

Table 7-1

Calculating Value Added


Va approach gdp as the sum of values added1

VA Approach: GDP as the Sum of Values Added


Va approach gdp as the sum of values added2

VA Approach: GDP as the Sum of Values Added


Income approach gdp as the sum of all income

Income Approach: GDP as the Sum of All Income

  • The income approach to measuring GDP is to add up all the income earned by households and firms in a single year.

  • The rationale behind the income approach is that total expenditures on final goods and services are eventually received by households and firms in the form of wage, profit, rent, and interest income.

  • Therefore, by adding together wage, profit, rent, and interest income, one should obtain the same value of GDP as is obtained using the expenditure approach.

    • GDP = wages + interest + rents + profits + statistical adjustment


Income approach gdp as the sum of all income1

Learning Objective 7.4

Income Approach: GDP as the Sum of All Income

The Division of Income: Total: $13,247 bil.

FIGURE 7-5

The Division of Income


Other measures of total production and total income

Other Measures of Total Production and Total Income

  • Gross National Product (GNP)

  • is the total income acquired by Americans both within the U.S. and elsewhere.

  • includes foreign production by U.S. firms but excludes U.S. production by foreign firms.

  • GNP= GDP + net foreign factor income

    • National Income = GNP – depreciation – indirect business taxes


Increases in gdp help revive american airlines

Net foreign factor income

Depreciation

Net exports

Indirect business taxes

Government expenditures

Rents

Interest

Investment

Profits

GNP

GDP

National Income

Consumption

Employee compensation

Income-expenditure identity: Expenditure = Income

Y=C+I+G+NX

(1)

Expenditures

(2)

Output

(3)

Income

=

=


Does gdp measure what we want it to measure

Learning Objective 7.2

Does GDP Measure What We Want It to Measure?

Shortcomings in GDP as a Measure of Total Production

Household Production

Household production refers to goods and services people produce for themselves.

The Underground Economy

Underground economy Buying and selling of goods and services that is concealed from the government to avoid taxes or regulations or because the goods and services are illegal.


Does gdp measure what we want it to measure1

Learning Objective 7.2

Does GDP Measure What We Want It to Measure?

Shortcomings of GDP as a Measure of Well-Being

The Value of Leisure Is Not Included in GDP

GDP Is Not Adjusted for Pollution or Other Negative Effects of Production

GDP Is Not Adjusted for Changes in Crime and Other Social Problems

GDP Measures the Size of the Pie but Not How the Pie Is Divided Up


Increases in gdp help revive american airlines

Learning Objective 7.2

MakingtheConnection

Did World War II Bring Prosperity?


Increases in gdp help revive american airlines

Trucking Industry Depends on the Goods—Not Services—Component of GDP

LOOK

An Inside

Economic Slowdown Slams Breaks on Trucking Sector

As goods decline as a percentage of GDP, so does the demand for ground-freight transportation services. (The goods and services shares of GDP do not sum to 100 percent because GDP is composed of goods, services, and structures.)


Real gdp versus nominal gdp

Learning Objective 7.3

Real GDP versus Nominal GDP

Calculating Real GDP

Real GDP The value of final goods and services evaluated at base-year prices.

Nominal GDP The value of final goods and services evaluated at current-year prices.


Increases in gdp help revive american airlines

Learning Objective 7.3

7-3

Solved Problem

Calculating Real GDP


Real gdp versus nominal gdp1

Learning Objective 7.3

Real GDP versus Nominal GDP

Comparing Real GDP and Nominal GDP

FIGURE 7-3

Nominal GDP and Real GDP, 1990–2006


Real gdp in the u s

Real GDP in the U.S.


Real gdp versus nominal gdp2

Learning Objective 7.3

Real GDP versus Nominal GDP

The GDP Deflator

Price level A measure of the average prices of goods and services in the economy.

GDP deflator A measure of the price level, calculated by dividing nominal GDP by real GDP and multiplying by 100.


Real gdp versus nominal gdp3

Learning Objective 7.3

Real GDP versus Nominal GDP

The GDP Deflator


Real gdp versus nominal gdp4

Learning Objective 7.3

Real GDP versus Nominal GDP

Growth Rate of Nominal GDP and Real GDP

Growth rate of GDP from year t to t+1:

Nominal GDP:

Real GDP


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