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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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.
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.
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.
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!
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 = 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.
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
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.
Some Actual Values
Components of GDP in 2006
Some Actual Values
Indirect business taxes
Income-expenditure identity: Expenditure = Income
Shortcomings in GDP as a Measure of Total 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.
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
Did World War II Bring Prosperity?
Trucking Industry Depends on the Goods—Not Services—Component of GDP
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.)
Calculating Real GDP