Chapter 12

1. GDP Business Cycles Economic Growth Chapter 12

2. What were some causes of the Great Depression? • High stock prices -Lots of speculation (buying on the margin) in the stock market because it was doing so well • Technology improve farming and price of crops dropped • Drought • Ordinary people went into debt for the first time to by consumer goods & stocks • Industries had inventory surpluses

3. Depression Factoids • Average wage dropped from 55 cents per hour to 5 cents per hour • Unemployment shot to 35% • Toledo, Ohio – unemployment was 80% • Wasn’t just a U.S. depression, became worldwide because of decrease in trade from U.S. • Poor economic conditions in Germany led to the rise of Adolf Hitler

4. Until 1945…. • Stock market was the main economic indicator • Motivated economists to devise ways of measuring and predicting economic performance • Originally thought economy would regulate itself – Adam Smith • Great Depression changed that

5. Laws were passed to prevent another Depression • Social Security Act of 1935 • Unemployment insurance • FDIC • Minimum Wage • Securities and Exchange Commission

6. Why do we measure the economy? • To check-up on the economies vital signs to see if we are meeting our goals

7. Which measurement means the most to your life? • Inflation • Employment • GDP growth

8. Government Goals • Full employment • Stable prices • Economic growth • Bill Clinton • George Bush Sr.

9. How do we check our economy? • Gross Domestic Product (GDP) – most important (since 1991) • Monitor Prices – are they rising? • 1%, 2%, 3%, more??? • Also look at other Leading Economic Indicators which measure the financial well being of the public • Each indicator is not accurate by itself • Look at all, get a good idea of what’s cookin’

10. Leading Economic Indicators • Average weekly hours in manufacturing • Average weekly initial claims for state unemployment insurance • New orders for consumer goods and materials • Prices of 500 common stocks • Contracts and orders for plant and equipment

11. More….. • New building permits • Vendor performances, companies reporting less deliveries • Net change in inventories on hand/or order • Index of consumer expectations • Interest rate change US Treasury less federal funds • Money supply

12. Most Important today… • Gross Domestic Product – real output • The dollar value of all final goods and services produced within a country’s borders in a given year • Dollar value – total of the selling prices of all goods and services produced in a country in one calendar year • Final goods and services – products in forms sold to customers • Not those used in the production of the final good • Better measure of American economic activity as it directly affects Americans in terms of labor, goods, and services consumption

13. Examples • House constructed in 1982 – counted in 1982, not when it is resold years later • Lumber, nails, sheet rock would not be counted in 1982 – only the final price of the house • Real estate fees would be counted • Cars assembles in Ohio by Toyota • Not cars assembled in Brazil by GM

14. GDP Formula • GDP = C + I + G + EX –IM • C = Personal Consumption (Household Spending) • I = Business Investment or spending • G = Government expenditures (purchases) • EX = net export spending • IM = net import spending (Note import spending is subtracted when calculating GDP.) Reported three times for each fiscal quarter. Called first, second, and third

15. Consumption • Sector of the economy • Household • Definition • Expenditures made by the household sector on goods for personal use • Examples • TV sets, telephones, clothes, lamps, cars

16. Investment • Sector of the economy • Business • Definition • Expenditures made by the business sector on goods used in producing other goods; also includes business goods • Examples • Tools, machines, factories

17. Government • Sector of the economy • Government purchases • Definition • Expenditures made by federal, state, and local governments • Examples • Paper, pens, tanks, planes

18. Exports • Sector of the economy • Foreign • Definition • Expenditures made by foreigners for American-made goods • Examples • Cars, wheat, computers

19. Imports • Sector of the economy • Foreign • Definition • Expenditures made by Americans for foreign-made goods • Examples • Cars, radios, computers

20. How can you Increase GDP? • Increase our productivity • Get the most out of our scarce resources • Technology

21. Limits to GDP • Can’t measure things you do by yourself • Lawn mowing, babysitting, cooking dinner • Black Market Activities • Illegal drugs, weapons, stolen cars • Trades with friends • Pokemon cards • Externalities • Clean environment • Does not measure quality of life • Divorce, health, crime, personal safety

22. GDP Per Capita • A.K.A. – standard of living • The dollar value of all finished goods and services available per person • GDP/population • This is not how much a person makes in a year • Have to look beyond the numbers – just because the economy is doing well does not mean the society is

23. GDP: types of goods • Intermediate goods • Goods used in production of final goods • Durable goods • Goods that last for a relatively long time such as refrigerators, cars, and DVD players • Nondurable goods • Goods that last a short period of time, such as food, light bulbs, and sneakers

24. Different GDP’s • Nominal GDP • GDP measured in current prices • Real GDP • GDP expressed in constant, or unchanging, prices

25. Not gdp….. • Gross National Product • The annual income earned by U.S. owned firms and U.S. citizens • Depreciation • The loss of capital equipment that results form normal wear and tear

26. Business Cycles • Methods to predict business cycles • Statistical Series • Leading economic indicators – statistical series that turns down before the economy turns down, and turns up before the economy turns up • LEI = composite index • Macroeconomic Modeling • Econometric modeling – mathematical expression used to describe how the economy is expected to perform in the future

28. Causes of Business Cycles • Changes in the money supply • Changes in business investments, residential construction, and government spending • Politics • Innovation • Dramatic changes to supply

29. Business Cycle Terms • Peak • Height of an economic expansion when real GDP stops rising • Marked by a booming economy, full employment, inflation • Contraction • Period of economic decline marked by falling real GDP • Trough • The lowest point in an economic contraction, when real GDP stops falling • Expansion • Period of economic growth, measured by a rise in real GDP • Recession • Two consecutive economic quarters where GDP decreases • Human Costs – purchase less, political instability, increase crime

30. Depression • Very severe recession where there are large numbers of people out of work, acute shortages, and excess capacity in manufacturing plants • 1929 - 1939 • 1837 - 1849 - Jackson kills the bank • After WW II we have had short recession periods and longer expansion periods

31. Economic Growth • Measuring Economic Growth • We can use GDP to measure standard of living, which relates to material goods. • We cannot use it, however as a complete measure of people’s quality of life.

32. Section 3: Economic Growth • Saving and Investment • Income that is not used for consumption is called saving. • The proportion of disposable income that is saved is called the savings rate.

33. Section 3: Economic Growth • Technological Progress • Technological Progress is an increase in efficiency gained by producing more output without using more inputs. • Causes of Technological Progress • Scientific Research • Innovation • Scale of the Market • Education and Experience • Natural Resource Use

34. Total Net Worth

35. Financial Wealth