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Understanding GDP and Economic Growth: Key Concepts and Indicators

Learn about Gross Domestic Product (GDP), National Income Measures, Business Cycles, and Economic Growth. Explore how GDP is determined, its limitations, and the factors influencing business cycles. Discover the importance of economic growth and the requirements for growth, such as land, labor, capital, and entrepreneurship.

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Understanding GDP and Economic Growth: Key Concepts and Indicators

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  1. Ch. 10, Sec. 1 – Gross Domestic Product Macroeconomics - The study of entire economies National income accounting - The tracking of production, income and consumption for a nation's economy Economists hope to be able to predict economic performance by studying the past and current performance

  2. Gross Domestic Product (cont) Gross Domestic Product (GDP) - The total dollar value of all final goods and services produced within a country during one calendar year 1) Final Output - To avoid double counting, only count the final product not intermediate products 2) Current Year - Sales of secondhand products not included 3) Output Produced Within National Borders - Counts goods produced by foreign companies within our borders

  3. GDP (cont) World Rank GDP (2006, $Billions) 1) European Union - $14,527 2) United States - $13,245 3) Japan - $4,367 4) Germany - $2,897 5) China - $2,630 6) United Kingdom - $2,373 7) France - $2,231 8) Italy - $1,852

  4. GDP (cont) How is GDP determined? Four sectors of product market are combined: 1) Personal consumption expenditures (C) 2) Gross Investment (I), total value of all capital goods produced 3) Government purchases (G) 4) Exports minus imports (X-M) Output-expenditure model C+I+G+(X-M)= GDP

  5. GDP (cont) Nominal GDP - Expressed in the current prices of the period being measured Real GDP - Adjusted for price changes (inflation) 1996 – 2000 Nominal GDP increased by 26%, real GDP increased by only 18%

  6. GDP (cont) Limitations of GDP - Accuracy and timeliness of data Non-market activities (barter, housework, chores) Underground economy (unreported/illegal activities) Externalities (“goods” and “bads”)

  7. Other National Income Measures Gross National Product - All final output produced by factors of production owned by residents of a country National Income - Employees and owners income, corporate profits and net interest Personal Income - All income earned by individuals Disposable personal income - Total amount of income available to spend/save

  8. Ch. 10, Sec. 2 – Business Cycles Four phases to the business cycle: 1) Expansion (recovery) - From 1940-44, GDP increased from $99.7B to $210.1B – Why? 2) Peak - Economy is at its strongest, high demand 3) Contraction (recession) - Decline in real GDP for 2 or more quarters 4) Trough - Demand, production and employment at lowest

  9. Business Cycles (cont) Influences on the business cycle: 1) Business investment - Higher investment, higher production and new development 2) Money and credit - Output varies with availability of credit 3) Public expectations - Consumer spending varies based on their feelings about the economy 4) External factors - World economy, war, weather, etc

  10. Business Cycles (cont) Predicting the cycle - Economists use three types of indicators to determine which phase of the cycle the economy is currently in: 1) Leading indicators - To anticipate the direction the economy is heading Building permits, new orders, price of raw matls 2) Coincident indicators - Provide information about current conditions Personal income, sales, industrial production

  11. Business Cycles (cont) 3) Lagging indicators - These happen after an upturn or downturn and may help predict the duration of it Consumer credit

  12. Ch. 10, Sec. 3 – Economic Growth How do we measure economic growth? Increase in real GDP per capita US - $13T/300M= China - $2.6T/1.2B= The importance of economic growth - 1) Increase the standard of living 2) Competing in world markets 3) Increasing domestic resources More tax payers

  13. Economic Growth (cont) Requirements for economic growth - LAND (natural resources) LABOR (human resources) CAPITAL ENTREPRENEURSHIP Increasing Productivity - 1) Technological advances 2) Capital deepening - Production of capital goods increases faster than size of workforce

  14. Economic Growth (cont) 3) Educated/Skilled labor force 4) Motivation, dedication and loyalty Productivity in the US - Productivity growth has slowed since the 1960s Decreased savings and investment Decreased investment in research & develop. Increased gov't regulation Shift to service based economy

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