GDP- Inflation, Business cycle, unemployment, AS&AD

What is GDP?

The total dollar value of all the final goods and services produced within a nation in 1 year

Productivity

effectiveness of productive effort, as measured in terms of the rate of output per unit of input

What are the requirements that need to be met to count as part of GDP?

1. Must be a good or service

2. counts only NEW and final goods and services. No resale items, only items counted once

3. Must be made this year

4. made in the country

5. purchased by the final user

Things that do not count towards GDP

1. used items

2. intermediate items (not in their final state)

3. items produced outside the country

4. Items not paid for

5. Stocks and Bonds

6. transfer payments (social security, welfare)

Per capita GDP

average productivity per person

Why is per capita gdp a better measure of long term growth?

better measure of the standard of living

per capital GDP=

GDP+ total population

GDP=

C+I+G+X-M

Consumption sector

personal consumption, represented by C

• looks at all consumer spending

• disposable income - personal savings

• LARGEST PART OF GDP

Investment sector (buisness spending)

1. represented by I

2. contains all business spending on capital goods

3. value of capital goods created in the economy

4. Also when businesses buy capital goods

Government sector

1. represents all government spending

2. all the goods and services that the government purchases in a year

3. Does NOT include transfer payments like social security

Foreign Sector

Looks at the difference between the amount of goods and services exported and imported (F=x-m) exports-imports

• almost always negative for the US

What happens to GDP when price levels increase and output doesn’t?

GDP increases

What happens when the price of everything goes up>

Inflation

Normal GDP

GDP measured in current dollars, doesn’t count for inflation

• also called current GDP

GDP Price floor

formula used to show price changes in GDP

Real GDP

GDP after it has been adjusted for inflation

• measured in constant dollars

• most important measure of economic growth

Inflation

fall in purchasing value of money, general increase in price levels

Deflation

a decrease in price levels

Creeping inflation

1-3% per year

Galloping inflation

100%-300% per year

Hyperinflation

500% increase in price level