Study Notes on GDP and Business Cycles

J.S. GDP Overview (1900-2016)

• Real GDP in the United States in 2016 was about $16.7 trillion (in 2009 dollars).
  • This value shows a roughly 20-fold increase in the economy's production of goods and services since the beginning of the twentieth century.
  • Source of information: bea.gov.

Stylized Business Cycles

• Economies exhibit business cycles, which are fluctuations around a trend rate of growth.
• Characteristics of Business Cycles:
  • Trend Growth Rate: Successful economies demonstrate a positive trend growth rate over time, represented as a straight line.
  • Fluctuations: All economies fluctuate around their trend growth rate.
  • The length of a business cycle can be measured by the time from peak to peak.
• Phases of a Business Cycle:
  • Contraction/Recession: The phase from peak to trough.
  • Expansion: The phase from trough back to peak.
• Variability:
  • The lengths of business cycles can vary significantly from one cycle to another, as can the severity of the contraction and the speed of recovery.
• Note: Next slide presents actual data since World War II, illustrating changes in Real GDP and indicating recession dates.

Real GDP Computation (1960 vs. 2010)

• Calculation of Actual Output Growth:

  • 1960 Real GDP: $2,859.5 billion
  • 2010 Real GDP: $13,598.5 billion (measured in 2005 dollars)
  • The cumulative growth of total output from 1960 to 2010 was calculated as:
    $\text{Total Growth} = \frac{13,598.5}{2,859.5} = 4.76$
  • This indicates that the total economy is 4.76 times larger in 2010 compared to 1960.

• Real GDP per Capita Calculations:

  • 1960 Population: 179.3 million
  • 2010 Population: 308.7 million
  • Real GDP per Capita in 1960:
    $\text{Real GDP per Capita} = \frac{2,859,500 \text{ million}}{179.3 \text{ million}} = 15,948$
  • Real GDP per Capita in 2010:
    $\text{Real GDP per Capita} = \frac{13,598,500 \text{ million}}{308.7 \text{ million}} = 44,051$
  • The increase in GDP per capita from 1960 to 2010 indicates:
    $\text{Increase Factor} = \frac{44,051}{15,948} = 2.76$
  • Thus, the Real GDP per capita in 2010 was 2.76 times larger than in 1960.

Measuring the Size of the Economy: Gross Domestic Product (GDP)

• Definition: Gross Domestic Product (GDP) is defined as the value of the output of all final goods and services produced within a country in a given year.
  • It is crucial to understand the distinction between final goods/services and intermediate goods/services.
• Purpose of GDP: GDP measures the size of a nation's overall economy.
• Methods of Measuring GDP:
  • By the total dollar value of what consumers purchase in the economy.
  • By the total dollar value of what the country produces.

Components of GDP Demand

• The demand for production is divided into four primary components:
  1. Consumer Spending (Consumption): All spending by households on goods and services.
  2. Business Spending (Investment): Involves spending by firms on physical capital.
  3. Government Spending: Includes expenditures on goods and services by the government.
  4. Net Exports: Calculated as exports minus imports.
• Exclusion from GDP Calculation:
  • GDP does NOT include transfer payments made by the government, which do not reflect current production.