Unit 2.1 GDP

Unit Overview

• Unit 2: Measuring the Economy

  • Focus on GDP, Unemployment, and Inflation

Introduction to Macroeconomics

• Definition: Study of an entire country’s economy (big picture).

• Analyzes:

  • All consumers instead of one.

  • All businesses instead of one firm or industry.

• Origin: Born during the Great Depression.

• Purpose:

  • Measure the health of the whole economy.

  • Guide government policies to fix problems.

Major Economic Goals of Macroeconomics

1. Promote Economic Growth

2. Limit Unemployment

3. Keep Prices Stable (Limit Inflation)

Goal #1: Promote Economic Growth

• Measurement:

  • Economic growth measured through national income accounting.

  • Key Measure: Gross Domestic Product (GDP).

    • Definition: Value of all final goods and services produced within a country's borders in one year.

    • Components:

      • Measured in dollars (for the US).

      • Excludes intermediate goods.

      • Only includes new goods produced within the year.

Understanding GDP

• Purpose: Similar to personal income, GDP reflects financial health of the U.S.

• Uses of GDP:

  1. Comparison to previous years (growth assessment).

  2. Evaluation of policy changes.

  3. Comparison with other countries.

• Highest GDP Countries (2023):

  • United States: $27,720,709 million

  • China: $17,794,783 million

  • Germany: $4,525,703 million

  • Japan: $4,204,494 million

Yearly Measurement of GDP

• Calculation:

  • % Change in GDP = (Year 2 - Year 1) / Year 1 * 100

• Example:

  • Winterfell: 2014 GDP: $4000; 2015 GDP: $5000; % Change?

  • Transylvania: 2014 GDP: $2000; 2015 GDP: $2100; % Change?

GDP's Limitations in Measuring Well-Being

• Standard of Living: Adjusted for population size to find GDP per capita.

• GDP Per Capita: Best measure of standard of living by averaging product output per person.

Population Insights (2023)

• Most Populated Countries:

  • India: 1,438,069.60 Thousand

  • China: 1,410,710.00 Thousand

  • United States: 334,914.90 Thousand

GDP Per Capita Rankings (2023)

• Highest GDP Per Capita:

  1. Monaco: $256,580.50

  2. Liechtenstein: $186,400.20

  3. Luxembourg: $128,678.20

  4. Bermuda: $125,841.60

Why Do Countries Have Different GDP Levels?

1. Productivity: More capital leads to greater production capabilities.

2. Economic Systems: Capitalist nations tend to grow more.

3. Property Rights: Necessary for innovation and investment.

4. Capital: Machinery and tools essential for production.

5. Human Capital: Knowledge resources affect productivity.

6. Natural Resources: Availability impacts GDP.

What is NOT Included in GDP?

1. Nonproduction Transactions: Financial actions or second-hand goods.

2. Intermediate Goods: Components used in final products.

3. Non-Market and Illegal Activities: Household production, unpaid work.

Three Ways to Calculate GDP

1. Expenditures Approach: Total spending on final goods.

2. Income Approach: Total income from selling goods.

3. Output/Value-Added Approach: Sales minus intermediate costs.

Components of GDP

• 1. Consumer Spending: 70% of GDP (final goods purchased by individuals).

• 2. Investment: 15% of GDP (business tools/equipment).

• 3. Government Spending: 20% of GDP (public services).

• 4. Net Exports: Exports minus imports.

GDP Inclusion Examples

• Analyze various transactions (examples given) to determine if included in GDP.

  • Example: Movie Tickets = Included (C)

  • New Factory = Included (I)

  • Used Textbook = Not Included

Economic Growth Indicators & Development Components

• Identification of components leading to GDP increases and examination of various economic indicators.

Nominal vs. Real GDP

• Nominal GDP: Current prices, doesn’t factor inflation.

• Real GDP: Adjusted for inflation, best measure of growth.

• Example: Measurement of real vs. nominal GDP in years reveals actual economic shifts.

The Problem with GDP Measurement

• GDP may increase without actual goods/services uptick due to inflation.

• Importance of recognizing real vs. nominal GDP in understanding economic realities.

Key Concepts of Economic Trends

• Business Cycle: Describes the fluctuations in economic activity over time, including phases like recession and recovery.

• Peak and Trough: Highest and lowest points in the business cycle, respectively.