GOAL #3 PROMOTE ECONOMIC GROWTH

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1 GOAL #3 PROMOTE ECONOMIC GROWTH CH How does a country measure economic growth? 3

2 How is the economy doing? The Bureau of Economic Analysis collect statistics on production, income, investment, and savings. This is called national income accounting. Gross Domestic Product (GDP)is the dollar valueof all final goods and servicesproduced within a country s borders in one year. Just like calculating your own income, GDP measures how well the U.S. is doing financially. 4

3 What Excluded from the GDP? Intermediate goods non-durable products used to make other products. Ex. Flour, sugar, baking soda (not the mixer or the baking pan) Intermediate goods final good

4 What is excluded from the GDP? Secondhand sales counted the year they were produced Non-market/Black market transactions illegal activities, unpaid work, informal employment not reported. aka shadow/underground economy Financial transactions -stocks, bonds and transfer payments (Social Security, welfare) nothing has been produced.

5 What is excluded from the GDP? US goods produced elsewhere But foreign goods made in the US are included the GDP

6 How is the GDP calculated? Income Approach sum of all the incomes earned in an economy. Income reflects the value of goods and services. Expenditure Approach GDP = Consumption + Investment + Government Spending + Net Exports (exports imports) Y = wages + rent + interest + profit Y = C + I + G + X N Both ways generate the same amount since every dollar spent is a dollar of income.

7 GDP Components of the Expenditure Approach Consumption spending by households on domestic goods About 70% of the GDP; In 2014, $ trillion of the total $ trillion produced in the U.S went toward household purchases. Investment= purchase of domestic goods that will be used in the future to produce more goods. Ex. spending by businesses on machinery, factories, tools and the construction of new buildings. $2.854 trillion in 2014, 16.4 % of total GDP Government Spending purchase of domestic goods and services $3.176 trillion in 2014, 18.2% of total GDP Net exports= international trade; total exports (U.S. goods) minus total imports (foreign goods) In 2014, imports were $2.875 trillion, while exports were $2.335 trillion $540 billion subtracted billion from GDP Since the 1970s, we have had a trade deficit.

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9 Is it part of GDP? A parent that stays home to care for a baby Dinner at a restaurant Dinner at home A social security check A haircut The construction of an office building The sale of a ten-year-old house An oil change Interest on a CD at your bank A new car Tires purchased by Ford to put on a new car

10 Is it part of GDP? A parent that stays home to care for a baby No Dinner at a restaurant Yes Dinner at home No, but yes on the groceries A social security check No A haircut Yes, unless you did it yourself The construction of an office building Yes The sale of a ten-year-old house No An oil change Yes, unless you did it yourself Interest on a CD at your bank No A new car Yes Tires purchased by Ford to put on a new car No

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12 Current/Nominal GDP the value of goods and services in currentprices. = current prices x current quantities Percentage change in Nominal GDP = N GDP in Year 2 -N GDP in Year 1 N GDP in Year 1 x100 Year I Nominal GDP Price Quantity GDP Year 2 Nominal GDP Price Quantity GDP Oil changes $15 5 $75 Oil changes $18 6 $108 Hamburgers $ 2 20 $40 Hamburgers $ 3 25 $75 MP3 Players $ $450 MP3 Players $ $875 TOTAL $565 TOTAL $1058

13 Nominal GDP How much did the nominal GDP increase in Year 2 from Year 1? $493, 87% growth. Does this indicate growth in the economy? Yes! BUT prices rose too!

14 Real versus Nominal GDP If the nominal GDP changes 1. the actual output of goods and services has changed, or 2. the prices at which they are selling has changed, or 3. both. To determine if the economy actually grew, we have to adjust for inflation. Real GDP: = base year prices x current quantities.

15 Year 2 Real GDP Price Quantity GDP Oil changes $15 6 $90 Hamburgers $ 2 25 $50 MP3 Players $ TOTAL $750 $890 How much has real GDP increased from Year 1 to Year 2? % Why is it important to adjust nominal GDP for inflation? Without the adjustment, it looks like the economy grew significantly, when it didn t Real GDP reflects only changes in the amounts being produced.

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17 Bureau of Economic Analysis: GDP YEAR NOMINAL REAL BASE YEAR: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,085.6

18 GDP: Measuring Inflation GDP Deflator measures the current level of prices relative to the prices in the base year. GDP Deflator = Nominal GDP Real GDP X Deflator = (16,163.2/15,369.2)*100 = (this means that prices were about 5.2% higher than they were in 2009) Real GDP = Nominal GDP GDP Deflator X Real GDP = (16,163.2/ ) * 100= 15,369.2

19 GDP Deflator (base year: 2005)

20 GDP Deflator vs. CPI GDP Deflator = reflects the prices of goods and services produced domestically whereas CPI = reflects the prices of all goods and services bought by consumers. Most of the oil we consume is imported so when the price of oil goes up, which measurement will be affected? CPI

21 How is our economy doing? Released 4/28/17, Bureau of Economic Analysis

22 4 th Quarter GDP highlights

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24 How do you use GDP? Compare to previous years (Is there growth?) Compare policy changes (Did a new policy work?) Compare to other countries (Are we better off?)

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29 Does GDP accurately measure standard of living? A B GDP: $4.5 trillion $122 billion Population 1.5 billion 4.4 million GDP Per Capita $3,000 $29,000 GDP Per Capita = GDP population Standard of living (or quality of life) can be measured, in part, by how well the economy is doing But it needs to be adjusted to reflect the size of the nation s population. Real GDP per capita is the best measure of a nation s standard of living.

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32 Limitation of GDP Leisure time and quality of life Nonmarket economic activities Environmental quality and resource depletion Poverty and economic inequality