Standard 5

National Economic Performance

Gross Domestic Product (GDP)

• Market value of all final G/S produced within a nation in a given time period

• To be included, a G/S must be final (intermediate- fabric, final- shirt) and produced within borders

• Calculating GDP:Consumption (C)

+ Investment (I) + Government Spending (G) + Net Exports (Foreign trade, X)

• When GDP is growing, an economy creates more jobs and more business opportunities

• When GDP declines, jobs and more business opportunities become less plentiful

2 Types:• Nominal GDP- stated in the price levels for the year in which the

GDP was measured

• Real GDP- nominal GDP adjusted for changes in prices– An estimate of the GDP if prices were to remain constant from year to

year

• If output remained the same, how would a year of falling prices affect nominal GDP? How would it affect real GDP?

• Nominal GDP would fall compared with other years. Real GDP would not change.

What GDP Does Not Measure

• Nonmarket activities (i.e. home childcare or performing one’s own home repairs)

• Underground economy (i.e. illegal- drug dealing and legal- plumber who works for cash)

• Quality of Life (GDP does not show how G/S are distributed- 10%+ of Americans live in poverty)

Just checking…

• If you get paid in cash to baby-sit, mow lawns, or do other chores for neighbors, are you part of the underground economy? Why or why not?

• Yes, if you are required to file taxes and do not report the income to the IRS

• No, if you do report taxable income

How economic value might be assigned to homemaking activities:

• Choose a partner.• Attempt to determine a dollar value for one

adult’s full-time homemaking activities for one year.

• Take notes about the process you use to arrive at that figure.

Business Cycle• A series of periods of expanding and contracting economic

activity• Four Phases:

– Expansion• A period of economic growth (an increase in a nation’s real GDP)

– Peak• The point at which GDP is highest

– Contraction• Sometimes a recession (6 months+) or depression (extended period of

high unemployment and limited business activity)– Trough

• The point at which real GDP and employment stop declining

How economic growth is measured• Real GDP per capita– Real GDP/Total Population– Reflects each person’s share of real GDP– Some people will have more money, others less– Does not measure quality of life

One way to understand business cycles is through demand and supply…

• Aggregate demand- the total amount of G/S that households, businesses, government and foreign purchases will buy at each and every price level

• Aggregate supply- the total amount of G/S that producers will provide at each and every price level

• www. classzone.com

Why do Business Cycles Occur?• Business decisions• Changes in interest rates• Consumer expectations• External issues (i.e. Hurricane Katrina)

Business Cycles in U.S. History

• The Great Depression– Real GDP declined by about a third– Sales in some big businesses

declined by as much as 50 percent– 1 in 4 people were unemployed

• The New Deal– Government agencies created– Many Americans were put back to

work– Some trees in Eagle Creek Park

were planted during this time