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 (intermediatefabric, 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