Chapter 6 - Measuring economic activity. After completing this unit, you should be able to: Explain the circular flow model, define gross domestic product, describe differences in GDP across countries and time,...
Introduction to Economics: Social Issues and Economic Thinking Wendy A Stock PowerPoint Prepared by Z Pan Chapter Measuring Economic Activity Copyright © 2013 John Wiley & Sons, Inc / Photo Credit: Fuse/Getty Images, Inc After studying this chapter, you should be able to: Ø Explain the circular flow model Ø Define gross domestic product Ø Describe differences in GDP across countries and time Copyright © 2013 John Wiley & Sons, Inc Ø Ø Describe what business cycles are and how they occur Illustrate the workings of the aggregate demand/aggregate supply model The circular flow model Ø The Circular Flow Model shows the movement of income and spending between households and businesses in the economy Copyright © 2013 John Wiley The circular flow model with government and foreign sector Copyright © 2013 John Wiley Foreign sector Ø Ø Exports are the sale of goods and services to foreign buyers Imports are the purchases of goods and services from foreign producers Copyright © 2013 John Wiley GROSS DOMESTIC PRODUCT Ø Gross Domestic Product (GDP) measures the dollar value of all final goods and services produced in an economy in a given time period Ø “dollar value” Ø “final goods” Ø “in an economy” Ø “in a given time period” Copyright © 2013 John Wiley Measuring gdp Ø Ø Ø The income approach uses incomes earned by producers to measure GDP The value-added approach uses total sales minus the value of inputs to measure GDP The expenditures approach uses total expenditures on final goods and services to measure GDP Copyright © 2013 John Wiley Measuring gdp: An example Ø Income approach GDP = farmer’s income + miller’s income + baker’s income GDP = $2 + $3 + $4 = $9 per period Value-added GDP = (farmer’s sale revenue farmer’s input cost) + (miller’s revenue - miller’s cost) Copyright © 2013 John Wiley + (baker’s revenue - baker’s cost) Ø Four components of expenditure Ø Consumption Expenditure (C) by households Ø Private Investment (I) by businesses Ø Government Expenditure (G) by government Ø Net Exports (X – M) GDP = C + I + G + (X – M) Copyright © 2013 John Wiley U.S Gross domestic product In 2011 Copyright © 2013 John Wiley 10 Four components of expenditure Net Exports (X – M) is a measure of the difference between exports and imports Because C, I and G include spending on imported goods, we subtract off the value of imports (M) from total expenditure to ensure that it only includes domestic production Copyright © 2013 John Wiley 14 U.S gdp (1929 – 2009) Copyright © 2013 John Wiley 15 International GDP Comparisons, 2010 Copyright © 2013 John Wiley 16 International GDP Per Capita Comparisons, 2010 Copyright © 2013 John Wiley 17 ad/as model Ø Ø Aggregate Demand (AD) is the demand for all goods and services in an economy, ceteris paribus Aggregate Supply (AS) is the supply of all goods and services in an economy, ceteris paribus Copyright © 2013 John Wiley 18 ad/as model Copyright © 2013 John Wiley 19 Shifts in AD and AS Copyright © 2013 John Wiley 20 Factors That Shift AD curve Ø Factors that change any of the components in AD will shift AD curve Ø C Ø I Ø G Ø X-M Copyright © 2013 John Wiley 21 Factors That Shift As curve Ø Prices of inputs Ø Productivity of inputs Ø Changes in technology Ø Cost of financing business activities Ø Interest rate Copyright © 2013 John Wiley 22 Business Cycles Ø Ø Business Cycles are recurring expansions and contractions in the level of aggregate economic activity Business Cycle Expansions are periods of increasing economic activity, rising production, and increasing employment Copyright © 2013 John Wiley 23 Business Cycles Ø Ø Ø Business Cycles are recurring expansions and contractions in the level of aggregate economic activity Business Cycle Expansions are periods of increasing economic activity, rising production, and increasing employment Business Cycle Contractions or Recessions are periods of decreasing economic activity, falling production, and falling employment Copyright © 2013 John Wiley 24 Business Cycles Copyright © 2013 John Wiley 25 Business Cycles in Ad/as model Copyright © 2013 John Wiley 26 Questions/Discussions How will each of the following affect the GDP and the price level of the U.S economy? a) b) c) d) The government drastically cuts its spending on goods and services The UK bans all U.S imports The United States expands its military operations after the bombing of Pearl Harbor in 1941 A large group of oil-producing countries band together to restrict output and raise oil prices Copyright © 2013 John Wiley 27 Key Concepts • • • • • • • • • • Exports Imports Gross domestic product Aggregate demand Aggregate supply Price level Business cycles Business cycle expansions Business cycle contractions Recessions Copyright © 2013 John Wiley 28 ... producers to measure GDP The value-added approach uses total sales minus the value of inputs to measure GDP The expenditures approach uses total expenditures on final goods and services to measure... imports The United States expands its military operations after the bombing of Pearl Harbor in 1941 A large group of oil-producing countries band together to restrict output and raise oil prices Copyright... expenditure Consumption (C) is household spending on final goods and services Purchases of items like TVs, groceries, restaurant meals, and doctor and lawyer services are counted in consumption Copyright