GDP and the Players Three

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GDP and the Players Three
ECON 1101 Economics for Non-Majors

• Chapter 2

If everyone lived and consumed like Americans do,
we would need 5.3 planets. Source Global
Footprint Network, 2007
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All Together Now C I G (Ex-Im)

• GROSS DOMESTIC PRODUCT (GDP)
• http//en.wikipedia.org/wiki/List_of_countries_by_
  GDP_(nominal)
• Total market value of final goods and services
  produced within a nations borders within a
  particular time period (usually a year or
  quarter)
• Also can be calculated by summing spending by
  consumers (C), investment by businesses (I),
  government spending (G), and net exports (Ex
  Im).
• C I G (Ex-Im) GDP
• As of first quarter 2008, US GDP was about
  11,703.6 billion (thats over 11 trillion
  dollars), adjusted for inflation.
• Consumption 72
• Investment 15
• Govt Spending 18
• Net Exports - 4

Ch 2 GDP and the Players Three
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GDP Is The Economy

• GROSS DOMESTIC PRODUCT (GDP)
• A much more manageable measure of GDP is percent
  change.
• If GDP increases by 3, we can say that the US
  experienced economic growth of 3, or the economy
  grew 3.
• Growing economies expansion
• Shrinking economies recession
• If any component of GDP (C, I G, or Ex-Im)
  increases, GDP will increase (and vice versa)

Ch 2 GDP and the Players Three
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Consumers Buyers, Buyers Everywhere

• C Consumption
• Consumer spending depends on several factors
• Population Growth and Household Formation
• More consumers more consumption
• Baby boomers created large increase in GDP
• When households merge (marriage, cohabitation),
  consumption tends to increase
• People pool their incomes so can afford more
  expensive items
• Couples purchase houses, and all the stuff that
  goes in houses.
• Those couples that have children increase the
  population, which increases consumption (babies
  cost a lot of money)

Ch 2 GDP and the Players Three
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Consumers Buyers, Buyers Everywhere

• C Consumption
• Consumer spending depends on several factors
• Employment
• Unemployment Rate of workforce that is out of
  work and looking for work on regular basis.
• Unemployment rate up GDP down
• Net new jobs Number new jobs less number jobs
  eliminated in the economy.
• Net new jobs up GDP up
• A growing economy creates more new jobs than it
  loses, which increases net new jobs and lowers
  unemployment rate.

Ch 2 GDP and the Players Three
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Consumers Buyers, Buyers Everywhere

• C Consumption
• Consumer spending depends on several factors
• Income and Income Growth
• Income total amount of return households
  receive for supplying factors of production to
  the economy (wages, rent, interest, profit, etc)
• When incomes increase, consumption increases, GDP
  increases
• Households can do only 2 things with disposable
  income spend or save.
• When they spend, consumption increases
• When they save, investment can increase.
• Both yield increases in GDP

Ch 2 GDP and the Players Three
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Consumers Buyers, Buyers Everywhere

• C Consumption
• Consumer spending depends on several factors
• Interest Rates and Taxes
• When interest rates fall, consumption increases
  (people will borrow more).
• When taxes fall, consumption and/or savings can
  increase.
• Both will cause GDP to increase.
• (even if taxes increase, GDP may not fall if govt
  spends the money instead of consumers.)

Ch 2 GDP and the Players Three
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Investment Business Buys as Well as Sells

• I Investment
• Investment (creation of capital) depends on
• Interest Rates and Taxes, Again
• Businesses are more sensitive to interest rates
  than households.
• Businesses compare rate of return they earn on
  investment to interest rate they will pay if
  rate of return lt interest, they will not make the
  investment.
• Lower interest rates mean more projects will be
  attractive to businesses (and vice versa).
• Lower taxes mean business will be able to keep
  more of the return earned on investment, so more
  investmnt will take place.

Ch 2 GDP and the Players Three
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Investment Business Buys as Well as Sells

• I Investment
• Investment (creation of capital) depends on
• Availability of SAVINGS (not capital, as book
  says)
• Businesses borrow in order to invest (create
  capital).
• If households dont save money in banks, there
  wont be money to borrow.
• The less money there is to borrow, the higher the
  interest rate.
• So, if there is a low quantity of savings, there
  will be less investment.
• US households have very low savings rates
  savings is supplemented by foreign savings in US
  banks.

Ch 2 GDP and the Players Three
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Investment Business Buys as Well as Sells

• I Investment
• Investment (creation of capital) depends on
• Availability of SAVINGS (not capital, as book
  says)
• Governments ALSO borrow from household savings to
  pay for budget deficits.
• When government borrows, it reduces the amount of
  money available for businesses to borrow.
• We call this crowding out government
  borrowing crowds out private investment.

Ch 2 GDP and the Players Three
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Government Hes Your Uncle, Not Your Dad

• G Government
• Government spends money on goods and services,
  boosting GDP
• Government also makes transfer payments which are
  NOT counted in GDP directly
• Transfer payments payments made to a
  beneficiary for which nothing is required in
  return.
• Ex, social security payments, welfare benefits,
  food stamps, Medicare health benefits,
  unemployment benefits, federal financial aid for
  education . . .
• These payments are not counted directly in GDP
  unless they are used by households for
  consumption.
• Governments impact GDP (not via G) by taxing and
  borrowing.

Ch 2 GDP and the Players Three
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Imports and Exports

• (Ex-Im) Net Exports (Exports Imports)
• Exports goods and services sold to foreign
  market
• Imports goods and services purchased from
  foreign market
• When exports gt imports, GDP increases, and vice
  versa.
• NOTE Your book says (on pg 28) that no nation
  wants a negative trade balance (exports lt
  imports) this is WRONG! We will discuss this
  in Part V, International Trade.

Ch 2 GDP and the Players Three
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