Pump Primer

1
Pump Primer

• Using your textbook
• Define Gross Domestic Product.
• List at least three categories that are not
  listed in GDP.

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By Alan J. CarperBob Jones University Press. 1998
ECONOMICS for Christian Schools

• Unit V Economics of the Government

3
Measuring the Wealth of the Nation

• Chapter 12

4
Objectives

• Define gross domestic product
• Differentiate between final and intermediate
  goods
• Identify the four categories of expenditures used
  to tabulate the GDP
• Explain why the nominal GDP figure is not
  entirely accurate and needs adjustment to become
  more useful

5
Objectives

• Define trade deficit and trade surplus
• List the reasons that a nation might experience a
  trade deficit
• Explain the positions of the protectionists and
  the supporters of free trade

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MACROECONOMIC APPROACHES AND PATHWAYS

• The Two Main Schools of Thought
• The two main approaches to macroeconomics are
  based on two schools of thought
• Classical macroeconomics
• Keynesian macroeconomics

(Bade slide 4)
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MACROECONOMIC APPROACHES AND PATHWAYS

• Classical macroeconomics is a body of theory
  about how a market economy works and why it
  experiences economic growth and fluctuations.
• The economy will fluctuate, and growth will slow
  down from time to time.
• But no government remedy can improve the
  performance of the market.
• The classical view markets work well and
  deliver the best available macroeconomic
  performance.

(Bade slide 5)
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MACROECONOMIC APPROACHES AND PATHWAYS

• Classical macroeconomic fell into disrepute
  during the 1930s, which was a decade of high
  unemployment and stagnant production throughout
  the world. (i.e., Great Depression)
• Classical macroeconomics predicted that the Great
  Depression would end, but gave no method for
  ending it more quickly.

(Bade slide 6)
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MACROECONOMIC APPROACHES AND PATHWAYS

• Keynesian macroeconomics is a body of theory
  about how a market economy works that stresses it
  inherent instability and the need for active
  government intervention to achieve full
  employment and sustained economic growth.
• John Maynard Keynes, in his book The General
  Theory of Employment, Interest, and Money, began
  this school of thought.
• Keynes theory was that too little consumer
  spending and investment lead to the Great
  Depression.

(Bade slide 7)
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MACROECONOMIC APPROACHES AND PATHWAYS

• Keynes solution to depression and high
  unemployment was increased government spending.
• But Keynes predicted that his policy aimed at
  curing unemployment in the short term might
  increase it in the long term.
• This prediction became reality during the 1960s
  and 1970s, when inflation exploded, growth
  slowed, and unemployment increased.
• It was time for another challenge to the
  mainstream new macroeconomics

(Bade slide 8)
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MACROECONOMIC APPROACHES AND PATHWAYS

• The New Macroeconomics
• New macroeconomics is a body of theory about how
  a market economy works based on the view that
  macro outcomes depend on micro choicesthe
  choices of rational individuals and firms
  interacting in markets.
• New classical macroeconomics incorporates the
  ideas of classical economists that markets work
  and new Keynesian macroeconomics that markets
  adjust slowly.

(Bade slide 9)
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MACROECONOMIC APPROACHES AND PATHWAYS

• The key difference between the two new schools is
  in their view of how quickly price and wages
  adjust in the face of excess demand or excess
  supply.
• But this difference is tiny, and a consensus is
  emerging.
• The Road Ahead
• We follow the new consensus and begin with an
  explanation of what determines real GDP and
  employment and the pace of economic growth.

(Bade slide 10)
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Gross Domestic Product
One persons spending is another persons
income.
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Gross Domestic Product

• The gross domestic product, or GDP, is commonly
  used to measure economic growth.
• The GDP in the dollar value at market prices of
  all final goods and services produced in the
  economy during a stated period.
• Final goods are goods intended for the final
  user.
• For example, gasoline is a final good but crude
  oil, from which gasoline and other products are
  derived, is not.

(NCEE slide 26)
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Gross Domestic Product

• GDP also aims to be a full count of the value of
  everything that is produced.
• Includes only those items that are traded in U.S.
  markets.
• GDP does not include
• sale of used goods (used cars)
• sale of intermediate goods
• illegal transactions
• purely financial transactions (A financial
  transaction does not involve production of a good
  or service. It is a transfer of assets.)
• do-it-yourself activities
• imports (goods made outside of U.S.)

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How GDP is Measured

• Business Investment
• a. Gross private domestic investment (GPDI), or
  business investment
• - sum of all business spending on capital
  investment and unplanned inventories.
• Government Spending
• - Federal, state and local governments
  purchase approx. 1 of every 5 worth of
  products and services

(Carper, 170-171)
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How GDP is Measured

• Net Exports
• a. Exports (products sold to other countries)
• b. Imports
• products purchased from other countries
• includes net income from assets abroad

(Carper, 172)
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The Output Market
Rest of World
Government borrows crowding out both
consumption and Investment.
The Financial Market
Government
Firms
Households
The Input Market
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Macroeconomic Goals

• Activity 11

by Advanced Placement Economics Teacher Resource
Manual. National Council on Economic Education,
New York, N.Y.
20
Part C Measuring Short-Run Economic Growth

• Before using GDP to measure output growth, we
  must first adjust GDP for price changes.
• Lets say GDP in Year 1 is 1,000 and in Year 2
  it is 1,100. Does this mean the economy has
  grown 10 percent between Year 1 and Year 2?
• Not necessarily. If prices have risen, part of
  the increase in GDP in Year 2 will merely
  represent the increase in prices.
• We call GDP that has been adjusted for price
  changes real GDP. If it isnt adjusted for price
  changes, we call it nominal GDP.
• To compute real GDP in a given year, use the
  following formula

Real GDP in Year 1 (nominal GDP x 100) / price
index
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• To computer real output growth in GDP from one
  year to another
• Subtract real GDP from one year to another
• Subtract real GDP for Year 2 from real GDP in
  Year 1.
• Divide the answer (the change in real GDP from
  the previous year) by real GDP in Year 1.
• The result, multiplied by 100, is the percentage
  growth in real GDP from year 1 to Year 2.
• (If real GDP declines from Year 1 to Year 2, the
  answer will be a negative percentage.)
• Heres the formula

(real GDP in Year 2 real GDP in Year 1)
Output growth
x 100
real GDP in Year 1
Example If real GDP in Year 1 1,000 and in
Year 2 1,028, then the output growth rate from
Year 1 to Year 2 is 2.8 (1,028 1,000)/1,000
.028, which we multiply by 100 in order to
express the result as a percentage (2.8).
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• To understand the impact of output changes, we
  usually look at real GDP per capita.
• To do so, we divide the real GDP of any period by
  a countrys average population during the same
  period.
• This procedure enables us to determine how much
  of the output growth of a country simply went to
  supply the increase in population and how much of
  the growth represented improvements in the stand
  of living of the entire population.

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Example, lets say the population in Year 1 was
100 and in Year 2 it was 110. What was the real
GDP per capita in Years 1 and 2?
Year 1 Real GDP per capita
Year 1 real GDP
1,000

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Population in Year 1
100
Year 2 Real GDP per capita
1,028
9.30
110

• In this example, the average standard of living
  fell even though output growth was positive.
  Developing countries with positive output growth
  but high rates of population growth often
  experience this condition.

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• Nominal and Real GDP
• Nominal GDP Price Index Population

Year 3 5,000 125 11 Year
4 6,600 150 12

• What is the real GDP in Year 3?
  _____________________________
• What is the real GDP in Year 4?
  _____________________________
• What is the real GDP per capita in Year 3?
  ____________________
• What is the real GDP per capita in Year 4?
  ____________________
• What is the rate of real output growth between
  Years 3 and 4?
• __________________________________________
• 13. What is the rate of real output growth per
  capita between Years 3 and 4?
• __________________________________________
• (Hint Use per-capita data in the output growth
  rate formula.)

4,000 (100 x 5,000) / 125
4,400 (100 x 6,600) / 150
364 (4,000 / 11)
367 (4,400 / 12)
10 (4,400 4,000) / 4,000 x 100
0.82 (367 364) / 364 x 100
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Foreign Trade

• Reasons for Trade Deficits
• 1. Domestic Inability to Produce
• 2. Better Quality of Foreign Goods
• 3. Cheaper Foreign Materials
• 4. Lower Foreign Wages
• 5. Lower Foreign Capital Costs
• 6. Foreign Government Subsidies

(Carper, 176-178)
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Foreign Trade

• Trade Policy, Protectionism, and Free Trade
• 1. Protectionists
• 2. Free Trade

(Carper, 180)
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John Stuart Mill (1806-1873)

• Economic Philosopher
• Analyzed contemporary economic thought
• Advanced the idea that society did not have the
  ability to alter its economic production
  capabilities, but did have the ability to alter
  the way it distributed its economic products.
• Major work, The Principles of Political Economy
• Government should control the distribution of
  wealth
• Individual freedom
• Social reforms
• Shorter work hours
• Tax reform
• Laid foundation for advancements in economics

(Carper, 180)
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GNP Activity

• With a partner complete the GNP Activity.

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Works Cited

• Bade, Robin and Michael Parkin. Foundations of
  Economics. Pearson Education, Inc. Boston, 2004.
• Bade, Robin and Michael Parkin. Essential
  Foundations of Economics. Power Point
  presentation.
• Carper, Alan. Economics for Christian Schools.
  Greenville Bob Jones University Press, 1998.
• "The New King James Version." Logos Bible
  Software. CD_ROM. ed. 2004.