Chapter 12

1. Chapter 12 Bell Work: Grab workbooks from back put in workbook, complete warm-ups on pages 109 and 110

2. Chapter 12.1 • “What does the GDP show about the nation’s economy?” • Objectives to know • How GDP is calculated • Difference b/t nominal and real GDP • Limitations of GDP • Factors that influence GDP • Other output/income measures • Key Terms (3) • http://www.pearsonsuccessnet.com/snpapp/iText/products/0-13-369833-5/Flash/Ch12/Econ_OnlineLectureNotes_ch12_s1.swf

3. Introduction • What does the Gross Domestic Product (GDP) show about the nation’s economy? • GDP measures the amount of money brought into a nation in a single year through the selling of that nation’s goods and services • GDP is a measurement of how well a nation’s economy is doing for a particular year. • High GDP means nation is doing well • Low GDP means nation is doing poorly

4. Nation Income Accounting • Economists use a system called national income accounting to monitor the U.S. economy • They collect microeconomic statistics, which the govt. uses to determine economic policies • M/I data economists analyze is Gross Domestic Product (GDP) • Dollar value of all final goods and services produced w/in country’s borders in a year

5. What is GDP • Tracks exchanges of money • Need to understand which are/are not included

6. Approaches: Read Sections • Expenditure • One method used to calculate GDP • Estimate annual expenditures on 4 categories of final goods/services • Consumer goods • Business goods/services • Govt. goods/services • Net Exports • Income • Adding up all the incomes in the economy • Rationale is that a sale of final good/service minus the cost of production represents income for that firms owners/employees

8. Nominal vs Real GDP: Read Section • Helps understand current conditions of GDP • Nominal GDP is measured in current prices • Calculated by using the current year’s prices to calculate the current years output • Problem: Doesn’t account for rise in prices • May show increase in GDP when output is still same • Real GDP • GDP expressed in constant, unchanging prices • Determine a year to set base prices so they can see a “true” change in GDP • Figure 12.3 311

9. Limitations of GDP • Doesn’t take into account some economic activities or aspects of life. • Nonmarket activities: GDP doesn’t measure goods/services people make/do themselves • Underground Economy: GDP doesn’t account for “black market” or people paid w/out taxes • Negative externalities: unintended side effects, like pollution, not subtracted from GDP • Quality of Life: GDP doesn’t necessarily represent quality of life

10. Other output and income Measure • In addition to GDP, there are other ways to measure economy

11. Influences on GDP • Aggregate Supply • Total amount of goods/services available at all possible price levels • In a nation’s economy, as the prices of most goods/services change, the price level changes and firms respond by changing their output • As price level rises, real GDP, or aggregate supply rises • As prices fall, so does real GDP

12. Influences on GDP • Aggregate Demand • Amount of goods/services that will be purchased at all possible price levels • As prices move up/down individuals/firms change how much they buy--- in the opposite direction of aggregate supply • Any shift in aggregate supply or aggregate demand will have an impact on real GDP and price level • Aggregate supply/demand represent supply/demand on a national level. • They show what happens to GDP and prices when aggregate supply/demand shifts. • Figure 12.5

14. Lesson Closing • “Exit Card”: Identify/Explain which is/isn’t part of GDP • Restaurant meal • Chair manufactured in Mexico by U.S. company • Childcare provided by parent • Bike made by European company in U.S. • Childcare provided by Daycare center • Selling of 3-year old used truck • Item made this year, but not sold yet • Workbook pages • 111, 16, and 19: Quiz done for tomorrow • Visual Glossary: GDP • Action Graphs: Measurements and Agg. S & D

15. 12.2: Bell Work Workbook pages 111, 16, and 19: Quiz done for tomorrow Visual Glossary: GDP Action Graphs: Measurements and Agg. S & D

16. 12.2 • “What factors affect phases of a business cycle?” • Objectives to know • Phases of business cycle • 4 key factors that keep business cycle going • How economists forecast fluctuations in cycle • Impact of business cycles in U.S. history • Key Terms(2) • http://www.pearsonsuccessnet.com/snpapp/iText/products/0-13-369833-5/Flash/Ch12/Econ_OnlineLectureNotes_ch12_s2.swf

17. Introduction • What factors affect the phases of a business cycle? • Periods of economic growth • Periods of economic decline • Business investments • Interest Rates and Credit • Consumer expectations • External Shocks

18. Phases of a Business Cycle • Business cycles are made up of major changes in real GDP above or below normal levels • Consists of four phases • Expansion • Rise in real GDP, jobs abundant, unemployment low, businesses prosper • Peak • When GDP stops rising, reaches height of expansion • Contractions • Falling GDP; usually less output and higher unemployment • 3 Types • Recession: long contraction (16-18 mnths) • Depression: Really long recession, high UE and output • Stagflation: Decline in real GDP w/rise in prices (inflation)

19. 4 Factors for Business cycle • Business cycles are affected by 4 main economic variables • Business Investment • When expanding, investments increase • Keeps increasing GDP, maintaining expansion • When firms cut spending, decreases GDP • Interest Rates/Credit • Consumers often us credit to buy new things • If interest rates on goods rise, less likely to buy • Same is true for businesses deciding whether or not to buy new equipment or make large investments

20. 4 Factors for Business cycle • Consumer Expectations • If people expect economy to contract they may reduce spending, pulling down GDP • High consumer confidence may lead people to buy more goods; pushes up GDP • External Shocks • Negative external shocks can have a great effect on business, causing GDP to decline • Country in War w/ heavy investments by banks/businesses • Positive External shocks can lead to increase in nations wealth • Like oil discovery or a great growing season

21. Forecasting Business Cycles • To predict the next phase of a cycle, forecasters must anticipate movements of real GDP before the occur • Economists use leading indicators to help them • Stock market is one leading indicator • Today it will turn downward sharply before recession • Conference Board: keeps index of 10 strong indicators • Stocks, interest rates, and capital goods purchases • None are altogether reliable

22. Impact of Cycles in U.S. History • Great Depression • Changed beliefs that a declining economy would recover on own. • Led economists to belief that modern market economies could fall into long-lasting contractions • Economy didn’t recover until WWII • Declining GDP/High unemployment were 2 major signs of the Great Depression • Pic on pg. 320 • What year did GD hit its Trough? • 1933 • How long did it take GDP to return to pre-depression peak? • 4 years

23. Impact of Cycles in U.S. History • OPEC Embargo • In 1970s, U.S. experienced an external shock when the price of gasoline and heating fuels skyrocketed as a result of the OPEC embargo on oil shipped to U.S. • U.S. economy also experienced a recession in the early 80s and another brief one in 1991 • Attacks of 9/11 led to another sharp drop in consumer spending in many service industries

24. Business Cycle today • Economy became slow in 2001 • Surged in late 2003 • Growth slowed again as a result of high gas prices in 2006 • Sub-Prime mortgage crisis caused further decline in 2007 • Stock market decline in 2008 appeared to be bringing country into another recession

25. Lesson Closing • “Exit Card” • Draw the business cycle with “hypothetical” peaks and troughs from the 1980s to now • Homework • Workbook pages: 112, 25, 27 • Video • How economy works • Tracking a business Cycle • If any of you would like a “jump” on the Ch.12 Project go ahead. Its on Sharepoint! Under the “announcements”

26. Chapter 12 Section 3 BW: Section 2 Quiz Video How economy works Tracking a business Cycle

27. Chapter 12 Section 3 • “How does the economy grow?” • Objectives to learn • How economic growth is measured • What capital deepening is and how it contributes to economic growth • Analyze how saving and investment are related to economic growth • Impact of population growth, government, and foreign trade on economic growth • Causes and impact of technological progress • Key Terms (1) • http://www.pearsonsuccessnet.com/snpapp/iText/products/0-13-369833-5/Flash/Ch12/Econ_OnlineLectureNotes_ch12_s3.swf

28. Introduction • How does the economy grow? • The economy grows through • Increase in capital deepening • Higher savings rate • Population that grows along w/capital growth • Government intervention • Technological Progress

29. Measuring Economic Growth • Basic measure is the % change in Real GDP over a period of time • Economists prefer a measuring system that takes population growth into account • GDP per capita is used then instead • Example: Imagine there are 2 families both living on $60,000/yr • Family 1: 5 in family, Family 2: 3 in family • Which family has a higher standard of living? • GDP measures standard of living, not quality • GDP also tells us nothing about output distributed across population • In general, nations w/high GDP per capita experience greater Quality of life; even though it tells us little about individuals other than a starting point • Watch Action Graph

30. What is Capital Deepening? • Nation w/large amount of physical capital will experience economic growth • CD is process of increasing amount of capital/worker. • One of most important sources for econ. growth

31. Saving and Investing • Amnt of $$ people save increases, then more investment funds are there for businesses • Funds can be used for capital investment and expand stock of capitol in business sector • Link to Cap.Deepening? • Provides more funds for financial institutions to invest

32. Effects on Economic Growth • Population Growth • High pop. Growth w/supply of capital same = less capital per worker • Opposite of capital deepening, lower standards of living • Low pop. Growth and expanding capital = greater capital deepening • Government (Taxes) • Raising Taxes • People have less money, reduce savings • Reduces money for investment • HOWEVER • If Govt. invests revenue in public goods this will increase investment • Results in capital deepening

33. Effects on Economic Growth • Foreign Trade • Can result in a trade deficit • Value of goods a country imports is higher than exported • If imports consist of investment type goods, running a trade deficit can help capital deepening • If funds are used for long-term investments, Capital Deepening can offset negatives of a trade deficit by helping generate economic growth • Popcorn Read Foreign Trade: pg. 327

34. Technical Progress • Key source for Economic Growth • Can result from new scientific knowledge, inventions, and production methods • Measuring technological progress can be done by determining how much growth in output comes from increases in capitol and how much comes from increases in labor • Any remaining growth in output comes from technological progress • Causes • Scientific Research • Innovation • Scale of Market • Larger markets provide more incentives for innovation • Education and Experience • Natural Resources • Increases need for new technology • Read Case Study: pg.329

35. Lesson Closing • Watch Case Study Video • Watch Essential Question Video • Answer Questions for Quiz…… fill in workbook

36. Friday • Project Work • This is your Project Grade for Ch.12 • Go to http://www.econedlink.org/lessons/index.php?lesson=904&page=student • Or just go to share-point and choose the site. • Follow directions • Print off results…. • May work w/partner but need to print off separate results