2. Increases in GDP Help Revive American Airlines Learning Objectives The business cycle does not affect all industries in the same way. For example, some trucking firms experienced slow sales during 2006 while airlines were prospering. Become familiar with other measures of total production and total income . 7.4 Discuss the difference between real GDP and nominal GDP . 7.3 Discuss whether GDP is a good measure of well-being . 7.2 Explain how total production is measured. 7.1

3. GDP: Measuring Total Production and Income Microeconomics The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices. Macroeconomics The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth. Business cycle Alternating periods of economic expansion and economic recession.

4. GDP: Measuring Total Production and Income Recession The period of a business cycle during which total production and total employment are decreasing. Economic growth The ability of an economy to produce increasing quantities of goods and services. Inflation rate The percentage increase in the price level from one year to the next. Expansion The period of a business cycle during which total production and total employment are increasing.

5. Gross Domestic Product Measures Total Production Learning Objective 7.1 Gross domestic product ( GDP ) The market value of all final goods and services produced in a country during a period of time, typically one year. Measuring Total Production: Gross Domestic Product GDP Is Measured Using Market Values, Not Quantities The word value is important in the definition of GDP.

6. Gross Domestic Product Measures Total Production Learning Objective 7.1 Final good or service A good or service purchased by a final user. Measuring Total Production: Gross Domestic Product Intermediate good or service A good or service that is an input into another good or service, such as a tire on a truck. GDP Includes Only Current Production GDP Includes Only the Market Value of Final Goods GDP includes only production that takes place during the indicated time period.

7. Calculating GDP Learning Objective 7.1 Solved Problem 7-1 100.00 20 Textbooks 0.10 2,000 Paper 10.00 80 Pizzas $50.00 100 Eye examinations (3) PRICE PER UNIT (2) QUANTITY (1) PRODUCT PRODUCTION AND PRICE STATISTICS FOR 2007 2,000 100 20 Textbooks 800 10 80 Pizzas $5,000 $50 100 Eye examinations (3) VALUE (2) PRICE PER UNIT (1) QUANTITY PRODUCT

8. Gross Domestic Product Measures Total Production Learning Objective 7.1 Production, Income, and the Circular Flow Diagram FIGURE 7-1 The Circular Flow and the Measurement of GDP

9. Gross Domestic Product Measures Total Production Learning Objective 7.1 Transfer payments Payments by the government to individuals for which the government does not receive a new good or service in return. Production, Income, and the Circular Flow Diagram

10. Gross Domestic Product Measures Total Production Learning Objective 7.1 Components of GDP Consumption Spending by households on goods and services, not including spending on new houses. Personal Consumption Expenditures, or “Consumption” Investment Spending by firms on new factories, office buildings, machinery, and additions to inventories, and spending by households on new houses. Gross Private Domestic Investment, or “Investment” Don’t Let This Happen to YOU! Remember What Economists Mean by Investment

11. Gross Domestic Product Measures Total Production Learning Objective 7.1 Components of GDP Government purchases Spending by federal, state, and local governments on goods and services. Government Consumption and Gross Investment, or “Government Purchases”

13. Gross Domestic Product Measures Total Production Learning Objective 7.1 Components of GDP Net exports Exports minus imports. Net Exports of Goods and Services, or “Net Exports” An Equation for GDP and Some Actual Values

14. Gross Domestic Product Measures Total Production Learning Objective 7.1 An Equation for GDP and Some Actual Values FIGURE 7-2 Components of GDP in 2006

16. Gross Domestic Product Measures Total Production Learning Objective 7.1 Measuring GDP by the Value-Added Method Value added The market value a firm adds to a product. Table 7-1 Calculating Value Added = $35 Total Value Added = 20 Value added by L.L. Bean = ($35 – $15) Value of shirt for sale on L.L. Bean’s Web site = $35 L.L. Bean = 12 Value added by shirt manufacturer = ($15 –$3) Value of cotton fabric made into a shirt = $15 Shirt Company = 2 Value added by cotton textile mill = ($3 – $1) Value of raw cotton woven into cotton fabric = $3 Textile Mill = 1 Value added by cotton farmer Value of raw cotton = $ Cotton Farmer VALUE ADDED VALUE OF PRODUCT FIRM

17. Does GDP Measure What We Want It to Measure? Learning Objective 7.2 Household production refers to goods and services people produce for themselves. Shortcomings in GDP as a Measure of Total Production Household Production The Underground Economy Underground economy Buying and selling of goods and services that is concealed from the government to avoid taxes or regulations or because the goods and services are illegal.

19. Does GDP Measure What We Want It to Measure? Learning Objective 7.2 Shortcomings of GDP as a Measure of Well-Being The Value of Leisure Is Not Included in GDP GDP Is Not Adjusted for Pollution or Other Negative Effects of Production GDP Is Not Adjusted for Changes in Crime and Other Social Problems GDP Measures the Size of the Pie but Not How the Pie Is Divided Up

21. Real GDP versus Nominal GDP Learning Objective 7.3 Real GDP The value of final goods and services evaluated at base-year prices. Calculating Real GDP Nominal GDP The value of final goods and services evaluated at current-year prices.

22. Calculating Real GDP Learning Objective 7.3 Solved Problem 7-3 1,800 90 20 Textbooks 880 11 80 Pizzas $4,000 $40 100 Eye examinations VALUE 2000 PRICE 2009 QUANTITY PRODUCT 100 20 90 15 Textbooks 10 80 11 90 Pizzas $50 100 $40 80 Eye examinations PRICE QUANTITY PRICE QUANTITY PRODUCT 2009 2000

23. Real GDP versus Nominal GDP Learning Objective 7.3 Comparing Real GDP and Nominal GDP FIGURE 7-3 Nominal GDP and Real GDP, 1990–2006

24. Real GDP versus Nominal GDP Learning Objective 7.3 Price level A measure of the average prices of goods and services in the economy. The GDP Deflator GDP deflator A measure of the price level, calculated by dividing nominal GDP by real GDP and multiplying by 100.

25. Real GDP versus Nominal GDP Learning Objective 7.3 The GDP Deflator GDP Deflator APPLIED TO 2006 APPLIED TO 2005 FORMULA $11,415 billion $11,049 billion REAL GDP $13,247 billion $12,456 billion NOMINAL GDP 2006 2005

26. Other Measures of Total Production and Total Income Learning Objective 7.4 Gross National Product (GNP) Net National Product (NNP) National Income Personal Income

27. Other Measures of Total Production and Total Income Learning Objective 7.4 Disposable Personal Income FIGURE 7-4 Measures of Total Production and Total Income, 2006

28. Other Measures of Total Production and Total Income Learning Objective 7.4 The Division of Income FIGURE 7-5 The Division of Income

29. An Inside LOOK Trucking Industry Depends on the Goods—Not Services—Component of GDP Economic Slowdown Slams Breaks on Trucking Sector As goods decline as a percentage of GDP, so does the demand for ground-freight transportation services. (The goods and services shares of GDP do not sum to 100 percent because GDP is composed of goods, services, and structures.)

30. Business cycle Consumption Economic growth Expansion Final good or service GDP deflator Government purchases Gross domestic product (GDP) Inflation rate Intermediate good or service Investment Macroeconomics Microeconomics Net exports Nominal GDP Price level Real GDP Recession Transfer payments Underground economy Value added K e y T e r m s