Economics

Gross Domestic Product

In this lesson, students will be able to identify

characteristics of the Gross Domestic Product.

Students will be able to identify and/or define

the following terms:

Gross Domestic Product (GDP)

Real GDP

Inflation

Durable Goods

Economics

Do you

remember

the Invisible

Hand?

It was the idea

that the

economy would

always fix

itself.

Economics

But when the Great Depression happened, the

economy didn’t seem to fix itself.

Economics

The Effects of the Great Depression on

Economists:

• The Great Depression taught economists that they needed some way of tracking the nation’s economy.

• By tracking the nation’s economy, economists could determine if the economy was in danger of a recession or a depression and could try to apply economic policies to prevent such hardships from occurring.

Economics

The Gross Domestic Product (GDP) is a tool

for tracking macroeconomic progress.

Economics

Gross Domestic Product (GDP)

• The Gross Domestic Product is the dollar value of all final goods and services produced within a country’s borders in a given year.

• In order for a good to be included in a nation’s GDP, it must be made in that country.

• It doesn’t matter if the factory is owned by a foreign company as long as the factory is located in the country where GDP will be calculated.

Economics

By tracking GDP, economists can tell whether

an economy is growing (expanding) or

shrinking (contracting).

Economics

Real GDP

• While nominal GDP is expressed in current

prices, real GDP is adjusted for inflation.

• Inflation means rising prices. The problem with

GDP is it could appear to rise when in reality

only prices rose.

• In other words, one million in1970 dollars is not

the same as one million in 2006 dollars. The

2006 dollars must be adjusted to 1970 dollars in

order to effectively compare the two amounts.

Economics

Real GDP is GDP that has been adjusted

for inflation.

Economics

Durable and Nondurable Goods

• The goods included in GDP are durable and nondurable goods.

• Durable goods are goods that last for a relatively long time, such as refrigerators and cars.

• Nondurable goods last for a short period of time like food and paperback books.

Economics

A refrigerator is a durable good. It lasts

a long time.

Economics

Food is a

nondurable good.

It does not

last a long time.

Economics

Just like going

for your yearly

physical allows

you to track your

health and prevent

more serious problems

from occurring, GDP

tracks the economy’s

health.

Economics

Questions for Reflection:

• What did economists believe about the economy before the Great Depression?

• What is Gross Domestic Product or GDP and why is it important?

• Why do economists adjust GDP for inflation and what is this adjusted GDP called?

• What is the primary difference between durable and nondurable goods?

Economics

Business Cycle

In this lesson, students will be able to identify characteristics of the business cycle.

Students will be able to identify and/or define the following terms:

Business Cycle

Expansion

Peak

Contraction

Trough

Economics

A business cycle is a period of macroeconomic

expansion followed by a period of contraction.

Economics

The Four Phases of a Business Cycle

• There are four phases in a business cycle:

Expansion: a period of economic growth

Peak: the height of the expansion

Contraction: a period of economic decline

Trough: the lowest point of the contraction

Economics

When an economy

is expanding or

growing, many people

have jobs and many

goods and services

are being produced

and sold. At the peak

of the expansion,

Gross Domestic Product

is as high as it will

go for that particular

business cycle.

Economics

During a

period of

contraction,

more people

are unemployed

and fewer goods

and services are

being produced

and sold. Not

all contractions

are equally

severe.

Economics

Recessions and Depressions

• Each phase of the business cycle is determined by monitoring Gross Domestic Product.

• A contraction that lasts for at least six months is called a recession.

• A particularly severe and long contraction is called a depression.

Economics

The Great

Depression

was the most

severe economic

contraction in the

history of the

world. It

permanently

changed the way

economists think.

Economics

Factors Which Affect the Business

Cycle

• The following four factors can affect the

business cycle:

Investment in Businesses

Interest Rates

Consumer Expectations

External Shocks

Economics

The more money people invest in businesses,

the more money businesses have to grow.

Investment affects the business cycle.

Economics

Interest is the price of borrowed money. When

interest rates are high, people borrow less.

Businesses borrow less too.

Interest rates affect the business cycle.

Economics

When people are optimistic about the future,

they spend more money. Optimism affects

the business cycle.

Economics

External shocks can be positive or negative.

An earthquake is a negative external shock.

It affects the business cycle.

Economics

Throughout American history, there have been

many business cycles.

Economics

Questions for Reflection:

• Define the business cycle.

• What are the four phases of the business

cycle and explain each phase?

• What are the four factors that affect the

business cycle and how does each factor

affect the business cycle?

• What is the relationship between Gross

Domestic Product and the four phases of

the business cycle?

Economics

Economic GrowthIn this lesson, students will be able to

identify factors which lead to

macroeconomic growth.

Students will be able to identify and/or

define the following terms:

Real GDP per capita

Capital Deepening

Savings Rate

Technological Progress

Economics

Our world’s population has increased greatly in

the last 200 years.

Economics

Population and the Economy

• A nation’s population tends to grow.

• Gross Domestic Product must keep up

with the population growth rate.

• If the economy does not continue to grow

as population grows, unemployment and

hunger will increase.

Economics

The economy is like a pie. The bigger the

pie, the more people can be fed.

Economics

Real GDP Per Capita

• It is important to remember that real GDP is

GDP that has been adjusted for inflation.

• Per capita means per person.

• Therefore, real GDP per capita is a way of

determining how much money each person in a

society would receive if wealth from GDP was

divided equally among the people of that nation.

Economics

A country with a high standard of living has

a high real GDP per capita.

Economics

Capital Deepening

• One way to increase economic productivity is through capital deepening.

• Capital deepening is the process of increasing the amount of capital per worker.

• Better educated workers can produce more output per hour of work.

Economics

Better educated workers are more productive

workers. Education helps the economy to grow.

Economics

Savings Rate

• Money that is saved is available for investment.

• The savings rate is the portion of disposable income spent to the portion of disposable income saved.

• A country with a higher savings rate will be more likely to experience economic growth because more money will be available to invest in businesses.

Economics

The more money citizens of a country

save, the more money is available

for businesses to expand.

Economics

When education rates and savings rates

increase, the economy grows. And

when the economy grows, people have

jobs, shelter, food, and the comforts of life.

Economics

Technological Progress

• Another key source of economic growth is

technological progress.

• This is an increase in efficiency gained by

producing more output.

• Technological progress like email greatly

increases business efficiency.

Greater efficiency means greater profits.

Economics

Questions for Reflection:

• Why must the economy continue to grow as population increases?

• Why is it important for economists to calculate real GDP per capita?

• What is capital deepening and how does it affect economic growth?

• How does the savings rate help the economy to grow?

• Why is technological progress important?