GDP, Growth, and Instability
AN INTRODUCTION TO
MEASURING DOMESTIC OUTPUT
AND NATIONAL INCOME
BUSINESS CYCLES, UNEMPLOYMENT,
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IN THIS CHAPTER YOU WILL LEARN:
1 How macroeconomics studies both longrun economic growth and short-run fluctuations in output and unemployment.
2 Why economists focus on GDP, inflation, and unemployment when assessing the health of an entire economy.
3 That sustained increases in living standards are a historically recent phenomenon.
4 Why savings and investment are key factors in promoting rising living standards.
5 Why economists believe that “shocks” and
“sticky prices” are responsible for short-run fluctuations in output and employment.
An Introduction to Macroeconomics
As you know from Chapter 1, macroeconomics studies the behavior of the economy as a whole. It is primarily concerned with two topics: long-run economic growth and the short-run fluctuations in output and employment that are often referred to as the business cycle. These phenomena are closely related because they happen simultaneously. Economies show a distinct growth trend that leads to higher output and higher standards of living in the long run, but in the short run there is a great deal of variability. Sometimes growth proceeds more rapidly and sometimes it proceeds more slowly. It may even turn negative for a while so that output and living standards actually decline, a situation referred to as a recession. This chapter provides an overview of the data that macroeconomists use to measure the status and growth of an entire economy as well as a preview of the models that they use to help explain both long-run growth and short-run fluctuations.
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GDP, Growth, and Instability
Performancean dP olicy
In order to understand how economies operate and how their performance might be improved, economists collect and analyze economic data. An almost infinite number of data items can be looked at, including the amount of new construction taking place each month, how many ships laden with cargo are arriving at our ports each year, and how many new inventions have been patented in the last few weeks. That being said, macroeconomists tend to focus on just a few statistics when trying to assess the health and development of an economy. Chief among these are real GDP, unemployment, and inflation.
• Real GDP, or real gross domestic product, measures the value of final goods and services produced within the borders of a given country during a given period of time, typically a year. This statistic is very useful because it can tell us whether an economy’s output is growing. For instance, if the
United States’ real GDP in 2007 is larger than the
United States’ real GDP in 2006, then we know that
U.S. output increased from 2006 to 2007. To get real GDP, government statisticians first calculate nominal GDP, which totals the dollar value of all goods and services produced within the borders of a given country using their current prices during the year that they were produced. But because nominal
GDP uses current prices, it suffers from a major problem: It can increase from one year to the next even if there is no increase in output. To see how, consider a sculptor who produces 10 sculptures this year and 10 sculptures next year. Clearly, her output does not change. But if the price of sculptures rises from $10,000 this year to $20,000 next year, nominal
GDP will rise from $100,000 (ϭ 10 ϫ $10,000) this year to $200,000 (ϭ 10 × $20,000) next year because of the increase in prices. Real GDP corrects for price changes. As a result, we can compare real GDP numbers from one year to the next and really know if there is a change in output (rather than prices).
Because more output means