Concepts and Problems in Macroeconomics

Concepts and Problems in Macroeconomics

Gross Domestic Product

The statistic used to measure the United States economy is called the Gross Domestic Product (GDP). The GDP is defined as the “total market value of final goods and services produced within an economy in a given year” (O'Sullivan, Sheffrin, & Perez, 2008, pg. 102). There is the measurement of the nominal GDP, which is the value of the GDP in current dollars, and there is the real GDB, “which is a measure of GDP that controls for changes in prices” (O'Sullivan et al.). The Bureau of Economic Analysis (BEA), generally uses the real GDP when reporting the annual GDP for comparison because it is more accurate. The BEA makes three essential distinctions as they calculate the real GDP:

There are three important ways in which the real GDP affects the United State’s economy. The most significant is that it is used to verify the pace at which the U.S. economy is growing. Is it growing faster, slower, or is it remaining the same as the previous quarter. The GDP is also used to compare the size of other economies throughout the world. It is also used to compare the relative growth of other economies in the world. Investors may use the GDP growth report when making decisions on how to allocate their assets and where there are good business opportunities. The Federal Reserve also uses the GDP growth rate to see if restraint or stimulation is needed for the economy (Amadeo, 2007).

Calculation GDP Values for 2004 & 2005 Using a simple Economy

Using the information from the chart below, we can find some calculations and percentages for the GDP’s of 2005 and 2005:

Quantity Prices

Year CD’s Tennis Racquets CD’s Racquets

2004 110 200 $18 $90

2005 120 210 $20 $95

Nominal GDP for 2004-

(110 x 18) + (200 x 90) = 1,980 + 18,000 = 19,980

Nominal GDP for 2005

(120 x 20) + (210 x 95) = 2,400 + 19,950 = 22,350

Real GDP for 2004 (same as nominal) using 2004 prices

(110 x 18) + (200 x 90) + 1,980 + 18,000 = 19,980

Percentage growth % - 19980/19980 = 0%

Real GDP for 2005 using 2004 prices

(120 x 18) + (210 x 90) = 2,160 + 18,900 = 21,060

Percentage growth % - 21,060 – 19,980 = 1,080,

1080/21060 = .055 = 5.5%

Price Index for GDP for 2005 using 2004 as a base

Base year/given year x 100 = CPI (19980/21060) + 100 = 0.9487179 x 100 = 94.87%

(O'Sullivan et al., 2008)

The GDP of Recent Years

The Bureau of Economic Analysis’ website reports that practically half of the deceleration of economic growth in 2007 was driven by a slump in the finance and insurance group. This information is supported by the statistics on industry contributions to real GDP growth found in their preliminary report (Bureau of Economic Analysis (BEA), 2008)

“Finance