Lesson Title: GDP and Business Cycles

Lesson objectives:
1. To understand what GDP is.
2. To discuss the importance of knowing GDP.
3. To appreciate how economic activities are represented by business
cycles.
4. To enumerate the 2 causes why a business cycles contract.

Pre-test

True or false
1.) GDP gives information about the size of the economy and how the
economy is performing.
2.) GDP is used as an indicator of the output or income of the country. It
measures the market value of all finished goods and services produced in
an economy for a given period.
3.) Importation of goods increases a country’s GDP while exportation
decreases a country’s GDP.
4.) Business cycle is the cycle of expansion and contractions.
5.) Real GDP is one of the important factors to determine the country’s
business cycle.

Concepts and Examples

Gross domestic product (GDP) is the market value of all final goods
and services produced within a country in a given period of time.
COMPONENTS OF GDP WITHIN A COUNTRY

• FIRMS
• HOUSEHOLDS
• GOVERNMENT
• FOREIGN PURCHASES (when the country engages in foreign trades)
• FOREIGN PRODUCTS (imports) (deduction in computing GDP)

Why should we measure GDP?

• To know the country’s economic activities.

• To determine the size and influence of the economy.
• To get the GDP per capita (real GDP divided by number people in the country)
• It provides economic snapshot of a country.
• It is used to estimate the size of an economy and growth rate.

Inclusions in computing for GDP

GDP is only measured on final goods and not on intermediate goods.

But what are these final and intermediate goods?

For example, eggs. If these eggs are cooked and serve as breakfast,
that egg is a final good but if that egg is used as an ingredient for making a
bread, then that egg is considered as an intermediate goods.
Limitations of GDP

What are those that are not included in the calculation of the GDP?

The answer to that question is very simple, it is the non-marketed goods. But
what are non-marketed goods?

• a non-market good or service is something that is not bought or sold

directly. Therefore, a non-market good does not have an observable
monetary value.

One example to explain the inclusions and limitation of GDP is when you ride
a taxi to the airport then you pay your fare, that fare is included in calculation
of the GDP. However, if your wife or husband or friends or relatives drive you
to the airport THAT IS NOT INCLUDED IN THE GDP, even though exact
same service has been performed, giving a ride is a non-marketed service.

3 METHODS OF GDP CALCULATION

1. Expenditure Method

This approach takes the sum of the spending on different final goods and
services.

GDP= C + I +G +NX
C= Consumptions of households
I= Investments of firms
G= Government
NX= Net exports (exports-imports)
 • THESE ARE THE TOTAL SPENDINGS ON GOOD 1,2,3,4,5......

For example:

Transfer Payments P54

Interest Income (i) P150
Depreciation P36
Wages (W) P67
Gross Private Investment P124
Business Profits (PR) P200
Indirect Business Taxes P74
Rental Income (R) P75
Net Exports P18
Net Foreign Factor Income P12
Government Purchases P156
Household Consumption P304
Mining of Gold P306
Livestock and fishing P74
Wholesale and Retail of Goods P70
Production of palay P52
Transportation and Communication P100

Using the formula GDP = C + G + I + NX

In this case the C is represented by Household Consumption which is P304.
The G refers to Government Spending which is P156.
I is gross private investment and is P124.
(X - M) is the net exports (exports-imports) and in the table is shown to be
P18.

Therefore:
GDP = P304 + P156 + P124 + P18
GDP = P602
2. INCOME METHOD
This approach takes the sum of the payments to the different factors of
production such as land, labor, capital & management.

To fully understand this method, data presented below is an example:

Transfer Payments P54

Interest Income (i) P150
Depreciation P36
Wages (W) P67
Gross Private Investment P124
Business Profits (PR) P200
Indirect Business Taxes P74
Rental Income (R) P75
Net Exports P18
Net Foreign Factor Income P12
Government Purchases P156
Household Consumption P304
Mining of Gold P306
Livestock and fishing P74
Wholesale and Retail of Goods P70
Production of palay P52
Transportation and Communication P100

In this case we use the formula:

NI = W + R + i + PR
W is the wages that are represented by P67 in the table.
Rental income is the R and is P75.
Interest income is i and is P150.
PR are business profits and are P200.
Therefore:
NI = P67 + P75 + P150 + P200
NI = P492
GDP = NI + Indirect Business Taxes + Depreciation
GDP = P492 + P74 + P36
GDP = P602
3. Output/Value Added Method

This approach calculates GDP by taking the sum of the value added of each
firm or economic activity. Value added is computed as the difference between
the sales of the firm and its spending on goods produced by the other firm.

Using the same example use in the 2 methods above, we can arrive at P602
final answer.

Solution:

ACTUAL COMPONENTS

+ Agriculture, Fishery and Forestry +Industry + Services

Solution:

Agriculture, Fishery and Forestry

Production of Palay P52
Livestock and Fishing P74 P126
Industry
Mining of Gold P306 P306
Services
Wholesale and Retail of Goods P70
Transportation and
P100 P170
Communication
TOTAL P602

Note: Calculated GDP under these 3 methods/approaches will be the same. The
equivalence among these approaches lies in the fact that each is just a different way of
viewing a transaction.
BUSINESS CYCLE

• One thing that will describe business cycle is that it is hard to predict.
• Cycle of expansions and contractions is called business cycles.
• Business cycle is measured using two factors mainly real GDP and
TIME.

GROWTH TREND LINE

• It is upward sloping because it is the optimal rate of real gdp growth

overtime that the economy wants to achieve with the full employment
of all available resources.

All business cycles have 4 phases.

1. Expansion
2. Peak
3. Contraction
4. Trough
 The higher the peak, the more excessive the inflation, the deeper the trough the more
excessive the unemployment.

A new business cycle starts when an economic activity reaches its

peak. Economic activity then contracts until it reaches bottom down or
reaches trough and then finally it expands and reach its peak again. From
peak to peak, that is one business cycle.

Real GDP is one of the important factors to determine the country's

business cycle. Other factors are employment, industrial productivity,
consumption, wages, wholesale-retail sale, and personal income.

Peak- highest level of raw GDP growth before it goes to contraction until it
reaches trough.
CAUSES OF REAL GDP CONTRACTION

1. Static effects

• changes in free market conditions

• changes in customer behavior

2. Shocks

• unpredictable events such as war, natural disasters, hurricanes, etc.

Recession- 2 straight quarters or 6 months of real GDP contractions.

Depression- severe and long recession, high unemployment. Deep real GDP
contractions.

POST TEST

1.) Which of the following is NOT a method in calculating GDP?

A. Income method
B. Output/Value added method
C. Expenditure method
D. Market value method
2.) Which BEST describes GDP?
A. It is a measure of what is happening to prices in an economy.
B. It is the standard measure of the value added created through the
production of goods and services in a country during a certain period.
C. It is the data used to determine how many people are employed.
D.GDP is used to determine the inventories of businesses around the
country.
3.) What is the formula in getting GDP using Income method?
A.GDP=Wages + Interest + Rents + Profits
B.GDP= GDP= C + | +G +NX
C.GDP= = Value added of firm 1 + Value added of firm 2 + Value added of
firm 3 + Value added of firm N
4.) It is the phase in business cycle where it occurs when growth slows,
employment falls, and prices stagnate.
A. Expansion
B. Peak
C. Contraction
D. Trough
5.) What happens to economic output as measured by GDP during a
recession.
A. It contracts for at least 6 months.
B. It contracts for at least two years.

C. It contracts for one month.

D. It falls more than the stock market does.

SUMMARY OF CONCEPTS

Gross Domestic Product is used as an indicator of the output or income of

the country. It measures the market value of all finished goods and services
produced in an economy for at given period, usually per quarter or per year.
GDP IS ONLY MEASURED ON FINAL GOODS AND NOT ON
INTERMEDIATE GOODS.

3 Methods of GDP Calculation

1. Expenditure Method
2. Income Method
3. Output/ Value Added Method

The business cycle is a series of expansions and contractions in real GDP.

The cycle begins at a peak and continues through a recession, a trough, and
an expansion. A new cycle begins at the next peak.

ANSWER KEY AND SOLUTIONS TO PRE-TEST AND POST-TEST

Pre-test
1.) TRUE 2.) TRUE 3.) FALSE 4.) TRUE 5.) TRUE
Post test
1.) D. 2.) B. 3.) A. 4.) C. 5.) A.

REFERENCES:

https://youtu.be/NJShg_BwtPA

https://youtu.be/Y5jr_zv2Y9M

https://www.economicshelp.org/blo g/1187/development/economicgrowth-and-development