In your notesIn your notes1.1. Draw 2 graphs showing Mexico’s GDP over the Draw 2 graphs showing Mexico’s GDP over the

past 10 years. (nominal GDP and % change)past 10 years. (nominal GDP and % change)2.2. How would you describe their economy?How would you describe their economy?

Year GDP Percent change

2000 1065.207 8.27 %

2001 1079.214 1.31 %

2002 1097.527 1.70 %

2003 1135.984 3.50 %

2004 1231.841 8.44 %

2005 1297.514 5.33 %

2006 1408.444 8.55 %

2007 1496.239 6.23 %

2008 1547.597 3.43 %

2009 1467.581 -5.17 %

2010 1564.872 6.63 %

2 goals of Macroeconomic Policy2 goals of Macroeconomic Policy Long Term GrowthLong Term Growth StabilityStability

Mexico’s EconomyMexico’s Economy

US GDP ChangesUS GDP Changes

Write down 3 events that might have Write down 3 events that might have either negatively or positively either negatively or positively affected the US GDPaffected the US GDP

For example: 1890’s Railroad For example: 1890’s Railroad connections increased consumer connections increased consumer spending and investmentspending and investment

The Business CycleThe Business Cycle

Changes in GDP over timeChanges in GDP over time

RecessionRecession 6 + months of negative GDP growth6 + months of negative GDP growth

• Decreased SpendingDecreased Spending• Lack of tradeLack of trade

6+ months of positive GDP growth6+ months of positive GDP growth• TechnologyTechnology• ProductivityProductivity

ProsperityProsperity

“downturn”“slump”

“boom”“Expansion”

Label recession on Mexico BR graph

Klein draw recession on PPFKlein draw recession on PPF

In your notesIn your notesCalculate the GDP for Portugal in Calculate the GDP for Portugal in

2008. (2008. (in millionsin millions))Consumers spent: $131,300Consumers spent: $131,300Investment: $42,000Investment: $42,000Exported $56,000Exported $56,000Imports $87,000Imports $87,000Government: $90,000Government: $90,000What is Portugal’s GDP per What is Portugal’s GDP per

Capita?Capita?

Portugal: 10 million peopleCurrency: Euro

PortugalPortugal

Great Great DepressionDepression

1929-19331929-193327% drop in GDP27% drop in GDP25% Unemployment25% Unemployment36% drop in World 36% drop in World

tradetrade43 straight months 43 straight months

of declining of declining spending !!!!spending !!!!

Great Great RecessionRecession

2007-20092007-20095 % drop in GDP5 % drop in GDP10% Unemployment10% Unemployment20% drop in World 20% drop in World

tradetrade18 straight months 18 straight months

of declining of declining spendingspending

Source Yoram Bauman, World BankSource Yoram Bauman, World Bank

Fiscal CliffFiscal CliffY = C + I + G + X >>>> Y = C + I + G + X >>>> (exports-imports)(exports-imports)

Short RunShort Run5% reduction in Government spending5% reduction in Government spendingSignificant tax increases affect on I and CSignificant tax increases affect on I and C

What would a ________ say about this in SR and LR?What would a ________ say about this in SR and LR?

KeynesianKeynesianClassical Perspective (Hayek)Classical Perspective (Hayek)

GDP = C + I + G + (Ex – Im)GDP = C + I + G + (Ex – Im)Assuming everything else stays equal, what happens if…Assuming everything else stays equal, what happens if…

US consumers spend 5% more in US consumers spend 5% more in 2012, than 2011 for the Winter 2012, than 2011 for the Winter

Holidays.Holidays.

GDP = C + I + G + (Ex – Im)GDP = C + I + G + (Ex – Im)Assuming everything else stays equal, what happens if…Assuming everything else stays equal, what happens if…

Banks report 3 % increase in business Banks report 3 % increase in business spendingspending

GDP = C + I + G + (Ex – Im)GDP = C + I + G + (Ex – Im)Assuming everything else stays equal, what happens if…Assuming everything else stays equal, what happens if…

US government passes $800 billion US government passes $800 billion healthcare reform billhealthcare reform bill

GDP = C + I + G + (Ex – Im)GDP = C + I + G + (Ex – Im)Assuming everything else stays equal, what happens if…Assuming everything else stays equal, what happens if…

Mexican citizens demand 15 % fewer Mexican citizens demand 15 % fewer US made carsUS made cars

GDP = C + I + G + (Ex – Im)GDP = C + I + G + (Ex – Im)Assuming everything else stays equal, what happens if…Assuming everything else stays equal, what happens if…

The internet is createdThe internet is created

GDP = C + I + G + (Ex – Im)GDP = C + I + G + (Ex – Im)Assuming everything else stays equal, what happens if…Assuming everything else stays equal, what happens if…

US students learn about the benefits US students learn about the benefits of saving moneyof saving money

GDP = C + I + G + (Ex – Im)GDP = C + I + G + (Ex – Im)Assuming everything else stays equal, what happens if…Assuming everything else stays equal, what happens if…

Free trade zone extends from Canada Free trade zone extends from Canada to Argentinato Argentina

GDP = C + I + G + (Ex – Im)GDP = C + I + G + (Ex – Im)Assuming everything else stays equal, what happens if…Assuming everything else stays equal, what happens if…

US military invades IranUS military invades Iran

GDP = C + I + G + (Ex – Im)GDP = C + I + G + (Ex – Im)Assuming everything else stays equal, what happens if…Assuming everything else stays equal, what happens if…

World Demand for US timber increasesWorld Demand for US timber increases

AssignmentWhat would happen to the GDP of the US if…(assume only 1 variable

changes)

1. The government increases education spending by $12 billion

2. Russians demand more US made cars3. The US government decides the border fence is

too expensive and cuts its funding4. US government places a tax on all Japanese

imports5. Consumers get easier access to credit cards and

buy 35 % more video games this year6. High school graduates get excited about the stock

market and invest 10% of their future incomes.7. The price of food increases by 14% in 20108. US business become fearful of the coming

recession and slow spending by 4%9. New modern warfare game released10. Make up an example of your own, show GDP change.

AssignmentAssignment Create an assignment for the regular Create an assignment for the regular

students to dostudents to do#1 12 realistic scenarios for students to #1 12 realistic scenarios for students to

choose the component. 3 for each part of choose the component. 3 for each part of GDP. GDP. For example: For example: 1965 US creates 1965 US creates Medicare (govt spending)Medicare (govt spending)

#2 2 GDP problems (C + I + G + X)#2 2 GDP problems (C + I + G + X)#3 Why is GDP per capita a better #3 Why is GDP per capita a better

measure of wealth than GDP?measure of wealth than GDP?