Measurement of Economic Performance GDP

Goals Understand and be able to draw and identify points on a Business Cycle. Understand how the Circular Flow Model represents the macroeconomy and its connection to GDP. Define Gross Domestic Product and be able to recognize the three methods of calculating GDP.

I. The Business Cycle Trough Peak Expansion Contraction Output is at its lowest Unemployment is high Peak Output is at its highest Unemployment is low Expansion Rising economic output Unemployment is decreasing Contraction Output is declining Unemployment is growing GDP also known as aggregate output; may also see level of real output

II. The Circular Flow Model What goes in, must come out. Doesn’t include financial sector, because nothing has been produced. Investment spending (Inventories)

III. GDP Gross Domestic Product (GDP) Included in GDP Total value of all final goods and services produced in the economy during a given year. Included in GDP Domestically produced final goods and services Includes, capital goods, new construction structures, and changes to inventories Not Included in GDP Intermediate Goods Inputs Used goods Financial assets Foreign-produced goods and services

III. GDP Value Added (Value added of production) – (Value of material inputs) Must eliminate inputs to avoid double counting Income Approach (Wages and Salaries) + (Rent) + (Profits) + (Interest) Typically used to check the expenditures approach Expenditure Approach (Consumption) + (Investments) + (Government Purchases) + (Net Exports) Most likely to see

IV. Practice 1) Which of the following is true? The simple circular-flow diagram Includes only the product markets. Includes only the factor markets. Is a simplified representation of the macroeconomy. I only II only III only I and III only None of the above C

IV. Practice 2) GDP is equal to The total value of all goods and services produced in an economy during a given period. C + I + G + X. The total value of intermediate goods plus final goods. The total income received by producers of final goods and services. None of the above. E

IV. Practice Which of the following is included in GDP? Changes to inventories Intermediate goods Used goods Financial assets (stocks and bonds) Foreign-produced goods A

IV. Practice 4) Which of the following is not included in GDP? Capital goods such as machinery Imports The value of domestically produced services Government purchases of goods and services The construction of structures B