Chapter 11 Economic Performance 11.1 GDP- Gross Domestic Product 11.2 Limitations of GDP Estimation 11.3 Business Cycles

11.1-GDP 11.1 Objectives Describe what the gross domestic product measures. Learn two ways to calculate the gross domestic product and explain why they are equivalent.

National Economy Economy- The structure of economic activity in a locality, a region, a country, a group of countries, or the world. GDP- Gross Domestic Product- The market value of all final goods and services produced in the US during a given period, usually a year.

National Economy National Income Accounts- Organize huge quantities of data collected from a variety of sources across the US. These accounts keep track of the value of final goods and services. A tooth brush, contact lenses or a bus ride are examples of final goods and services. You are the final consumer of these products.

No Double Counting Intermediate goods and services- products purchased for additional processing. EX- Chicken. KFC buys chicken from a chicken farm. KFC the fries the chicken and makes the final product, which is the KFC Chicken. Intermediate Goods are not counted in the GDP. If they were, this would be called double counting.

Consumption Consumption- Household purchases of final goods and services. Examples of services- Dry cleaning, haircuts and air travel. Nondurable goods- soap, toothpaste and soup. Durable goods- TV, furniture and dishwasher. Have to last 3 years or longer.

Investment Investments- The purchase of a new plant, new equipment, new buildings, new residence and net additions to inventories. These are things that could possible make you money or help you make money. Physical Capital- Buildings and Machinery.

Aggregate Expenditure Aggregate Expenditure- Total spending on all final goods and services produced in the economy during the year. Aggregate means TOTAL. This totals all money spent for the year. Aggregate Income- The sum of all the income earned by resource suppliers in the economy during a given year.

11.2 Limitations of GDP Estimations Objectives: Identify what types of production GDP calculations neglect Determine why and how to adjust GDP for changes over time in the general price level.

What GDP Misses Underground economy- Activity that goes unreported either because it’s illegal or because those involved want to evade (not pay) taxes. Standard of living- Level of economic prosperity. The more leisure time you have could indicate prosperity.

Depreciation Depreciation- The value of the capital stock that is used up or becomes obsolete in producing GDP during the year. Gross Investment- Measures the value of all investment during a year. Net Investment- Measures money actually made of the investments.

Nominal GDP vs. Real GDP Nominal GDP- GDP based on prices at the time of the transactions. Real GDP- The economy’s aggregate output measured in dollars of constant purchasing power. GDP measured in terms of goods and services produced.

Consumer Price Index CPI- Measure of inflation based on the cost of a fixed “market basket” of goods and services purchased by a typical family.

11.3 Business Cycles Objectives: Distinguish between the two phases of the business cycle, and compare the average length of each. Differentiate among leading, coincident and lagging economic indicators.

US Economic Fluctuations Business Cycles- Fluctuations reflecting the rise and fall of economic activity relative to the long-term goal growth trend of the economy. 2 Phases- Economic expansion (growth) and economic contraction (shrink).

Recession Recession- A decline in total production lasting at least two consecutive quarters, or at least six months. Peak and Trough- A peak is a high point in the economy and a trough is a low point in the economy. Expansion- The phrase of economic activity during which the economy’s total output increases. Leading economic indicators- Measures that usually predict or lead to recession or expansions. EX- Oil, when a war breaks out, oil usually goes up in value. This causes an economic downturn because now everything will cost more.