How do we measure the economy’s growth? Understanding Macroeconomic indicators of prosperity

GDP (Gross Domestic Product) Def.- the dollar value of all final goods and services made within a country in a year. Final goods-those goods produced for consumption. Intermediate goods- used to make other g/s, are not counted as part of GDP Durable goods- goods that typically last 5 years. Ex: refrigerators, cars, T.V.s, jewelry, etc. Nondurables- goods that are consumed relatively quickly. Ex: food, clothes, toothbrushes, light bulbs.

Production that is included in GDP A final good that is made in the U.S., although parts of the production process can occur in another country. Goods must be new, not used goods being resold. Services counted in GDP must represent consumption, like a haircut, and not a stage of production, like working in a restaurant. Exports are also part of GDP Capital Goods and services that are consumed by business or government that do not become part of a final good are included.

Read “GDP Rebound Reason for Consumer, Fed Optimism” What contributed most to the growth the economy experienced last quarter? What “offset” the 9.5% growth of export markets to actually cause net exports to be negative? What does the article suggest may be the reason for the growth of business inventories that occurred in the 1 st quarter of this year?

Nominal vs. Real GDP Nominal GDP- GDP that is not adjusted for inflation Real GDP- When GDP is adjusted for inflation. Real GDP is a better indication that growth has occurred in the economy.

Limitations of GDP GDP does not include nonmarket activities, which are productive, but not done for profit. Ex: raising children, painting your own house, cooking dinner. GDP does not reflect underground markets like the black market or the barter economy. GDP does not reflect negative externalities that effect our quality of life. GDP does not reflect the increase to your quality of life created by a g/s, only that g/s’s $ value. GDP does not distinguish between durable and nondurable goods.

GNP GNP-(Gross National Product)- the annual income earned by U.S. owned firms and U.S. citizens. GNP includes all of GDP plus g/s produced overseas by U.S. businesses and citizens.

Aggregate Supply and Demand Aggregate supply- refers to all g/s produced at all possible average prices. Aggregate demand- refers to all g/s consumed at all possible average prices. Movement of the equilibrium of aggregate supply and demand is an indication of inflation or deflation.

Real GDP per capita GDP will likely go up as a population grows. To better indicate a change to the standard of living, Real GDP is divided by population. While this is a more refined indicator of the standard of living, it doesn’t reflect the gap between rich and poor.

2/section1.pdf What countries have the highest and second highest GDP in 2010? What country’s GDP has the highest percentage in manufacturing markets? What is the trend of manufacturing’s % in the nations/ regions charted on the graph? What country had the highest GDP in 2010?

The Business Cycle finance-domain/macroeconomics/aggregate- supply-demand-topic/business-cycle- tutorial/v/the-business-cycle finance-domain/macroeconomics/aggregate- supply-demand-topic/business-cycle- tutorial/v/the-business-cycle Def.- the tendency of the economy to go from a time of expansion to a time of contraction.

The Business Cycle Expansion- time when real GDP is rising Contraction- time when real GDP is falling Recession- when real GDP falls for at least 2 quarters (6 months) Depression- a long recession Stagflation- a decline in real GDP combined with a rise in prices.

Causes of the Business Cycle Business Investment- increased investment in businesses increases GDP, and vice versa Interest Rates- higher interest rates makes it harder to buy g/s, so GDP goes down, and vice versa. Consumer Expectations- Fear of an economic downturn causes people to buy less stuff, and thus causes contraction in the economy External Shocks- Any big event is bound to effect the economy. They can be positive or negative.

Indicators of a change in the Business Cycle Leading indicators- that which suggests their may be a turn coming up in the business cycle. Ex: sharp turn in the stock market, changing interest rates. Coincidental indicators- occur at the same time as a change in the cycle. Ex: business profits, and higher personal income. Lagging indicators- that which points out that a change has already happened in the business cycle. Ex: rising or falling employment.

Ch 13: Unemployment To be considered “unemployed” labor force, you must be: 1.16 years old or older. 2.Looking for a job, but can’t find one.

Types of Unemployment Frictional unemployment- happens when a worker is between jobs, generally by choice. Ex. You leave your job to find one you will be happier with. Seasonal unemployment- happens when a change in season causes an industry to slow down or shut down. Ex. Agriculture, tourist seasons, construction,

Types of Unemployment Cyclical Unemployment- caused by a downturn in the business cycle. Structural Unemployment- occurs when the skills of a worker become outdated, and they can no longer adequately do their job, or there is no need for that job anymore.

CPI (Consumer Price Index)