Chapter 10 Section 1

Objectives How do economist calculate gross domestic product? How do economist calculate gross domestic product? What are some of the limitations of gross domestic product? What are some of the limitations of gross domestic product? What other statistics do economists use to measure the economy? What other statistics do economists use to measure the economy?

GDP Economists are constantly trying to measure the health of a nations economy. Economists are constantly trying to measure the health of a nations economy. One way to do this is look at a country’s gross domestic product (GDP). One way to do this is look at a country’s gross domestic product (GDP). GDP is the total dollar value of all final goods and services produced within a country during one calendar year. GDP is the total dollar value of all final goods and services produced within a country during one calendar year. Used goods are not counted, and only final goods are counted-only the total finished product. Used goods are not counted, and only final goods are counted-only the total finished product. Goods produced in other countries are not counted. Goods produced in other countries are not counted.

Components of GDP What makes up GDP? Using the output- expenditure model the following components make up GDP: Personal consumption (C), Government expenditures (G), gross investment (I), and net exports (Xn). What makes up GDP? Using the output- expenditure model the following components make up GDP: Personal consumption (C), Government expenditures (G), gross investment (I), and net exports (Xn). GDP can be expressed as follows: GDP=C+G+I+Xn GDP can be expressed as follows: GDP=C+G+I+Xn Countries with a higher GDP usually have better economies. Countries with a higher GDP usually have better economies.

Inflation and GDP Economists have to be aware of an increase in price (inflation) from year to year when comparing GDP from one year to the next. Economists have to be aware of an increase in price (inflation) from year to year when comparing GDP from one year to the next. GDP adjusted for inflation is called real GDP while GDP that uses current prices and not adjusted for inflation is called nominal GDP. GDP adjusted for inflation is called real GDP while GDP that uses current prices and not adjusted for inflation is called nominal GDP. Real GDP gives economists a better idea if a country’s economy is growing regardless of inflation. Real GDP gives economists a better idea if a country’s economy is growing regardless of inflation.

Limitations of GDP Limitations of GDP Limitations of GDP 1. Collecting data is slow and time consuming 2. Non-market activities: jobs that are done by individuals with no charge. (I cut my own grass, wash my own car, etc) 3. Underground economy-goods and services sold in the blackmarket are not counted.

Other Measurements of the Economy Economist can use other ways to measure the economy: (p. 234) Economist can use other ways to measure the economy: (p. 234) 1. Gross National Product (GNP)-counts all goods and services produced with factors of production owned by residents of a country. 2. Net National Product (NNP): GNP-fixed capital depreciation 3. National Income (NI): NNP+subsidies-indirect business taxes, nontax liabilities, and other items. 4. Personal Income (PI): NI+personal interest and dividend income and transfer payments-corporate profits, net interest, and social insurance contributions. 5. Disposable Personal Income (DPI): PI – personal taxes and nontax payments.

Chapter 10 Section 2

Objectives What are the four phases of the business cycle? What are the four phases of the business cycle? What factors influence the business cycle? What factors influence the business cycle? What are the three leading indicators used to determine the current phase of the business cycle and predict where the economy is headed? What are the three leading indicators used to determine the current phase of the business cycle and predict where the economy is headed?

Business Cycle Business cycles are fluctuations or changes in a market system’s economic activity. Business cycles are fluctuations or changes in a market system’s economic activity. The business cycle is divided into four stages or phases: The business cycle is divided into four stages or phases: 1. Expansion, or recovery (period of economic growth) 2. Peak (high point at which economy is at its strongest) 3. Contraction, or recession (GDP stops increasing) 4. Trough (production and employment are at their lowest levels)

Influences on the Business Cycle There are several factors that may cause fluctuations in the business cycle: There are several factors that may cause fluctuations in the business cycle: 1. Business investment: higher levels of business investment are represented by expansion in the cycle. 2. Availability of money and credit: when money and credit is short, contraction is taking place. 3. Public expectations: If people expect the economy is heading into a recession, they may tighten their spending and speed up the process. 4. External Factors: political crisis, wars, or mother nature may lead to contractions.

Predicting the Business Cycle Economist can try to predict the business cycle by looking at indicators or signs that tell which way the economy is heading. Economist can try to predict the business cycle by looking at indicators or signs that tell which way the economy is heading. There are three types of indicators: There are three types of indicators: 1. Leading indicators: factors that predict an expansion or contraction of the economy such as the number of new building permits issued, stock prices, etc. 2. Coincident indicators: provide information about the current status of the economy-include personal income and numbers of goods sold. 3. Lagging indicators: show up after economy has changed- include use of credit.

Chapter 10 Section 3

Objectives Why is economic growth important? Why is economic growth important? What are the requirements for economic growth? What are the requirements for economic growth? What is the relationship between economic growth and productivity? What is the relationship between economic growth and productivity?

Economic Growth Economic growth can be defined as the increase in the output of final goods and services produced within a nation’s borders over a specified period of time. Economic growth can be defined as the increase in the output of final goods and services produced within a nation’s borders over a specified period of time. In other words-this is an increase in a nation’s Real GDP. In other words-this is an increase in a nation’s Real GDP. Since an increase in population would raise real GDP, economist look at Real GDP per capita: an increased in the real value of all final goods and services that are produced per person for a specified period of time. Since an increase in population would raise real GDP, economist look at Real GDP per capita: an increased in the real value of all final goods and services that are produced per person for a specified period of time.

Importance of Economic Growth Economic growth is important for several reasons: Economic growth is important for several reasons: 1. It allows the United States to maintain its position as a leading economic power among industrialized nations and compete in the global market. 2. It increases our standard of living. People have more money to spend and more free time to spend it on. 3. Since people are making more money, the government is allowed to collect more taxes which will benefit the nation as a whole.

Requirements for Economic Growth In order for a nation to achieve long-term economic growth it must increase either its inputs (factors of production) or increase the productivity of these inputs. In order for a nation to achieve long-term economic growth it must increase either its inputs (factors of production) or increase the productivity of these inputs. The factors of production that a nation must protect or increase are: natural resources, human resources, capital resources, and entrepreneurship The factors of production that a nation must protect or increase are: natural resources, human resources, capital resources, and entrepreneurship

Increasing Productivity Another way to have economic growth is to increase productivity. Another way to have economic growth is to increase productivity. Economists define productivity growth as an increase in the output of each worker per hour of work. Economists define productivity growth as an increase in the output of each worker per hour of work. Factors that impact productivity growth include: Factors that impact productivity growth include: 1. Level of available technology. 2. Quantity of capital goods available per worker-meaning the number of machines, tools, and equipment available for each person to use. 3. Education and skill level of the workforce.