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2. Chapter Menu Chapter Introduction Section 1:Section 1:National Income Accounting Section 2:Section 2:Correcting Statistics for Inflation Section 3:Section 3:Aggregate Demand and Supply Section 4:Section 4:Business Fluctuations Section 5:Section 5:Causes and Indicators of Business Fluctuations Visual Summary

3. Chapter Intro 1 Economists look at a variety of factors to assess the growth and performance of a nation’s economy.

4. Chapter Intro 2 Economists use an array of tools to evaluate the performance of the American economy. In this chapter, read to learn about GDP, the consumer price index, and other economic indicators.

5. Section 1-Key Terms national income accountingnational income accounting gross domestic product (GDP)gross domestic product (GDP) net exports depreciation net domestic product (NDP)net domestic product (NDP) national income (NI) personal income (PI) transfer payments disposable personal income (DPI)disposable personal income (DPI) Content Vocabulary

6. Section 1 National Income Accounting, GDP, and NDP Gross domestic product is an estimate of the total dollar value of all final goods and services produced annually within a country.

7. Section 1 National Income Accounting, GDP, and NDP (cont.) National income accounting is used to measure the national economy’s performance.National income accounting View: Measuring the National EconomyMeasuring the National Economy

8. Section 1 National Income Accounting, GDP, and NDP (cont.) Five major statistics measure the national economy: –Gross domestic product –Net domestic product –National income –Personal income –Disposable income

9. Section 1 National Income Accounting, GDP, and NDP (cont.) Gross domestic product (GDP) is the broadest measure of the economy’s size.Gross domestic product (GDP) –Only new and final goods are counted.

10. Section 1 National Income Accounting, GDP, and NDP (cont.) To derive GDP, economists add the expenditures made in four economic categories: –Consumer sector (C)—goods and services bought directly by consumers. –Investment sector (I)—business purchases of items used to produce other goods.

11. Section 1 National Income Accounting, GDP, and NDP (cont.) –Government sector (G)—goods and services bought by the government. –Net exports (X)—difference between what the nation sells and what it buys from other countries.Net exports View: Computing GDPComputing GDP

12. Section 1 National Income Accounting, GDP, and NDP (cont.) Net domestic product (NDP) takes GDP and subtracts the total loss in value of capital goods caused by depreciation.Net domestic product (NDP)depreciation

13. A.A B.B C.C D.D Section 1 Why do economist count only the value of the final product when calculating the GDP? A.To avoid double counting. B.To find the correct dollar value. C.To avoid confusion with the NDP. D.To account for depreciation.

14. Section 1 Measurements of Income Disposable personal income is the total income that people have left after taxes are paid.

15. Section 1 Measurements of Income (cont.) In gauging the value of the nation’s output, economists also look at three measurements dealing with income. National income (NI) or the total income earned by everyone in the economy.National income (NI) View: Elements of National IncomeElements of National Income

16. Section 1 Measurements of Income (cont.) NI is the sum of the income resulting from five different sources: –Wages and salaries –Income of self-employed individuals –Rental income –Corporate profits –Interest on savings and other investments

17. Section 1 Measurements of Income (cont.) Personal income (PI) is the total income that individuals receive before personal taxes are paid.Personal income (PI)

18. Section 1 Measurements of Income (cont.) –Several items, including corporate income taxes and social security contributions employees make, are subtracted. –Government transfer payments such as welfare and unemployment compensation are added to NI.transfer payments This number is derived from NI through a two-step process:

19. Section 1 Measurements of Income (cont.) Disposable personal income (DPI) equals PI minus personal taxes. It represents the actual amount of money income people have available to spend.Disposable personal income (DPI)

20. A.A B.B Section 1 DPI is important because it measures the actual amount of money people can save and spend. A.True B.False

21. Section 2-Key Terms inflation purchasing power deflation consumer price index (CPI)consumer price index (CPI) market basket base year producer price index (PPI)producer price index (PPI) GDP price deflator real GDP Content Vocabulary

22. Section 2 The Purchasing Power of Money The nominal value of GDP must be adjusted for changes in the purchasing power of money to determine changes in real output.

23. Section 2 The Purchasing Power of Money (cont.) Economists need to take inflation into account when thinking about GDP.inflation When inflation occurs, the purchasing power of the dollar goes down.purchasing power Deflation also has an impact on the GDP, although this has rarely happened in modern times.Deflation

24. A.A B.B C.C Section 2 Can you think of any examples of items that cost more now than they did when you were younger? A.A lot of examples B.A couple of examples C.No examples

25. Section 2 Measures of Inflation Inflation can be measured in several ways by calculating changes in different price indexes.

26. Section 2 Measures of Inflation (cont.) The three most commonly used measurements of inflation are: –The consumer price index (CPI)consumer price index (CPI) About 80,000 specific goods and services make up the market basket.market basket The CPI is compiled monthly starting with prices from a base year so there is a point of comparison for current-day prices. (The base year is really the average of prices that existed for the three years, 1982-1984).base year View: Selected Consumer PricesSelected Consumer Prices

27. Section 2 Measures of Inflation (cont.) –The producer price index (PPI)producer price index (PPI) PPI usually increases before the CPI. PPI is mainly from mining, manufacturing and agriculture industries. –The GDP price deflatorGDP price deflator When the price deflator is applied to GDP in any year, the new figure is called real GDP.real GDP View: Nominal and Real GDP Over TimeNominal and Real GDP Over Time

28. A.A B.B C.C D.D Section 2 Most of the producer prices included in the PPIs are in the following areas EXCEPT: A.Mining B.Manufacturing C.Agriculture D.Textiles

29. Section 3-Key Terms aggregates aggregate demand aggregate demand curve aggregate supply aggregate supply curve Content Vocabulary

30. Section 3 Aggregate Demand and Supply Aggregate demand and aggregate supply curves plot the price level versus total output.

31. Section 3 Aggregate Demand and Supply (cont.) When we look at demand and supply in the economy as a whole, we are looking at aggregates. aggregates Aggregate demand is the total of all planned expenditures in the entire economy.Aggregate demand –This is related to price level, the average of all prices as measured by a price index. View: Aggregate Demand and SupplyAggregate Demand and Supply

32. Section 3 Aggregate Demand and Supply (cont.) An aggregate demand curve is a graphed line showing the relationship between the aggregate quantity demanded and the average of all prices as measured by the implicit GDP price deflator.aggregate demand curve

33. Section 3 Aggregate Demand and Supply (cont.) There are two reasons for the inverse relationship of the aggregate demand curve: –Inflation causes the purchasing power of cash to go down, and deflation causes it to go up.

34. Section 3 Aggregate Demand and Supply (cont.) –When the price level goes down in the U.S., our goods become relatively better deals for foreigners who want to buy them. Aggregate supply looks at the real domestic output of producers based on the rise and fall of the price level.Aggregate supply –Producers offer more real domestic output as the price level increases, and less as the price falls.

35. Section 3 Aggregate Demand and Supply (cont.) Aggregate supply curve is a graphed line showing the relationship between the aggregate quantity supplied and the average of all prices as measured by the implicit GDP price deflator.Aggregate supply curve The equilibrium price level is determined where the aggregate demand curve crosses the aggregate supply curve, or at the GDP price deflator. View: Equilibrium Price LevelEquilibrium Price Level

36. A.A B.B C.C D.D Section 3 If something pushes out the aggregate demand curve faster than the aggregate supply curve, what will the equilibrium price level do? A.Rise B.Fall C.Shift right D.Shift left

37. Section 4-Key Terms business fluctuations business cycle peak/boom contraction recession depression trough expansion/recovery Content Vocabulary

38. Section 4 Model of the Business Cycle Business cycles are characterized by periods of expansion and contraction in economic activity.

39. Section 4 Model of the Business Cycle (cont.) Business fluctuations are common and some individuals associate them with the business cycle.Business fluctuations business cycle View: Model of a Business CycleModel of a Business Cycle

40. Section 4 Model of the Business Cycle (cont.) The business cycle usually follows the following pattern: –Peak/boomPeak/boom –ContractionContraction –RecessionRecession –DepressionDepression –TroughTrough –Expansion/recoveryExpansion/recovery

41. Section 4 Ups and Downs of Business Throughout its history, the United States has experienced business expansions and recessions of varying severity and frequency.

42. Section 4 Ups and Downs of Business (cont.) The stock market crash in October 1929 was the largest drop in the business cycle, and led to the Great Depression. –The economy slowly began to rise again, reaching a boom period after World War II. View: Business ActivityBusiness Activity

43. Section 4 Ups and Downs of Business (cont.) The 1980s also started off with a small recession, but recovered within 2 years (except for the stock market crash of 1987). The economy experienced more trouble during the dot-com meltdown of March 2001 and the September 11 terrorist attacks.

44. A.A B.B C.C Section 4 What do you think is the main reason that terrorist attack may cause weakness in the economy? A.It shakes consumer confidence. B.It disrupts supply. C.It disrupts demand.

45. Section 5-Key Terms innovation economic indicators leading indicators coincident indicators lagging indicators Content Vocabulary

46. Section 5 Causes of Business Fluctuations Business cycles can be caused by changes in business investment, government policies, and the availability of key commodities, or by psychological factors.

47. Section 5 Causes of Business Fluctuations (cont.) Economists link fluctuations to four main forces: –Business investment—when businesses anticipate an economic downturn, they may cut back on capital investment, which could lead to a recession—or vice versa. Innovations can also help the economyInnovations

48. Section 5 Causes of Business Fluctuations (cont.) –Government activity—the government affects business activity in two ways: Through its policies on taxing and spending. Through its control over the supply of money available in the economy. –External factors—wars and the availability of raw materials may also have an effect.

49. Section 5 Causes of Business Fluctuations (cont.) –Psychological factors—factors, such as the terrorist attacks in 2001, can cause fluctuations in business.

50. A.A B.B C.C D.D Section 5 Which force do you think is the strongest? A.Business investment B.Government activity C.External factors D.Psychological factors

51. Section 5 Economic Indicators Some economists use leading, coincident, and lagging indicators to assess the current state of the economy and to predict its future course.

52. Section 5 Economic Indicators (cont.) Economists study a number of economic indicators to learn about the state of the economy.economic indicators –The U.S. Department of Commerce, along with a private company called the Conference Board, compiles these statistics once a month. View: Major Economic IndicatorsMajor Economic Indicators

53. Section 5 Economic Indicators (cont.) Economic indicators include: –Leading indicatorsLeading indicators –Coincident indicatorsCoincident indicators –Lagging indicatorsLagging indicators

54. A.A B.B C.C Section 5 Average weekly hours for production workers in manufacturing are which type of economic indicator? A.Leading B.Coincident C.Lagging

55. VS 1 A nation’s gross domestic product (GDP) is the total dollar value of all final goods and services produced annually.

56. VS 2 GDP figures must be adjusted for inflation, which can be measured in several ways.

57. VS 3 The price level of the overall economy is determined by the interaction of aggregate demand and aggregate supply.

58. Figure 1

59. Figure 2

60. Figure 3

61. Figure 4

62. Figure 5

63. Figure 6

64. Figure 7

65. Figure 8

66. Figure 9

67. Figure 10

68. Concept Trans 1

69. Concept Trans 2

70. Concept Trans 3

71. DFS Trans 1

72. DFS Trans 2

73. DFS Trans 3

74. DFS Trans 4

75. DFS Trans 5

76. Vocab1 national income accounting: measurement of the national economy’s performance, dealing with the overall economy’s output and income

77. Vocab2 gross domestic product (GDP): total dollar value of all final goods and services produced in a nation in a single year

78. Vocab3 net exports: difference between what the nation sells to other countries and what it buys from other countries

79. Vocab4 depreciation: loss of value because of wear and tear to durable goods and capital goods

80. Vocab5 net domestic product (NDP): value of the nation’s total output (GDP) minus the total value lost through depreciation on equipment

81. Vocab6 national income (NI): total income earned by everyone in the economy

82. Vocab7 personal income (PI): total income that individuals receive before personal taxes are paid

83. Vocab8 transfer payments: welfare and other supplementary payments that a state or the federal government makes to individuals

84. Vocab9 disposable personal income (DPI): income remaining for people to spend or save after all taxes have been paid

85. Vocab10 inflation: prolonged rise in the general price level of final goods and services

86. Vocab11 purchasing power: the real goods and services that money can buy; determines the value of money

87. Vocab12 deflation: prolonged decline in the general price level of goods and services

88. Vocab13 consumer price index (CPI): a statistical measure of the average of prices of a specified set of goods and services purchased by typical consumers in city areas

89. Vocab14 market basket: representative group of goods and services used to compile the consumer price index

90. Vocab15 base year: year used as a point of comparison for other years in a series of statistics

91. Vocab16 producer price index (PPI): measure of the change in price over time that U.S. producers charge for their goods and services

92. Vocab17 GDP price deflator: price index that removes the effect of inflation from GDP so that the overall economy in one year can be compared to another year

93. Vocab18 real GDP: GDP that has been adjusted for inflation by applying the price deflator

94. Vocab19 aggregates: summation of all the individual parts in the economy

95. Vocab20 aggregate demand: the total of all planned expenditures in the entire economy

96. Vocab21 aggregate demand curve: a graphed line showing the relationship between the aggregate quantity demanded and the average of all prices as measured by the implicit GDP price deflator

97. Vocab22 aggregate supply: real domestic output of producers based on the rise and fall of the price level

98. Vocab23 aggregate supply curve: a graphed line showing the relationship between the aggregate quantity supplied and the average of all prices as measured by the implicit GDP price deflator

99. Vocab24 business fluctuations: ups and downs in an economy

100. Vocab25 business cycle: irregular changes in the level of total output measured by real GDP

101. Vocab26&27 peak/boom: period of prosperity in a business cycle in which economic activity is at its highest point

102. Vocab28 contraction: part of the business cycle during which economic activity is slowing down

103. Vocab29 recession: part of the business cycle in which the nation’s output (real GDP) declines for at least six months

104. Vocab30 depression: major slowdown of economic activity

105. Vocab31 trough: lowest part of the business cycle in which the downward spiral of the economy levels off

106. Vocab32&33 expansion/recovery: part of the business cycle in which economic activity slowly increases

107. Vocab34 innovation: transforming an invention into something useful to humans

108. Vocab35 economic indicators: statistics that measure variables in the economy

109. Vocab36 leading indicators: statistics that point to what will happen in the economy

110. Vocab37 coincident indicators: economic indicators that usually change at the same time as changes in overall business activity

111. Vocab38 lagging indicators: indicators that seem to lag behind changes in overall business activity