Chapter 10

1. Chapter 10 Section 1

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

3. GDP • 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). • 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. • Goods produced in other countries are not counted.

4. 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). • GDP can be expressed as follows: GDP=C+G+I+Xn • Countries with a higher GDP usually have better economies.

5. 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. • 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.

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

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

8. Chapter 10 Section 2

9. Objectives • What are the four phases of 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?

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

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

12. 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. • There are three types of indicators: • Leading indicators: factors that predict an expansion or contraction of the economy such as the number of new building permits issued, stock prices, etc. • Coincident indicators: provide information about the current status of the economy-include personal income and numbers of goods sold. • Lagging indicators: show up after economy has changed-include use of credit.

13. Chapter 10 Section 3

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

15. 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. • 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.

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

17. 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. • The factors of production that a nation must protect or increase are: natural resources, human resources, capital resources, and entrepreneurship

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