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11.1 GDP- Gross Domestic Product 11.2 Limitations of GDP Estimation 11.3 Business Cycles

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.

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11.1 GDP- Gross Domestic Product 11.2 Limitations of GDP Estimation 11.3 Business Cycles

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  1. Chapter 11 Economic Performance 11.1 GDP- Gross Domestic Product11.2 Limitations of GDP Estimation11.3 Business Cycles

  2. 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.

  3. 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.

  4. 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.

  5. 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.

  6. 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.

  7. 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.

  8. 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.

  9. 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.

  10. 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.

  11. 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.

  12. 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.

  13. 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.

  14. 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.

  15. 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).

  16. 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.

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