Economics Chapter 12 - Gross Domestic Product and Growth

National Income Accounting

a system that collects statistics on production, income, investments, and savings

Leading Indicators

key economic variables that economists use to predict a new phase of business cycle

Capital Deepening

process of increasing the amount of capital per worker

Final goods

products in the form sold to consumers

Aggregate Demand

the amount of goods and services in the economy that will be purchased at all possible price levels

Gross National Product (GNP)

the annual income earned by U.S. owned firms and U.S. citizens

Price level

the average of all prices in the economy

Gross Domestic Product (GDP)

the dollar value of all FINAL goods and services produced within a country's borders in a given year.

Peak

the height of an economic expansion, when real GDP stops rising

Depreciation

the loss of the value of capital equipment that results from normal wear and tear

Trough

the lowest point in an economic contraction, when real GDP stops falling

Savings rate

the proportion of disposable income that is saved

Investment goods

the structures and equipment purchased by businesses

Aggregate Supply

the total amount of goods and services in the economy available at all possible levels.

Intermediate Goods

used in the production of final goods Ex. - Nails for a couch

Real GDP per Capita

Real GDP divided by the total population

Phases of a Business Cycle

*1. Expansion* - period of economic growth as measured by a rise in real GDP *2. Peak* - when real GDP stops rising *3. Contraction* - economic decline after the peak, marked by falling real GDP -recession - depression - stagflation *4. Trough* - when the economy has "bottomed out", reached the lowest point in economic contraction

What Keeps a Business Cycle Going?

*1. business investment* - investment spending creates additional output and jobs, helping to increase GDP and maintain the expansion *2. interest rates and credit* - cost of credit is the interest rate institutions charge the customers that make people not want to pay more *3. consumer expectations* - consumer spending is determined by consumer's expectations *4. external shocks* - difficult to predict, dramatically affect an economy's aggregate supply there are positive shocks that move the AS to right

Ways to calculate GDP

*Expenditure approach* - economist estiamate the annual money spent. *Income Approach* - Calculates GDP by adding up all the incomes in the economy

Population, Government, and Trade

- If population grows while supple of capital remains constant, the amount of capital per worker will shrink - Tax increase will cause people to become reluctant to invest

Business Cycle Forecasting

- leading indicators: set key economic variables that economic variables that economists use to predict a new phase of a business cycle (Stock Market, interest rates - difficult to predict changes in the business cycle

Expenditures Approach are calculated by(4):

1. Consumer goods and services 2. Business goods and services 3. government goods and services 4. net exports or imports of goods and services

Limitations of GDP

1.) Non market activities 2.) Underground market 3.) Negative Extranalities 4.) Quality of Life

Causes of Technological Progress

1.) Scientific Research - Generate improved production techniques 2.) Innovation - New products and ideas are successfully brought to the market - Government issued patents 3.) Scale of the Markets - Larger markets provide more incentives for innovation 4.) Education and Experience 5.) Natural Resource - Increased natural resource use can create need for new technology.

Real GDP

GDP expressed in constant, or unchanging, prices

Nominal GDP (Current GDP)

GDP measured in current prices

Business Cycles in American History

The Great Depression - stock market crashed in 1929 - between 1929 and 1933 GDP fell by almost 1/3, and unemployment rose to about 25%

Dollar value

Total of the selling prices of all goods and services produced in a country in one calender year, which are added to calculate the GDP

Stagflation

a decline in real GDP combined with a rise in the price level. INFLATION IS UP.

Contraction

a period of economic decline marked by falling real GDP

Expansion

a period of economic growth as measured by a rise in real GDP

Business Cycle

a period of macroeconomic expansion followed by a period of contraction

Recession

a prolonged economic contraction (6 - 10% unemployment)

Depression

a recession that is especially long and severe

Economic Growth

a steady, long term increase in real GDP

Technological progress

an increase in efficiency gained by producing more output without using more inputs

Nondurable Goods

goods that last a short period of time, such as food, light bulbs, and sneakers

Durable Goods

goods that last for a relatively long time, such as refrigerators, cars, and DVD players

Saving

income not used for consumption