Economics Chapter 12

Gross Domestic Product (GDP)

dollar value of all final goods and services produced within a country's borders in a given year; does not include the value of intermediate goods

The Expenditure Approach

totals annual expenditures on four categories of final goods and services 1. Consumer goods and services 2. Business or investment goods and services 3. Government goods and services 4. new exports (+) or imports (-) of goods or services

Four phases of the business cycle

-Expansion: period of economic growth as measured by a rise in real GDP, economic growth is a steady, long-term rise in real GDP, interest rates are usually increased by government -Peak: when real GDP stops rising, the economy has reached its peak, the height of its economic expansion -Contraction: following its peak, the economy enters a period of contraction, an economic decline marked by a fall in real GDP, interest rates are usually decreased by the government -Trough: lowest point of economic decline, when real GDP stops following

Business Cycles are affected by the 4 main variables

1. Business investment: when an economy is expanding, firms expect sales and profits to keep rising, and therefore they invest in new plants and equipment, this investment creates new jobs and furthers expansion, in recession opposite occurs 2. Interest rates and credit: when interest rates are low, companies make new investments, often adding jobs to the economy, when interest rates climb investment dries up, as does job growth 3. Consumer Expectations: forecasts of an expanding economy often fuel more spending, while fears of recession tighten consumers spending 4. External Shocks: external shocks, such as disruptions of the oil supply, wars, or natural disasters, greatly influence the output of an economy

Leading indicators are key economic variables economists use to predict a new phase of a business cycle

1.stock market 2. new home sales 3. interest rates

Business cycle

a macroeconomic period of expansion followed by a period of contraction

Measuring economic growth

basic measure of a nation's economic growth rate is the percentage change of real GDP over a given period of time

GDP Per Capita

better measure of economic prosperity because populations of countries are all different; divide GDP by population US GDP Per Capita=$51,045

The Income Approach

calculates GDP by adding up all the income in the economy wages- $12.78 trillion (71%) profits- $3.6 trillion (20%) interest income- 1.26 trillion (7%0 rental income- 360 billion (2%)

Real GDP

expressed in constant, or unchanging dollars; base year is used for a period of time; if base year is 1 then the prices of products from year 1 are used to calculate the GDP

US Business Cycles in the 1990's

following a brief recession in 1991, the US economy grew steadily during the 1990's, with real GDP rising each year

Intermediate goods

goods used in the production of final goods and services

GDP and population growth

in order to account for population increases in an economy, economists use a measurement of real GDP divided by the total population, real GDP per capita is considered the best measure of a nation's standard of living

Later Recessions

in the 1970's, an OPEC embargo cause oil prices to quadruple, led to a recession that lasted through the 1970's into the early 1980's, 2008 home foreclosures led to banks failing and our current recession

Nominal GDP

measured in current prices; does not account for price level incomes from year to year

The Great Depression

was the most severe downturn in the nation's history; between 1929-1933, GDP fell by almost one third, and unemployment rose to about 25%