Chapter 12 - Gross Domestic Product & Growth Terms

National Income Accounting

a system economists use to collect and organize macroeconomic statistics on production, income, investment, and savings - to monitor the US Economy

Stagflation

is a decline in real GDP (output) combined with a rise in the price level (inflation)

Income Approach to calculate - GDP

method to calculate GDP by adding up all the incomes in the economy.

Limitations of GDP - listed below* GDP does not take into account ---------------------------------

non-market activities, the under-ground economy, negative externalities, and quality of life

*Contraction

period of economic decline marked by falling real GDP

Real GDP Per Capita

real GDP divided by the total population of a country.

*Dollar Value

refers to the total cash value of the sales of all goods and services produced in a country's households, firms, ad government in a calendar year.

*In a Given Year

takes into account when a good was produced.

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 a nation's firms and citizens.

Price Level

the average of all prices in the economy

Gross Domestic Product (GDP) 4 parts listed below*

the dollar value 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.

Capital Deepening

the process of increasing the amount of capital per worker.

Savings Rate

the proportion of disposable income that is saved.

Aggregate Supply

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

*Non Durable Goods

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

*Durable Goods

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

*Trough

when the economy has bottomed out - the lowest point in an economic contraction. At that point, real GDP stops falling and a new period of expansion begins.

Saving

income not used for consumption (spending)

Phases of Business Cycle* definitions below

1) Expansion 2) Peak 3) Contraction 4) Trough

Business Cycles are affected by 4 Main Economic Variables.

1) business investment 2) interest rates and credit 3) consumer expectations 4) external shocks

*Produced within a Country's Borders

Because we are trying to find the country's GDP we can look only at goods and services produced within that country.

*Nonmarket Activities

GDP does not measure goods and services that people make or do themselves - like, caring for children, mowing the lawn, cooking dinner, etc....

Nominal GDP (AKA) "Current GDP"

GDP measured in current prices

Recession

If real GDP falls for two consecutive quarters (at least six straight months - a prolonged economic contraction.- marked by unemployment reaching 6%-10%

Expenditure Approach (AKA) Output-Expenditure Approach - to calculate GDP

One of two methods the government uses to calculate the GDP. First expenditures/amounts spent are estimated on four final goods and services 1) consumer goods and services 2) business goods and services 3) government goods and services 4) net exports

* Negative Externalities

Unintended economic side effects, or externalities, have a monetary value that often is not reflected in GDP - power plant that pollutes the air.

*Expansion

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

Business Cycle

a period of macroeconomic expansion followed by one of macroeconomic contraction

Depression

a recession that is especially long and severe - high unemployment and low economic output.

Leading Indicators

a set of key economic variables that economists use to predict future trends in a business cycle.

Economic Growth

a steady, long-term increase in real GDP

Net Exports

are found by adding up exports--goods produced in the country but purchased in other countries--and then subtracting imports.

*Final Goods and Services

are products in the form sold to consumers.

Intermediate Goods

are products used in the production of final goods.

*Quality of Life

economists and politicians interpret rising GDP as a sign of rising well being - more goods and services do not necessarily make people any happier. Things not counted in GDP that make people happy - pleasant surroundings, ample leisure time, and personal safety.

Real GDP

expressed in constant and unchanging prices

*The Underground Economy

income never reported to the government - black market transactions, illegal goods, illegal gambling, under-table wages