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