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Unit 5- CH 12 & 13 Measuring Economic Performance Measuring Economic Performance Economies are measured by looking at the Gross Domestic Product. Business cycles reflect the expansion and contractions experienced by all types of businesses and countries as well Countries need to look at their unemployment and make changes to ensure growth Rising prices work against the population of a country If a country wants to positively affect its poor, it must “increase the pie” KEY TERMS TO REMEMBER Aggregate Demand – the amount of goods and services in the economy that will be purchased at all possible price levels Aggregate Supply – the amount of goods and services in the economy available at all possible price levels Capital Deepening – process of increase the amount of capital per worker Depreciation – the loss of the value of capital equipment that results from normal wear and tear Depression – a recession that is especially long and severe Durable Goods – good that last for a relatively long time, such as refrigerators, cars, and DVD players Full Employment – the level of employment reached when there is no cyclical unemployment (5%) Unit 5- CH 12 & 13 Measuring Economic Performance Gross Domestic Product (GDP) – the dollar value of all final goods and services produced within a country’s borders in a given year Nominal – GDP measured in current prices Real – GDP expressed in constant, or unchanging, prices Gross National Product (GNP) – the annual income earned by U.S. owned firms and U.S. citizens Hyperinflation – inflation that is out of control Inflation – a general increase in prices Cost – push Theory – theory that inflation occurs when producers raise prices in order to meet increased costs Demand – pull Theory – theory that inflation occurs when demand for goods and services exceeds existing supplies Quantity Theory – theory that too much money in the economy causes inflation Leading indicators – key economic variables that economists use to predict a new phase of a business cycle Non-durable Goods – goods that last a short period of time, such as food, light bulbs, and sneakers Per Capita GDP – GDP divided by the total population Price Index – a measurement that show how the average price of a standard group of goods changes over time Consumer Price Index (CPI) – a price index determined by measuring the price of a standard group of goods meant to represent the “market basket” of a typical urban consumer Producer Price Index (PPI) - a price index determined by measuring the price of a standard group of goods meant to represent the costs to the producers Purchasing Power – the ability to purchase goods and services Recession – a prolonged economic contraction – at least 2 consecutive quarters Stagflation – a decline in real GDP combined with a rise in the price level Trough – the lowest point in an economic contraction, when real GDP stops falling Underemployed – working at a job for which one is over-qualified, or working part-time when fulltime work is desired Unemployment – those 16 or older who are actively looking for work Cyclical unemployment – unemployment that rises during economic downturns and falls when the economy improves Frictional unemployment – unemployment that occurs when people take time to find a job Seasonal unemployment – unemployment that occurs as a result of harvest schedules or vacations, or when industries slow or shut down for a season Structural unemployment – unemployment that occurs when workers’ skill do not match the jobs that are available Unit 5- CH 12 & 13 Measuring Economic Performance How is GDP calculated? The basic formula for calculating GDP is: GDP = C + I + G + (X-M) C= I = G= (X –M) = Unit 5- CH 12 & 13 Measuring Economic Performance (Source: Capstone – Exemplary Lessons for High School Economics) Unit 5- CH 12 & 13 Measuring Economic Performance (Source: Capstone – Exemplary Lessons for High School Economics) Unit 5- CH 12 & 13 Measuring Economic Performance (Source: Capstone – Exemplary Lessons for High School Economics) Unit 5- CH 12 & 13 Measuring Economic Performance Unit 5- CH 12 & 13 Measuring Economic Performance Business Cycles Expansion – Peak – Contraction – Trough – Business cycles are affected by four main economic variables: 1. 2. 3. 4. business investment interest rates and credit consumer expectations external shocks a. disruptions in the oil supply b. droughts c. war d. trade disputes Unit 5- CH 12 & 13 Measuring Economic Performance Factors Contributing to Long-Term Economic Growth Technological innovation (including technology transfers from more developed nations) High investment levels in physical and human capital Strong incentives to save, invest, and increase productivity (including property rights) High rates of savings (to permit high levels of investment) Low inflation Political stability Free trade Slower rates of population growth Decentralized decision-making in most sectors of the economy (Source - From Focus: Economic Systems, © National Council on Economic Education, New York, N Unit 5- CH 12 & 13 Measuring Economic Performance The Mysteries of Unemployment: How Can You Hide Something So Macro? (See separate attachment) Unit 5- CH 12 & 13 Measuring Economic Performance Unit 5- CH 12 & 13 Measuring Economic Performance Part 2: Questions for Discussion 1. What happened to inflation when planned economies began their transition to market economies? 2. What happened to the rate of inflation as countries moved farther toward a market economy? 3. Which group of countries has increased the share of output in its private sector the most? 4. Which group of countries has increased the share of output in its private sector the least? 5. Which group of countries has had the smallest growth in the money supply? 6. Which group of countries has had the largest growth in the money supply? 7. If a delegation of Group 4 countries asked you for advice on how to decrease their 1,547 percent inflation rate, what would you tell them? Support your answer. Unit 5- CH 12 & 13 Measuring Economic Performance KEY POINTS TO REMEMBER 1. There are several ways to evaluate a nation’s economic performance. Gross domestic product (GDP) is the most important, despite its limitations. 2. Business cycles consist of successive periods of improvement and decline in a macroeconomy. 3. Contributors to long-term growth include population, government, foreign trade, capital deepening, saving and investing, and advances in technology. 4. The unemployment rate provides an important clue to the health of the entire economy. 5. The level of inflation in the economy can affect wages, purchasing power, and other aspects of everyday life. 6. Even in a successful economy, millions of people remain poor. The question is to what degree? Questions to Master 1. What roles does saving play in the process of economic growth?_______________________ _____________________________________________________________________________ _____________________________________________________________________________ 2. How do patents encourage technological progress? _________________________________ _____________________________________________________________________________ _____________________________________________________________________________ 3. How does capital deepening contribute to economic growth? __________________________ _____________________________________________________________________________ _____________________________________________________________________________ 4. What are three causes of inflation, and how do they differ? ____________________________ _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ 5. Which groups are most affected by poverty? Support your answer ______________________ _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ NOTES: Unit 5- CH 12 & 13 Measuring Economic Performance _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________