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ECONOMICS STUDY GUIDE, CHAPTER TWELVE: GROSS DOMESTIC PRODUCT AND GROWTH GEORGIA PERFORMANCE STANDARDS (your objectives for this chapter): SSEMA1 Illustrate the means by which economic activity is measured. a. Explain that overall levels of income, employment, and prices are determined by the spending and production decisions of households, businesses, government, and net exports. b. Define Gross Domestic Product (GDP), economic growth, unemployment, Consumer Price Index (CPI), inflation, stagflation, and aggregate supply and aggregate demand. c. Explain how economic growth, inflation, and unemployment are calculated. e. Define the stages of the business cycle, include peak, contraction, trough, recovery, expansion as well as recession and depression. KEY TERMS aggregate demand the amount of goods and services in the economy that will be purchased at all possible price levels (p. 307) aggregate supply the total amount of goods and services in the economy available at all possible price levels (p. 307) capital deepening process of increasing the amount of capital per worker (p. 320) contraction period of economic decline marked by falling real GDP (p. 310) depreciation the loss of the value of capital equipment that results from normal wear and tear (pp. 305, 520), or, a decrease in the value of a currency (p. 459) depression a recession that is especially long and severe (p. 311) durable goods goods that last for a relatively long time, such as refrigerators, cars, and DVD players (p. 302) economic growth steady, long-term increase in real GDP (p. 310) expansion a period of economic growth as measured by a rise in real GDP (p. 310) gross national product (GNP) the annual income earned by U.S.-owned firms and U.S. residents (p. 305) intermediate goods goods used in the production of final goods (p. 301) leading indicators key economic variables that economists use to predict a new phase of the business cycle (p. 314) national income accounting a system that collects macroeconomic statistics on production, income, investment, and savings (p. 301) nominal GDP gross domestic product measured in current prices (p 304) nondurable goods goods that last a short period of time, such as food, light bulbs, and sneakers (p. 302) peak the height of an economic expansion, when real GDP stops rising (p. 310) price level the average of all prices in the economy (p. 307) real GDP gross domestic product expressed in constant, or unchanging, prices (p. 304) real GDP per capita real gross domestic product divided by the total population (p. 319) recession a prolonged economic contraction (p. 311) saving income not used for consumption (p. 320) savings rate the proportion of disposable income that is saved (p. 320) stagflation a decline in real GDP combined with a rise in the price level (p. 311) technological progress an increase in efficiency gained by producing more output without using more inputs (p. 322) trough the lowest point in an economic contraction, when real gross domestic product stops falling (p. 311) KEY IDEAS AND CONCEPTS • Gross Domestic Product (GDP), and GDP, GNP, NNP, NI, PI, and DPI o Four Limitations of GDP: 1. ______________________ 2. _______________________ 3. ______________________ 4. _______________________ o Define the following: o GNP _____________________________________________________________________________________ • • • • • • o NNP _____________________________________________________________________________________ o NI _____________________________________________________________________________________ o PI _____________________________________________________________________________________ o DPI _____________________________________________________________________________________ Aggregate Supply and Demand Business Cycles o Four Variables that Affect the Business Cycle: 1. ______________________ 2. _______________________ 3. ______________________ 4. _______________________ o Business Cycle Forecasting and Leading Indicators o Business Cycles in U.S. History: Depressions, Recessions, and Keynesian Economic Theory Measuring Economic Growth: o Per Capita GDP o GDP Growth, Education, Life Expectancy, Unemployment and Consumer Prices Capital Deepening: the most important growth source in many economies Saving and Investing Population Growth, Government and Trade Page 1 of 2 • Technological Progress: Know the importance of Solow, Denison, and Measuring Technological Progress o Five Causes of Technological Progress: 1. __________________ 2. __________________ 3. __________________ 4. ___________________ 5. ___________________ Compare and Contrast • Expenditure & Income Approaches to GDP • Nominal & Real GDP • Depressions & Recessions SAMPLE ESSAY QUESTIONS 1. 2. 3. 4. Explain why final goods and services are included in the calculation of GDP and intermediate goods are not. Explain the concept of business cycles, and describe what happens during the four business cycle phases. Explain the relationship between consumer expectations and economic performance. Describe the five causes of technological progress, and give examples of how these increase efficiency in a macroeconomy. Page 2 of 2