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Chapter 11
Gross Domestic Product
and Economic Growth
11-1 Gross Domestic Product
11-2 Business Cycles and Economic
Growth
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
1
Chapter 11
11-1
Gross Domestic
Product
Learning Objectives
LO1-1 Define GDP and what is included and not included.
LO1-2 Analyze how the circular flow model represents
economic activity.
LO1-3 Understand how GDP is computed.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
2
Chapter 11
11-1
Gross Domestic
Product
Vocabulary
What Is Gross Domestic Product?
gross domestic product (GDP)
transfer payment
final goods
intermediate goods
Circular-Flow Model
circular-flow model
How Is GDP Computed?
nominal GDP
real GDP
GDP per capita
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
3
Chapter 11
What Is Gross Domestic Product?
Gross domestic product (GDP) is the market value
of all final goods and services produced annually in a
country.
 The most widely reported measure of a nation’s
economic performance is gross domestic product.
 GDP tells a country how well its economy is doing.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
11-1 Gross Domestic Product
4
Chapter 11
What Is Gross Domestic Product?
A transfer payment is a government payment to
persons in exchange for goods and services
produced.
 Welfare, Social Security, veterans’ benefits, and
unemployed benefits are transfer payments.
Transfer payments are made to people who are
entitled to them.
 These transactions are considered nonproductive.
The reason is because these payments are not for any
current output.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
11-1 Gross Domestic Product
5
Chapter 11
What Is Gross Domestic Product?
Final goods are goods and services sold to the
final user.
 GDP only counts final goods.
Intermediate goods are goods and services used as
inputs for the production of final goods.
 Intermediate goods are not produced for
consumption by the ultimate user.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
11-1 Gross Domestic Product
6
Chapter 11
Circular-Flow Model
A circular-flow model shows the exchange of
money, products, and resources
between businesses,
households, and
government.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
11-1 Gross Domestic Product
7
Chapter 11
How Is GDP Computed?
Nominal GDP is GDP measured by current prices.
Real GDP is GDP adjusted for changes in prices
over time.
GDP per capita is GDP divided by the total
population.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
11-1 Gross Domestic Product
8
Chapter 11
11-2
Business Cycles and
Economic Growth
Learning Objectives
LO2-1 Explain the four phases of the business cycle and
business cycle indicators.
LO2-2 Analyze the causes of business cycles.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
9
Chapter 11
11-2
Business Cycles and
Economic Growth
Vocabulary
The Business Cycle Roller Coaster
business cycle
peak
recession
trough
expansion
economic growth
leading indicators
coincident indicators
lagging indicators
What Causes the Business Cycle?
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
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Chapter 11
The Business Cycle Roller Coaster
The business cycle consists of alternating periods of
economic growth and contraction.
 A central concern of macroeconomics is the
upswings and downswings of the economy called
the business cycle.
 Business cycles always exist in market economies.
 A free market system is driven by ever-changing
forces of supply and demand. A key measure of
cycles is the rise and fall of real GDP.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
11-2 Business Cycles and Economic Growth
11
Chapter 11
The Business Cycle Roller Coaster
At a peak, real GDP reaches it maximum.
A recession is a downturn in the business cycle
during which real GDP declines.
The trough is where real GDP reaches its lowest
level after falling during a recession.
An expansion is an upturn in the business cycle
during which real GDP rises.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
11-2 Business Cycles and Economic Growth
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Chapter 11
The Business Cycle Roller Coaster
Economic growth is defined by economists as an
increase in a nation’s real GDP during an expansion.
 An outward shift of the production possibilities curve
illustrates economic growth.
 Increases in resources, technological advances, and
productivity are key reasons for economic growth.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
11-2 Business Cycles and Economic Growth
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Chapter 11
The Business Cycle Roller Coaster
Leading indicators are key variables that change
before real GDP changes.
 The government’s chief forecasting gauge for
business cycles is the index of leading indicators.
Coincident indicators are key variables that change
at the same time that real GDP changes.
 The second data series of variables listed are four
coincident indicators.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
11-2 Business Cycles and Economic Growth
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Chapter 11
The Business Cycle Roller Coaster
Lagging indicators are seven variables that change
after real GDP changes.
 The seven variables are: (1) unemployment rate,
(2) duration of unemployment, (3) labor cost,
(4) consumer prices, (5) commercial and industrial
loans, (6) consumer credit to personal income ratio,
and (7) best consumer loan rates.
 The duration of unemployment is a lagging indicator.
As real GDP increases, this variable does not fall until
months after the beginning of the expansion.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
11-2 Business Cycles and Economic Growth
15
Chapter 11
What Causes the Business Cycle?
The theory generally accepted by economists is that
changes in total spending cause variations in real
GDP.
 If consumer spending increases, then businesses find
it profitable to increase investment in plants and
equipment.
 When firms become more productive, they use more
land, labor, and capital.
 These increases lead to economic growth in output,
employment, and incomes.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
11-2 Business Cycles and Economic Growth
16
Chapter 11
What Causes the Business Cycle?
A recession is the result of declines in sectors of
real GDP.
 If consumers spending decreases, then business profit
fall, and they decrease investment in plants and
equipment.
 Businesses become less productive and use fewer
resources.
 A decline in economic growth may be caused by a
reduction in government or from a decrease in
foreign spending for exports relative to spending for
imports.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
11-2 Business Cycles and Economic Growth
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