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Chapter 10
Section 1
Objectives
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How do economist calculate gross domestic
product?
What are some of the limitations of gross
domestic product?
What other statistics do economists use to
measure the economy?
GDP
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Economists are constantly trying to measure the health
of a nations economy.
One way to do this is look at a country’s gross domestic
product (GDP).
GDP is the total dollar value of all final goods and
services produced within a country during one calendar
year.
Used goods are not counted, and only final goods are
counted-only the total finished product.
Goods produced in other countries are not counted.
Components of GDP
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What makes up GDP? Using the outputexpenditure model the following components
make up GDP: Personal consumption (C),
Government expenditures (G), gross investment
(I), and net exports (Xn).
GDP can be expressed as follows:
GDP=C+G+I+Xn
Countries with a higher GDP usually have better
economies.
Inflation and GDP
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Economists have to be aware of an increase in
price (inflation) from year to year when
comparing GDP from one year to the next.
GDP adjusted for inflation is called real GDP
while GDP that uses current prices and not
adjusted for inflation is called nominal GDP.
Real GDP gives economists a better idea if a
country’s economy is growing regardless of
inflation.
Limitations of GDP
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Limitations of GDP
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2.
3.
Collecting data is slow and time consuming
Non-market activities: jobs that are done by
individuals with no charge. (I cut my own grass,
wash my own car, etc)
Underground economy-goods and services sold in
the blackmarket are not counted.
Other Measurements of the
Economy
Economist can use other ways to measure the economy: (p.
234)
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Gross National Product (GNP)-counts all goods and services
produced with factors of production owned by residents of a
country.
Net National Product (NNP): GNP-fixed capital depreciation
National Income (NI): NNP+subsidies-indirect business taxes,
nontax liabilities, and other items.
Personal Income (PI): NI+personal interest and dividend
income and transfer payments-corporate profits, net interest, and
social insurance contributions.
Disposable Personal Income (DPI): PI – personal taxes and
nontax payments.
Chapter 10
Section 2
Objectives
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What are the four phases of the business cycle?
What factors influence the business cycle?
What are the three leading indicators used to
determine the current phase of the business
cycle and predict where the economy is headed?
Business Cycle
Business cycles are fluctuations or changes in a
market system’s economic activity.
The business cycle is divided into four stages or
phases:
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2.
3.
4.
Expansion, or recovery (period of economic growth)
Peak (high point at which economy is at its strongest)
Contraction, or recession (GDP stops increasing)
Trough (production and employment are at their lowest
levels)
Influences on the Business Cycle
There are several factors that may cause fluctuations
in the business cycle:
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2.
3.
4.
Business investment: higher levels of business investment
are represented by expansion in the cycle.
Availability of money and credit: when money and credit is
short, contraction is taking place.
Public expectations: If people expect the economy is
heading into a recession, they may tighten their spending
and speed up the process.
External Factors: political crisis, wars, or mother nature
may lead to contractions.
Predicting the Business Cycle
Economist can try to predict the business cycle by
looking at indicators or signs that tell which way the
economy is heading.
There are three types of indicators:
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Leading indicators: factors that predict an expansion or
contraction of the economy such as the number of new
building permits issued, stock prices, etc.
Coincident indicators: provide information about the
current status of the economy-include personal income
and numbers of goods sold.
Lagging indicators: show up after economy has changedinclude use of credit.
Chapter 10
Section 3
Objectives
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Why is economic growth important?
What are the requirements for economic
growth?
What is the relationship between economic
growth and productivity?
Economic Growth
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Economic growth can be defined as the increase in the
output of final goods and services produced within a
nation’s borders over a specified period of time.
In other words-this is an increase in a nation’s Real
GDP.
Since an increase in population would raise real GDP,
economist look at Real GDP per capita: an increased
in the real value of all final goods and services that
are produced per person for a specified period of
time.
Importance of Economic Growth
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Economic growth is important for several reasons:
1. It allows the United States to maintain its position
as a leading economic power among industrialized
nations and compete in the global market.
2. It increases our standard of living. People have
more money to spend and more free time to spend
it on.
3. Since people are making more money, the
government is allowed to collect more taxes which
will benefit the nation as a whole.
Requirements for Economic Growth
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In order for a nation to achieve long-term
economic growth it must increase either its
inputs (factors of production) or increase the
productivity of these inputs.
The factors of production that a nation must
protect or increase are: natural resources, human
resources, capital resources, and
entrepreneurship
Increasing Productivity
Another way to have economic growth is to increase
productivity.
Economists define productivity growth as an
increase in the output of each worker per hour of
work.
Factors that impact productivity growth include:
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Level of available technology.
Quantity of capital goods available per worker-meaning the
number of machines, tools, and equipment available for
each person to use.
Education and skill level of the workforce.