Download Chapter 13: Macroeconomics

Measuring the Economy’s Performance
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National Income Accounting- overall output
and income.
◦ Measuring Gross domestic product- total dollar
value of all final goods and services.
◦ 2006 = $13 trillion
◦ No double counting by only measuring final goods.
◦ Only new goods.
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Computing GDP- expenditures in 4 areas
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Consumer sector
Investment sector
Government Sector
Net exports
Net Domestic Product (NDP)
◦ GDP – depreciation (value lost due to wear and tear
of capital goods.
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NI = the sum of:
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Wages and Salaries
Income of self-employed individuals
Rental income
Corporate profits
Interest on savings and investments
Personal Income (PI)- before taxes are paid.
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Transfer payments added- Money from the
government; welfare, social security, food
stamps etc.
Disposable Personal Income-Pi - taxes
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Inflation- The prolonged rise in general
prices.
Purchasing power goes down.
Nations output might not change, GDP takes
inflation into account.
Deflation- prolonged decline in prices
Rarely has happened in modern times.
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Consumer Price Index (CPI)- monthly
measurement of a specific group of goods.
Market Basket- 80,000 specific goods and
services.
Every 10 years the items are updated.
Choose a base year for comparison.
Producer Price Index (PPI)- Goods sold to
producers; mining, manufacturing, and
farming
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Converting current GDP to real GDP
Accounts for inflation
Divide by price deflator (Inflation amount)
Multiply by 100.
Real GDP can be compared to any other year.
Government uses 2000 as its base.
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Macro-economics looks supply and demand
of all goods and services together
(Aggregate)
Aggregate Demand- total of all planned
expenditures in the entire economy.
Slopes downward- Inflation = less buying
power. Deflation = more buying power.
Exports rise as prices lower.
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Aggregate Supply- Real domestic output of
producers based on rise and fall of the price
level.
Equilibrium price means no inflation or
deflation.
Change in Aggregate demand or supply will
change the equilibrium price.
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Business fluctuations- ups and downs of the
economy.
Business cycle- changes in the level of total
output, GDP.
Peak or boom- prosperity
Contraction- decline
Recession- six consecutive months of GDP
decline
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Depression- millions out of work economy
far below capacity.
Trough- lowest point.
Expansion or recovery- increase in economic
activity.
Great depression- worst example, led to the
idea “war is good for the economy”.
Standard of living did not rise.
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Causes
Innovations
Business cuts back on capital investment
when anticipating a downturn.
Government activities
Wars
Psychological effects
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Statistics to measure variables in the
economy.
Leading indicators
Coincidental indicators
Lagging indicators- clues to the duration of a
business cycle.