Chapter 10: Measures of Economic Performance



Chapter 12

GDP

Macroeconomics is the study of the economy of the___________________________________.

* It examines the effects of events on the economy in___________________________________.

* Aggregate means ______________, or with all elements taken together.

* Macroeconomic issues:

Gross Domestic Product

Economic Performance- Measurements are used to ___________________ the performance of the economy

Ways that a nation’s income is calculated

* Gross Domestic Product- _____________________ of all goods and services produced ________________ ____________during one calendar year

* GDP can be a limited measuring tool because sometimes it is not ________, the data is measured after the fact, there are _____________ activities like the underground economy or ____________________.

~~ What nation has the largest GDP?

What is excluded from GDP?

1. Nonmarket Activities: GDP does not measure goods and services that people make or do themselves, such as caring for children, mowing lawns, or cooking dinner. GDP ignores: ____________________________ __________________________________________________________________________________________________________________________________________________

2. Transfer Payments: ____________________________________________________________________

3. Security Payments: ____________________________________________________________

4. Underground economy (Black Market): includes __________________________________ _____________________ as well as _________________________________, or gray, ones (not quite legal, but not exactly illegal).

Ex. Cash only transactions that never get reported to the IRS:____________________________________ __________________________________. The underground economy tends to grow when the economy is ______________________________. Cash transactions replace reported purchases and income.

5. Not Sold this year or Secondhand sales: When a product is resold from one person to another no new wealth is created. _______________________________________________ ______________________

6. Intermediate Products- _________________________________________________________________

Example: a tomato in a hamburger at 5 Guys

What Is a Business Cycle?

▪ A modern industrial economy experiences cycles of ____________________________________________ __________________________________________________________

▪ Business cycles are of major interest to macroeconomists, who study their causes and effects.

▪ There are four main phases of the business cycle: ______________________________________________ ______________________________________________________

A business cycle is a macroeconomic period of expansion followed by a period of contraction.

Phases of the Business Cycle

• Expansion- An expansion is a period of ___________________________________ as measured by a rise in real GDP. Economic growth is a steady, long-term rise in real GDP.

• Peak- When _______________________________________, the economy has reached its peak, the height of its economic expansion.

• Contraction- Following its peak, the economy enters a period of contraction, ____________________________________. A _______________ is a prolonged economic contraction. An especially long or severe recession may be called a __________________.

• Trough- The trough is the lowest point of economic decline, _________________________ _________________________________

What Keeps the Business Cycle Going? Business cycles are affected by four main economic variables:

• Business Investment

When an economy is expanding, firms expect sales and profits to keep rising, and therefore _____________ _____________________________. This investment creates new jobs and furthers expansion. In a recession, _______________________________.

• Interest Rates and Credit

When interest rates are low, _______________________________, often adding jobs to the economy. When interest rates climb, investment dries up, as does job growth.

• Consumer Expectations

Forecasts of an expanding economy _____________________, while fears of recession _______________________________

• External Shocks

External shocks, such as ____________________________________, greatly influence the output of an economy.

Forecasting Business Cycles

▪ Economists try to forecast, or predict, changes in the business cycle.

▪ ________________________ are key economic variables economists use to predict a new phase of a business cycle.

▪ Examples of leading indicators are ____________________________________

Per Capita GDP- GDP of a country __________________________. Is often a useful measurement of standard of living

▪ Standard of living is a rough estimation of the ________________ that people in a country are able to afford.

▪ GDP is not always an accurate measure of standard of living because some countries do not have an even __________________________

Capital Deepening

▪ The process of ______________________________ is called capital deepening. Capital deepening is one of the most important sources of growth in modern economies.

▪ Firms increase physical capital by purchasing more equipment. Firms and employees increase human capital through _____________________________.

The Effects of Savings and Investing

▪ The proportion of disposable income spent to income saved is called the _________

▪ When consumers save or invest money in banks, their money becomes available for firms to borrow or use. This allows firms to deepen capital.

▪ In the long run, ___________________________________ for the population, raising GDP and living standards.

The Effects of Technological Progress

▪ Besides capital deepening, the other key source of economic growth is technological progress.

▪ Technological progress is an increase in efficiency gained by producing _________________________ _____________________________________________

A variety of factors contribute to technological progress:

▪ Innovation: When new products and ideas are successfully brought to market, output goes up, ___________________________________.

▪ Scale of the Market: Larger markets provide more incentives for innovation since the _____________________________________.

▪ Education and Experience: Increased human capital makes workers ____ ___________. Educated workers may also have the necessary skills needed to use new technology.

Other Factors Affecting Growth

Population Growth

▪ If population grows while the supply of capital remains constant, ____________________

Government

▪ Government can affect the process of economic growth by __________________. Government use of tax revenues also affects growth: funds spent on public goods increase investment, while funds spent on consumption decrease net investment.

Foreign Trade

▪ Trade deficits, ____________________________________________________, can sometimes increase investment and capital deepening if the imports consist of investment goods rather than consumer goods.

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