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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