Chapter 12 Presentation PDF

Economics Chapter 12 Economic Indicators and Measurements Section 1 Gross Domestic Product and Other Indicators Define gross domestic product (GDP). The gross domestic product (GDP) is the market value of all final goods and services produced within a nation in a given time period. Economists u...

Economics Chapter 12 Economic Indicators and Measurements Section 1 Gross Domestic Product and Other Indicators Define gross domestic product (GDP). The gross domestic product (GDP) is the market value of all final goods and services produced within a nation in a given time period. Economists use GDP to gauge how well a country’s economy is doing. When GDP is growing, an economy creates more jobs and more jobs and more business opportunities; when GDP declines, jobs and more business opportunities become less plentiful. What are the three requirements to be included in the GDP? It has to be final rather than intermediate. Example: The fabric used to make a shirt is an intermediate good; the shirt itself is a final good. The good or service must be produced during the time period, regardless of when it is sold. Example: Cars made this year but sold next year would be counted in this year’s GDP. The good or service must be produced within the nation’s borders. Products made in foreign countries by U.S. companies are not included in the U.S. GDP. How is GDP calculated? With this method the group national spending on final goods and services according to the four sectors of the economy: spending by households, or consumption; spending by businesses, or investments; government spending; and total exports minus total imports, or net exports. Economists identify consumption with the letter C; investment with the letter I; government spending with the letter G; and net exports with the letter X. To calculate GDP, economists add the expenditures from all sectors together: C + I + G + X = GDP. To get a clear picture of a country’s health, economists calculate two forms of GDP: Nominal GDP & Real GDP The most basic form is nominal GDP, states GDP in terms of the current value of goods and services. If prices never changed, nominal GDP would be sufficient, but prices tend to increase over time. To factor out rising prices, economists use real GDP, states GDP corrected for changes in prices from year to year. Real GDP is an estimate of the GDP if prices were to remain constant from year to year. To find real GDP, economists compare nominal GDP to a base year. Since real GDP eliminates price differences, the line for real GDP rises more gradually than the line for nominal GDP. Real GDP provides a more accurate measure of economic performance. Output Not Measured by GDP Nonmarket Activities Nonmarket activities are services that have potential economic value but are performed without charge. Example: There is no effective way to measure the output of plumbers who install or repair plumbing systems in their own homes or people who do volunteer work for schools or hospitals. By far the biggest nonmarket activity consists of many services – cooking, cleaning, childcare – provided by homemakers. Output Not Measured by GDP Underground Economy The underground economy describes market activities that go unreported because they are illegal or because those involved want to avoid taxation. Example: Some activities are kept underground because they are illegal – drug dealing, smuggling, gambling, and selling stolen goods. Other underground activities are themselves legal, but the way the payment is handled is not; such as a plumber who repairs for a neighbor might receive payment in cash and not declare it as taxable income. Estimates suggest that the underground economy would make up to 8 to 10 percent of the U.S. GDP. Output Not Measured by GDP Quality of Life Countries with high GDPs have high living standards, but GDP does not show how the goods and services are distributed. Example: The United States has the largest GDP of any country, but more than 10 percent of its people still live in poverty; GDP also does not express what products are being built and services offered. Other Measurements to Gauge Economic Growth Gross National Product (GNP) Gross national product (GNP) is the market value of all final goods and services produced by a country. GNP equals GDP plus the income from goods and services produced by U.S. companies and citizens in foreign countries minus the income foreign companies and citizens earn here. Other Measurements to Gauge Economic Growth Net National Product (NNP) Net national product (NNP) is the value of final goods and services less the value of capital goods that become worn out. Other Measurements to Gauge Economic Growth National Income (NI) National income (NI) is the total income earned in a nation from the production of goods and services. It is calculated by subtracting indirect business taxes, such as property and sales taxes, from NNP. Other Measurements to Gauge Economic Growth Personal Income (PI) Personal income (PI) is the income received by a country’s people from all sources. It can be calculated from NI by subtracting social security taxes, corporate profit taxes, and corporate profits not paid to stockholders and by adding social security, unemployment, and welfare payments. Other Measurements to Gauge Economic Growth Disposable Personal Income (DPI) Disposable personal income (DPI) is personal income minus taxes. It shows hoe much money is actually available for consumer spending. Section 2 Business Cycles What is a business cycle? The business cycle is the series of growing and shrinking periods of economic activity, measured by increases or decreases in real GDP. What are the four stages of the business cycle? Expansion – In the expansion phase, real GDP grows from a low point, or trough. The expansion is a period of economic growth, the increase in a nation’s real GDP over a period of time. During an expansion, jobs are relatively easy to find, so unemployment goes down. Peak – The point at which real GDP is the highest represents the peak of the business cycle. As prices rise and resources tighten, businesses become less profitable. From that point on, real GDP declines as businesses curtail production. Contraction – The contraction phase begins after the peak. As producers cut back, resources become less scarce and prices tend to stabilize or fall. Unemployment rises because employers produce less. Trough – The final phase of the business cycle is the trough, the point at which real GDP and employment stop declining. A business cycle is complete when it has gone through all four phases, from trough to trough or peak to peak. Define recession. Recession is a prolonged economic contraction lasting two or more quarters (six months or more). Define depression. Depression is an extended period of high unemployment and reduced business activity. Define stagflation. Stagflation describes periods during which prices rise at the same time there is a slowdown in business activity; a stagnation of business activity and inflation of prices.