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.