Chapter 12Economic Indicators and Measurements

GDP and Other Indicators Gross Domestic Product (GDP): is the

market value of all final goods and service produced in a nation within a given time period.

3 requirements for a good or service to be included in GDP Must be final, a shirt, not the fabric to make the

shirt. Must be produced in the time period. (sold doesn’t

matter, just produced) No products made by U.S. companies in foreign

countries is included.

Calculating GDP C + I + G + X = GDP (C is consumption, I is

investment, G is government spending, and X is net exports

Two Types of GDP Nominal GDP states GDP in terms of the current

value of goods and services. Real GDP is the GDP corrected for price changes

throughout the year.

Calculating GDP Example Country A only produces Televisions so it is

easy to see their total production. Listed below is the # produced each year, the price, the nominal GDP, and Real GDP (which uses the first year as a base year to measure change. 2004: 500 TVs produced at $100 each, $50,000

Nominal GDP, $50,000 Real GDP. 2005: 600 TVs produced at $100 each, $60,000

Nominal GDP, $60,000 Real GDP. 2004: 500 TVs produced at $120 each, $72,000

Nominal GDP, $60,000 Real GDP.

GDP Example Cont. How did they get Nominal GDP and Real GDP?

Nominal GDP = # Produced X Price that year Real GDP = # Produced X Price in base year

Why did Real GDP not Change from 2005 to 2006?

GDP does not measure… Quality of Life Nonmarket Activities

(ex. Maintenance Work)

Underground Economic Activities

Other Economic Performance Indicators

GDP + Income earned by US Companies abroad – Income earned by Foreign Companies in the US = Gross National Product (GNP)

GNP – depreciation of capital stock (replacing capital) = Net National Product (NNP)

NNP – Indirect business taxes = National Income (NI)

NI – Income earned but not received (welfare taxes) + income received but not earned (welfare) = Personal Income (PI)

PI – Personal taxes = Disposable Personal Income (DPI)

Section 2The Business Cycle: A series of growing and shrinking periods of economic activity measured by increases and decreases in Real GDP

Stage 1: Expansion The expansion is a period of

economic growth where there is an increase in Real GDP. Expansions are noted for

decreases in unemployment and vary in length. The longest U.S. economic expansion was from 1991 to 2001

Stage 2: Peak The Peak is the point in which Real GDP

is at its highest. From this point on, prices rise and resources tighten do Real GDP declines.

Stage 3: Contraction During contractions,

producers cut back and unemployment rises. If the cutbacks become severe, the economy may face a recession where the contraction lasts more than two quarters. Even longer periods of contraction are called a depression.

Stage 4: Trough The trough is the point at which Real

GDP reaches its lowest. From this point forward the business cycle begins again with a period of expansion.

Why do Business Cycles Occur? Factor 1: Business Decisions (Business deciding

on production levels). Changes in demand and new technology are big influencers of this.

Factor 2: Changes in Interest Rates (How costly it is for people and businesses to borrow money)

Factor 3: Consumer Expectations (How secure buyers feel)

Factor 4: External Issues (Natural Disasters or wars for example)

Supply and Demand as Economic Indicators

Aggregate Demand is the sum of all demand in the economy. The total amount of goods and services that households, businesses, government, and foreign purchasers will buy at a certain price.

Aggregate Supply is the sum of all the supply in the economy. The total amount of goods and services that producers will produce at each price level.

Changes in AS and AD How is GDP effected

by an increase or decrease in AD?

How is GDP effected by an increase or decrease in AS?

Notice that the same effects on price take place as they did with normal supply and demand.

Factors of Economic Growth #1 Natural Resources: In general the more

resources a country has access to the faster it grows.

#2 Labor Resources: The # of workers and the # of hours they work.

#3 Capital: There is greater growth when more workers have access to more capital.

#4 Technology and Innovation: Greater Efficiency = Greater Output