Expedenture approach
GDP=AE=C+I+G+(X-M)
Four limitations of using GDP to measure economic growth
Nonmarket activities, the underground economy, negative externalities, quality of life
A system that collects macroeconomic statistics on production, income, investment, and savings
National income accounting
Goods used in the production of final goods
Intermediate goods
GDP measured in current prices
Nominal GDP
Goods that last a short period of time
Nondurable goods
GDP expressed in constant or unchanging prices
Real GDP
Goods that last a relatively long time
Durable goods
Loss of the value of capital equipment that results from normal wear and tear
Depreciation
The total amount of goods and services in the economy available at all possible price levels
Aggregate supply
The average of all prices in the economy
Price level
The annual income earned by us owned firms and us residents
Gross national product
The dollar value of all final goods and services produced within a country's borders in a given year
Gross domestic product
Phases of the business cycle
expansion, peak, contraction, trough
Contributing Factors
Business investment, interest rates&credit, consumer expectations, external shocks
Cycle Indicators
Stock market(tends to fall before recession), Interest Rates, Manufacturers new orders of capital goods
Business cycle
a period of expansion followed by a period of contraction
Expansion
An increase in real GDP
Economic Growth
steady, long-term growth
Peak
The height of an economic expansion
Contraction
Decrease in real GDP
Trough
Lowest point in an economic contraction
Recession
Prolonged contraction
Depression
Especially long and severe
Stagflation
Decrease in real GDP & higher prices; actual GDP decreases & prices increase
Leading Indicators
Key economic variables that economists use to predict a new phase of a business cycle
How does capital deepening increase output per worker?
You have more efficient output
How is human capital deepened?
by investing in education and training
What happens when saving rises?
more investment funds become available to business firms and these firms then spend more on capital
How does increased investment help the economy?
It leads to an increase in GDP
What happens when population grows and capital remains constant?
The amount of capital per worker shrinks, leading to lower living standards; less output
How do government taxation for consumption spending and importing goods for short-term consumption affect economic growth?
Taxing in order to pay for consumption spending decreases the amount of investment. Importing goods for short-term consumption will not make the economy grow any faster, and will leave the country without additional GDP to pay back debts
How does the government aid technological innovation?
It issues patents and sponsors basic research
Savings Rate
The proportion of disposable income spent to income saved
Real GDP per capita
The real GDP divided by the total population
Capital Deepening
Increasing the amount of capital per worker
Income not used for consumption is considered
saving
Technological Progress
An increase in efficiency gained by producing more output without using more inputs