Gross Domestic Product
The dollar value of all final goods and services produced within a country's borders in a given year
Consumer good and services, business good and services, government g and s, net exports or imports of g and s
How is the expenditure approach used to calculate GDP?
By adding up all incomes in the economy
How is the income approach used to calculate GDP?
Nominal measures in current prices. It does not account for price level increases from year to year. Real expressed in constant or unchanging dollars.
What is the difference between nominal GDP and real GDP?
Non market activity, negative externalities, underground economy, quality of life
4 limitations of using GDP to measure economic growth
GDP is borders only and GNP is worldwide
How is the gross national product derived from the gross domestic product?
National income accounting
A system that collects macroeconomics statistics on production, income, investment, and savingd
Intermediate goods
Goods used in the production of final goods
Nominal GDP
GDP measured in current prices
Non durable goods
Goods that last a short period of time
Real GDP
GDP expressed in constant, or unchanging prices
Durable goods
Goods that last for a relatively long time
Depreciation
Loss of the value of capital equipment that results from normal wear and tear
Aggregate supply
The total amount of goods and services in the economy available at all possible price levels
Price level
The average of all prices in the economy
Gross national product (GNP)
The annual income earned by US owned firms and US residents
Business cycle
Expansion followed by a period of contraction
Expansion
A period of economic growth as measured by a rise in real GDP
Peak
The height of an economic expansion when real GDP stops rising
Contraction
A period of economic decline marked by falling real GDP
Trough
The lowest point in an economic contraction, when real GDP stops falling
Recession
A prolonged economic contraction
6 months
How long does GDP have to fall in order to have a recession?
Depression
Long or severe recession
Stagflation
A decline in real GDP combined with a rise in the price level
Inflation, recession
What 2 events occur during a stagflation
When an economy is expanding, firms expect profits to keep rising, therefore they invest in new plants and equipments
How do business investments lead to expansion?
Interest
Price you pay to borrow money
Companies make new investments, often adding jobs
How does a low interest rate affect business cycle?
Investments dry up as does job growth
How does a high interest rate affect the business cycle?
While fears of recession tighten consumers spending
How does decreased spending lead to contraction?
Forecasts of expanding economy often fuel more spending
How does increased spending lead to an expansion?
External shocks
Oil supply wars or natural disasters, greatly influence the output of economy
Make it worse, prices go up
How do negative external shocks affect the business cycle?
Additional trade, china
How do positive external shocks affect the business cycle?
Leading indicators
Key economic variables economists use to predict a new phase of a business cylce
Supply and demand shouldn't fix it, spend money
What did John Maynard Keynes believe about government interventions?
OPEC embargo
What external shock caused the recession in the 1970s?
Real GDP per capita
Real GDP divided by the total population
Measures the standard of living
Why is real GDP per capita an important measure?
Labor activity
The amount of output produced per worker
Capital deepening
Process of increasing the amount of resources (computers, laptops) per worker
Human capital deepening
The productive knowledge and sills acquired by a worker through education and experience, increases output per worker
The increase in demand will increase the equilibrium wage rate
How does capital deepening lead to higher wages for workers?
Saving
Disposable income not used for consumption
Savings rate
The proportion of disposable income that is saved
Output can only be consumed or invested, whatever is not consumed must be invested
How is savings related to investment?
If the population grows while the supply of capital remains constant, the amount of capital per worker will shrink
How does the size of the population affect capital deepening?
Trade deficit
When the value of goods a country imports is higher than the value of goods it exports
Capital deepening can help a country pay back it's creditors
How does borrowing money from foreign countries help a countries help a countries economy?
Technological progress
An increase in efficiency gained by producing more output without using more inputs
It raises a nations productivity, produce more output with same accounts of land, labor and capital. Society can enjoy higher real GDP per capita
How does technological progress affect the standard of living?
Scientific research, innovation, scale of the market, education and experience, natural resource use
5 factors that bring technological progress