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CHAPTER 11

CHAPTER 11. Measuring Economic Activity. Business Cycle Alternating periods of economic expansion and contraction. Peak. Recession. Inflation. Recovery. Depression. GDP.

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CHAPTER 11

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  1. CHAPTER 11 Measuring Economic Activity

  2. Business Cycle • Alternating periods of economic expansion and contraction Peak Recession Inflation Recovery Depression

  3. GDP • GDP measures the market value of final goods and services produced within a country’s border during a given time period

  4. Three approaches to measurement • Value added • Expenditure method • Income method

  5. What is not included in GDP? • Used goods • Financial transactions • Underground transactions • Transfer payments • Barter transactions • Some non-market production

  6. Expenditure Method • GDP = C + I + G + (x - m) • C =Personal consumption expenditure • I =Gross private domestic investment • G =Government consumption expenditures and investment • (x-m)= net exports

  7. Components of GDP • Personal consumption expenditures • Durable goods • Non-durable goods • Services Spending on durable goods tends to be highly volatile during business cycles

  8. Components of GDP • Gross private domestic investment • Fixed investment • Non-residential (structures equipment & software) • Residential (new houses by HH and landlords) • Changes in private inventories • Goods produced but not sold during a given year

  9. Components of GDP Govt. consumption Exp. & Gross investment • Federal • National defense • Non-defense • State and local

  10. Components of GDP • Exports • Goods • Services • Imports • Goods • Services

  11. Income Method Gross domestic product Less: Depreciation Plus: Statistical discrepancy Equals: National income Compensation of employees Proprietor’s income Rental income Corporate profits Net interest

  12. Income Method cont… Less: Income earned but not received Plus: Income received but not earned Equal: Personal income Less: personal taxes Equals: disposable income personal consumption personal savings

  13. Measurement of Price level • Inflation • A sustained increase in price level • Deflation • A sustained decrease in price level • Main Indices • Consumer price index (CPI) • Producer price index (PPI) • GDP deflator

  14. Measurement of Employment • Population 16 years of age or older Less: members of armed forces Less: Institutionalized persons (in jails or nursing homes) Equals: Civilian Non-institutional population Cont….

  15. Measurement of Employment Less: Persons who are not actively seeking jobs (housewives, retirees, students, discouraged workers) Equals: Civilian labor force

  16. Unemployment • Natural rate of unemployment • Minimum level of unemployment that can be achieved with current institutions without causing inflation to accelerate Unemployment rate # of persons unemployed Labor force X 100 =

  17. Relevance for the manager inflation recession In contraction phase, generally, GDP, P, employment, profits & production show a downward trend

  18. Relevance for the manager In Expansion phase, generally, GDP, P, employment, profits and production show an upward trend Demand for firm’s product is influenced by the business cycle. Policy changes also take place

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