Chapter 12

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# Chapter 12 - PowerPoint PPT Presentation

Chapter 12. Economic 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

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### Chapter 12

Economic 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 2

The 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.
• 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.