Measurement of Economic Performance GDP and the Business Cycle

Goals Understand and be able to draw and identify points on a Business Cycle. Define Gross Domestic Product and be able to recognize the three methods of calculating GDP.

I. The Business Cycle Trough Peak Expansion Contraction Output is at its lowest Unemployment is high Peak Output is at its highest Unemployment is low Expansion Rising economic output Unemployment is decreasing Contraction Output is declining Unemployment is growing GDP also known as aggregate output; may also see level of real output

I. The Business Cycle Recession Period of temporary economic decline, during which trade and production are reduced. A decrease in GDP over two successful quarters. Depression A particularly deep or extended recession with high levels of unemployment. Typically lasting two or more years.

II. GDP Gross Domestic Product (GDP) Included in GDP Total value of all final goods and services produced in the economy during a given year. Included in GDP Domestically produced final goods and services Includes, capital goods, new construction structures, and changes to inventories Not Included in GDP Intermediate Goods Inputs Used goods Financial assets Foreign-produced goods and services

II. GDP Value Added (Value added of production) – (Value of material inputs) Must eliminate inputs to avoid double counting Income Approach (Wages and Salaries) + (Rent) + (Profits) + (Interest) Typically used to check the expenditures approach Expenditure Approach (Consumption) + (Investments) + (Government Purchases) + (Net Exports) Most likely to see

1) GDP is equal to The total value of all goods and services produced in an economy during a given period. C + I + G + X. The total value of intermediate goods plus final goods. The total income received by producers of final goods and services. None of the above. E

2) Which of the following is included in GDP? Changes to inventories Intermediate goods Used goods Financial assets (stocks and bonds) Foreign-produced goods A

3) Which of the following is not included in GDP? Capital goods such as machinery Imports The value of domestically produced services Government purchases of goods and services The construction of structures B

4) Which of the following is not considered by one of the four components of the expenditures approach to calculate GDP? Purchases of physical capital by American businesses. Consumer spending on American made goods. Purchase of shares of stock in American owned businesses. Foreign purchases of American made goods. American purchases of foreign made goods. C

5) GDP increases occurring as a result of firms’ purchases of new equipment from other domestic firms are counted as this. Consumption. Investment. Government Purchases. Net Exports Financial Assets. B