Economics Chapter 13

National Income Accounting The measurement of the national economy’s performance. A measure of the amount of goods and services produced yearly by the nation and the amount of income people have to spend.

Gross Domestic Product (GDP) The broadest measure of the economy’s size. The total dollar value of all final goods and services produced in the nation during a single year. Includes all final products in four sectors: Consumer goods and services Investment goods and services Government goods and services Net exports

A measure of the economy that subtracts depreciation from GDP. NDP = GDP - Depreciation

A measure of the total amount of income earned by everyone in the economy. Wages and Salaries Income of self-employed individuals Rental income Corporate profits Interest on savings and other investments

A measure of the total income that individuals receive before personal taxes are paid.

A measure of the income remaining for people to spend or save after all taxes have been paid.

Inflation A prolonged rise in the general price level of goods and services. Skews GDP Deflation A prolonged decline in the general price level. Rarely happens

When is a dollar not a dollar? When inflation occurs, the prices of goods and services rise…therefore, the purchasing power of the dollar goes down. A dollar’s purchasing power is the real goods and services that it can buy.

Consumer Price Index (CPI) Producer Price Index (PPI) GDP Price Deflator

The measure of the change in price over time of a specific group of goods and services used by the average household. Measures the percent increase every three years over the base year. Market Basket—the specific group of goods and services analyzed. (90,000)

The measure of the change in price over time that United States producers have charged for their goods and services. Often an indicator if the CPI will rise.

A price index that removes the effect of inflation from GDP so that the overall economy in one year can be compared to another year. The new figure is called real GDP. Real GDP is then compared to a base year GDP.

Aggregate Demand is the total quantity of all goods and services in the entire economy demanded by all people. Aggregate Demand is related to the price level-the average of all the prices as measured by a price index.

Aggregate Supply is the real domestic output of producers based on the rise and fall of the price level.

The equilibrium price is where the demand curve intersects the supply curve.

Business fluctuations are the ups and downs in an economy.

The business cycle is changes in the level of total output measured by real GDP.

Growth Peak or Boom Contraction or Recession Trough Expansion or Recovery Peak or Boom Contraction or Recession

Peak or Boom—period of prosperity Contraction—Business activity slows down Recession—Any period of at least two quarters (6 months) during which real GDP does not grow. Trough—Where the downward direction of the economy levels off. Expansion or Recovery—The increase in total economic activity following a trough.

Business Investment Government Activity External Factors Psychological Factors

Some economists say that business decisions are the key to business fluctuations. Capital Investments Increase or Cut Back Innovations—inventions and new production techniques.

A number of economists believe that the changing of policies by the federal government are a reason for cycles. Policies on taxing and spending Control over the money supply available in the economy.

Wars impact the economy. Availability of raw materials (oil)

Prospects of peace in an area can impact the economy Discovery of new oil reserves War

Trying to predict what will happen in the economy in the coming months and years. Economic Indicators are the statistics that measure variables in the economy, such as stock prices or the dollar amounts of loans to be repaid.

Leading Indicators are statistics that point to what will happen in the economy. These lead to an overall change in the business activity—up or down.

Economic indicators that usually change at the same time as changes in the overall business activity. Often lead to a contraction in the economy.

These economic indicators seem to lag behind overall business activity. These give economists clues as to the duration of the phases of the business cycle.