Chapter 6 Measuring the Size of the Economy: Gross Domestic Product

Macroeconomics

Measure of how a country is performing and includes all production and consumption within every market.

What are the 3 macroeconomic goals?

Economic growth, low unemployment, and low inflation

What does macroeconomics focus on?

It focuses on the economy as a whole and how whole economies interact

Is production supply or demand?

supply

Is consumption supply or demand?

demand

Economic Growth

Economic growth determines the standard of living in a country, measured by the change in GDP adjusted for inflation.

Low employment

Unemployment is the percentage of the labor force without a job.

Low inflation 

Inflation is the overall increase in the level of prices in an economy. Inflation is measured by the Consumer Price Index

What are the principal tools that economists use?

Theories and models

In macroeconomics what theories do you use?

Aggregate demand and aggregate supply

What are two perspectives of macroeconomics?

Neoclassical and Keynesian

What does the Monetary Policy involve?

Managing the money supply and interest rates

What does the Fiscal Policy involve?

Changes in government spending, purchases, and taxes

What’s the first step in macroeconomics?

Measuring the overall economy

How do economists measure the size of a nation’s overall economy?

GDP

What does GDP mean?

Gross domestic product 

What are 3 ways to measure GDP?

By demand, by supply, and the national income approach 

How do you measure GDP by Demand?

Consumption, Investment, Government spending on goods and services, and spending on net exports

Whats the largest compenent of GDP?

Consumption

How much does consumption account for?

two-thirds in any year

What does consumption tell us?

The spending decisions are a major driver of the economy

Does consumer spending fluctuate much with consumption?

No, not much, and it only increased modestly over time

What do investment expenditures refer to?

To purchase buildings and equipment

Does investment fluctuate more noticeably than consumption?

yes

What demand is far smaller than consumption demand?

investment demand

How much does investment demand account for?

15%-18% of GDP

Buying a new fighter jet for the Air Force

Federal government spending

Building a new highway

State government spending

Building a new school

Local government spending

What is the only art of government spending that is counted in demand?

Government purchases of goods or services produced in the economy

What does exports > imports mean?

trade surplus

What does imports > exports mean?

trade deficit

Exports

Domestically porduced goods that a country sells abroad

Imports

Goods produced in other countries that residents of this country purchase

What’s the gap between exports and imports called?

Trade balance

How do you measure GDP by Supply?

Durable goods, Non-durable goods, services, structures, and inventories

What’s another way to measure GDP?

Adding up all the income produced in a year

The total value of a nation’s output is equal to what?

The total value of its income

Double counting

Counting output more than once as it travels through production

How do you avoid double-counting?

Only count the value of final goods and services, not intermediate goods

What does Gross National Product mean?

Measures what a country’s citizens and firms produce, regardless of whether it is produced domestically or internationally

What does Net National Product mean?

GNP minus how much physical capital depreciates due to aging over the course of a year

Can GNP or NNP be divided into national income and personal income?

NNP

Nominal GDP

Equal to the quantity of every good or service produced, multiplied by the price at which it was sold, summed up for all goods and services

Real GDP

Equal to nominal GDP divided by the price index

GDP deflator

A price index measuring the average prices of all final goods and services included in the economy

What’s the equation of the GDP deflator?

Nominal GDP/Real GDP x 100

What’s the equation of the Real GDP?

Nominal GDP/ (Price index/100)

What do we use to compute the real statistic?

Prices in the base year

One year/period plays a special role in what?

Whenever you compute a statistic in real terms instead of nominal terms across a period of time

How do you calculate real GDP

The quantities of goods and services produced in each year are multiplied by their base year price

As long as inflation is positive, real GDP should be what?

Less than nominal GDP in any year after the base year

What’s amplified by inflation?

Value of nominal GDP

Nominal and real GDP will be what in the base year?

Equal

What’s the equation of real GDP growth rate?

(Current year real GDP— base year real GDP)/base year real GDP x 100

How long does the business cycle run?

From the height of the economy to the lowest point and back to the peak

How long does a recession last?

It lasts from peak to trough

How long does an economic upswing last?

From trough to peak

What is a depression?

A longer and deeper decline

What are the steps to calculating CPI?

Fix the basket, find the prices, then compute the basket’s cost, Choose a base year, and the compute the inflation rate

What’s the CPI equation?

Inflation rate in year 2 = CPI in year2 — CPI in year 1/ CPI in year 1 × 100

What societal factors are not included in GDP?

Environmental cleanliness, population health, air quality, and infant mortality rates