I. Total production is a measure of an economy's growth
II. We use Gross Domestic Product (GDP) to measure production
III. GDP: the total dollar value of all final
goods/services produced within a country each year
A. goods/services multiplied
by their prices (essentially Q x P)
B. 3 parts to consider
1.
Final Output
a. only "final goods" are counted in the GDP
b. "intermediate goods" (things used to make something else) are not counted
in order to avoid duplication by counting an item twice
2.
Current Year
a. secondhand sales are not counted
b. those items were counted during the year they were originally sold
3.
Within a nation's borders
a. counts production regardless of who owns it
b. DOES count foreign businesses operating in US
c. DOES NOT count Coca-Cola factory in Brazil
IV. Real v. Nominal GDP
A. Nominal (current) GDP:
uses current prices and is not adjusted for price increases
1.
w/out adjusting, GDP appears to grow every year
B. Real GDP: adjusted for prices
changes
1.
Real GDP allows us to see if actual production changed
BUSINESS CYCLES
I. Business Cycle: change in economy's activity
II. 4 Stages
A. Expansion/recovery: GDP
increases and unemployment decreases
B. Peak: GDP reaches highest point
C. Contraction: GDP starts
to decline and unemployment rises
1.
recession: GDP declines for 6 consecutive months
2.
depression: severe and long recession
D. Trough: GDP reaches its
lowest point and starts to go back up
*cycle starts all over again
III. Causes of Business Cycle
A. Consumer Expectations
1.
if recession is near, people save more and spend less = GDP declines
2.
opposite is also true (in good times, people spend more = GDP rises)
B. Money/Credit
1.
if interest rates are low, it is cheaper for people to borrow money to
spend = GDP rises
2.
opposite is also true
C. Business Investment
1.
more investment in capital, labor, and technology = more production = GDP
rises
D. External Factors
1.
events in world affect US economy
2.
high oil prices led to energy crisis and US recession in mid 1970s and
early 1980s.
3.
businesss cut production and people bought less = GDP declined
4.
"war is good for business"
a. every US war of the 20th Century (except the Gulf War) produced a huge
economic boom
b. the govt. typically spends a lot of money on wars, which produces jobs
= GDP rises
IV. Predicting Business Cycles (indicators to
watch)
A. GDP
B. new houses
C. consumer confidence
D. saving v. spending
E. unemployment rates