ECON1130 Chapter Notes - Chapter 8: Gross Domestic Product, Business Cycle, Price Level

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6 Feb 2017
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Chapter Eight: GDP Measuring Total Production and Income
Gross Domestic Product Measures Total Production
Microeconomics: the study of how households and firms make choices, how they
interact in markets, and how the government attempts to influence their choices
Macroeconomics: the study of how the economy as a whole, including topics such
as inflation, unemployment, and economic growth
Business cycle: alternating periods of economic expansion and economic
recession
Expansion: the period of a business cycle during which total production an total
employment are increasing
Recession: the period of a business cycle during which total production and total
employment are decreasing
Economic growth: the ability of an economy to produce increasing quantities of
goods and services
Inflation rate: the percentage increase in the price level from one year to the next
Measuring Total Production: Gross Domestic Product
Gross domestic product: the market value of all final goods and services produced
in a country during a period of time, typically one year
GDP is Measured Using Market Values, Not Quantities
Do not add the quantity of goods but rather the value of all of the goods in dollar
terms
GDP Includes Only the Market Value of Final Goods
In measuring GDP, include the value of final goods and services
Final good or service: a good or service purchased by a final user
Intermediate goods: a good or service that is an input into another good or service,
such as a tire or a truck
GDP Includes Only Current Production
Includes only production that takes place during the indicated period of time
Production, Income, and the Circular Flow Diagram
Also measuring the value of total income
o When you add up the value of goods and services, you get the exact
amount of income
Firms use factors of production (labor, capital, natural resources, and
entrepreneurship) to produce goods and services
Divide income into four categories
o Wages, interest, rent, and profit
Profit is the income that remains after a firm has paid wages, interest, and rent
Transfer payments: payments by the government to households for which the
government does not receive a new good or service in return
o Not included in the GDP because they are not received in exchange for
production of goods or services
GDP is the total income received by households
Spending on foreign produced goods and services imports
Components of GDP
Personal consumption expenditures
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