CONTEMPORARY ECONOMICS: LESSON 11.1 © SOUTH-WESTERN1

CHAPTER 11

Economic Performance

11.111.1 Gross Domestic Product

11.211.2 Limitations of GDP Estimation

11.311.3 Business Cycles

11.411.4 Aggregate Demand and Aggregate Supply

CONTEMPORARY ECONOMICS: LESSON 11.1 © SOUTH-WESTERN2

CHAPTER 11

Economic Performance How is the economy’s performance measured? What’s gross about the gross domestic product? What’s the impact on gross domestic product if you make

yourself a sandwich for lunch? How can you compare the value of production in one year

with that in other years if prices change over time? What’s the business cycle? What’s the big idea with the national economy?

Consider

CONTEMPORARY ECONOMICS: LESSON 11.1 © SOUTH-WESTERN3

LESSON 11.1

Gross Domestic Product Describe what the gross domestic

product measures. Learn two ways to calculate the gross

domestic product, and explain why they are equivalent.

Objectives

CONTEMPORARY ECONOMICS: LESSON 11.1 © SOUTH-WESTERN4

LESSON 11.1

Gross Domestic Product economy gross domestic product (GDP) consumption investment aggregate expenditure aggregate income

Key Terms

CONTEMPORARY ECONOMICS: LESSON 11.15 © SOUTH-WESTERN

The National Economy

National economics, or macroeconomics, focuses on the overall performance of the economy.

Economy describes the structure of economic activity in a locality, a region, a country, a group of countries, or the world.

CONTEMPORARY ECONOMICS: LESSON 11.16 © SOUTH-WESTERN

Gross Domestic Product

Gross domestic product (GDP) measures the market value of all final goods and services produced in the United States during a given period.

CONTEMPORARY ECONOMICS: LESSON 11.17 © SOUTH-WESTERN

National Income Accounts

Organize huge quantities of data collected from a variety of sources across the United States

Keep track of the value of final goods and services

CONTEMPORARY ECONOMICS: LESSON 11.18 © SOUTH-WESTERN

No Double Counting

Intermediate goods and services are those purchased for additional processing and resale.

Sales of intermediate goods and services are excluded from GDP to avoid the problem of double counting.

GDP also ignores most of the secondhand value of used goods, such as existing homes and used cars.

CONTEMPORARY ECONOMICS: LESSON 11.19 © SOUTH-WESTERN

Calculating GDP

GDP based on the expenditure approach GDP based on the income approach

CONTEMPORARY ECONOMICS: LESSON 11.110 © SOUTH-WESTERN

GDP Expenditure Approach

The expenditure approach to GDP adds up the spending on all final goods and services produced in the economy during the year.

Consumption consists of purchases of final goods and services by households during the year.

Investment consists of spending on new capital goods and additions to inventories.

Aggregate expenditure equals the sum of consumption, investment, government purchases, and net exports.

C + I + G + (X – M) = GDP

CONTEMPORARY ECONOMICS: LESSON 11.111 © SOUTH-WESTERN

GDP Income Approach

The income approach to GDP adds up the aggregate income earned during the year by those who produce that output.

Aggregate income equals the sum of all the income earned by resource suppliers in the economy.

CONTEMPORARY ECONOMICS: LESSON 11.112 © SOUTH-WESTERN

Computation of Value Added for a New Desk

Stage of Stage of ProductionProduction

(1)(1)Sale ValueSale Value

(2)(2)Cost of Cost of

Intermediate GoodsIntermediate Goods

(3)(3)Value Value AddedAdded

Logger $ 20 — $ 20

Miller 50 $ 20 30

Manufacturer 120 50 70

Retailer 200 120 80

Market value of final good $200