Key Concepts and Summary

Key Terms

business cycle the economy's relatively short-term movement in and out of recession depreciation the process by which capital ages over time and therefore loses its value depression an especially lengthy and deep decline in output double counting a potential mistake to avoid in measuring GDP, in which output is counted more than once as it travels through the stages of production durable good long-lasting good like a car or a refrigerator exchange rate the price of one currency in terms of another currency final good and service output used directly for consumption, investment, government, and trade purposes; contrast with “intermediate good” GDP per capita GDP divided by the population gross domestic product (GDP) the value of the output of all final goods and services produced within a country in a year gross national product (GNP) includes what is produced domestically and what is produced by domestic labor and business abroad in a year intermediate good output provided to other businesses at an intermediate stage of production, not for final users; contrast with “final good and service” inventory good that has been produced, but not yet been sold national income includes all income earned: wages, profits, rent, and profit income net national product (NNP) GNP minus depreciation nominal value the economic statistic actually announced at that time, not adjusted for inflation; contrast with real value nondurable good short-lived good like food and clothing peak during the business cycle, the highest point of output before a recession begins real value an economic statistic after it has been adjusted for inflation; contrast with nominal value recession a significant decline in national output service product which is intangible (in contrast to goods) such as entertainment, healthcare, or education standard of living all elements that affect people’s happiness, whether people buy or sell these elements in the market or not structure building used as residence, factory, office building, retail store, or for other purposes trade balance gap between exports and imports trade deficit exists when a nation's imports exceed its exports and it calculates them as imports –exports trade surplus exists when a nation's exports exceed its imports and it calculates them as exports – imports trough during the business cycle, the lowest point of output in a recession, before a recovery begins

Key Concepts and Summary

6.1 Measuring the Size of the Economy: Gross Domestic Product

Economists generally express the size of a nation’s economy as its gross domestic product (GDP), which measures the value of the output of all final goods and services produced within the country in a year. Economists measure GDP by taking the quantities of all goods and services produced, multiplying them by their prices, and summing the total. Since GDP measures what is bought and sold in the economy, we can measure it either by the sum of what is purchased in the economy or what is produced. We can divide demand into consumption, investment, government, exports, and imports. We can divide what is produced in the economy into durable goods, nondurable goods, services, structures, and inventories. To avoid double counting, GDP counts only final output of goods and services, not the production of intermediate goods or the value of labor in the chain of production.

6.2 Adjusting Nominal Values to Real Values

The nominal value of an economic statistic is the commonly announced value. The real value is the value after adjusting for changes in inflation. To convert nominal economic data from several different years into real, inflation-adjusted data, the starting point is to choose a base year arbitrarily and then use a price index to convert the measurements so that economists measure them in the money prevailing in the base year.

6.3 Tracking Real GDP over Time

Over the long term, U.S. real GDP have increased dramatically. At the same time, GDP has not increased the same amount each year. The speeding up and slowing down of GDP growth represents the business cycle. When GDP declines significantly, a recession occurs. A longer and deeper decline is a depression. Recessions begin at the business cycle's peak and end at the trough.

6.4 Comparing GDP among Countries

Since we measure GDP in a country’s currency, in order to compare different countries’ GDPs, we need to convert them to a common currency. One way to do that is with the exchange rate, which is the price of one country’s currency in terms of another. Once we express GDPs in a common currency, we can compare each country’s GDP per capita by dividing GDP by population. Countries with large populations often have large GDPs, but GDP alone can be a misleading indicator of a nation's wealth. A better measure is GDP per capita.

6.5 How Well GDP Measures the Well-Being of Society

GDP is an indicator of a society’s standard of living, but it is only a rough indicator. GDP does not directly take account of leisure, environmental quality, levels of health and education, activities conducted outside the market, changes in inequality of income, increases in variety, increases in technology, or the (positive or negative) value that society may place on certain types of output.

Self-Check Questions

1 . Country A has export sales of $20 billion, government purchases of $1,000 billion, business investment is $50 billion, imports are $40 billion, and consumption spending is $2,000 billion. What is the dollar value of GDP? 2 . Which of the following are included in GDP, and which are not? a. The cost of hospital stays b. The rise in life expectancy over time c. Child care provided by a licensed day care center d. Child care provided by a grandmother e. A used car sale f. A new car sale g. The greater variety of cheese available in supermarkets h. The iron that goes into the steel that goes into a refrigerator bought by a consumer. 3 . Using data from Table 6.5 how much of the nominal GDP growth from 1980 to 1990 was real GDP and how much was inflation? 4 . Without looking at Table 6.7, return to Figure 6.10. If we define a recession as a significant decline in national output, can you identify any post-1960 recessions in addition to the 2008-2009 recession? (This requires a judgment call.) 5 . According to Table 6.7, how often have recessions occurred since the end of World War II (1945)? 6 . According to Table 6.7, how long has the average recession lasted since the end of World War II? 7 . According to Table 6.7, how long has the average expansion lasted since the end of World War II?