1. Unit 6 Notes

2. Unit 6, Lesson 1
Notes

3.  Economists monitor economic data of the
country using national income accounting –
collects statistics on production, income,
investments, and savings
 This data is collected and presented to the
government and maintained by the
Department of Commerce

4.  The MOST IMPORTANT measure that is
collected is GDP – the dollar value of all final
goods and services produced within a
country’s borders in a given year.
 The definition itself is worded that each
piece must be looked at individually

5.  Dollar value is the total selling prices of all
goods and services produced in a country in a
given year
 Final goods and services are the products
sold to consumers in a given year
 Produced within a country’s borders means
that anything produced in the U. S. is
counted (Kia plant in Ohio)

6. 1. Intermediate goods – products/services used to
make final products.
a. Ex: Car tires (intermediate good) aren’t counted if they are
going onto a brand new car (final good).
b. Avoids multiple counting
2. Nonproduction Transactions
a. Transfer Payments (public or private) – money is given for no
service/product. Ex: $ as a gift, welfare, social security.
b. Stocks & Bonds transactions
3. Sale of USED goods
4. Non-market Transactions
Ex: Time & effort you spend fixing up your car.
5. Underground Economy – no record exists of the
transaction.
Ex: babysitting, lawn mowing, maid services, drug
trade

7. GDP Basics:
 Always expressed in terms of $.
 Primary measure of economy’s performance.
 Calculated using either the expenditure
approach or the income approach.
 Increases in GDP are desirable
 When the government looks at GDP, the
measurement must be as accurate as possible

8.  To calculate GDP, one way is the Expenditure
approach
 Economists estimate the annual expenditures
($ spent) on four categories:
 Consumer
 Business
 Government
 Net imports/exports
 This total equals GDP – practical approach

9.  Another way to measure GDP is the income
approach – provides better accuracy
 This approach adds up all the incomes in the
economy (ex. Income from selling a house for
$115,000)

10. Unit 6, Lesson 2
Notes

11.  Nominal GDP is GDP measured in current
prices - GDP unadjusted for inflation or
deflation of prices.
 Uses current year’s prices
 Real GDP is GDP expressed in constant, or
unchanging, prices - GDP that has been
adjusted for inflation/deflation.
 Reflects price changes so that you may
compare if production increased or if higher
prices simply caused a higher nominal GDP.
(Remember: GDP measures the goods/service
produced in one year.)

12.  Even though GDP is the primary economic
measure, others are also taken
 GDP is used to determine 5 other economic
measures including:
 GNP
 Depreciation

13.  GNP is the annual income earned by U. S.-owned
firms and U. S. citizens
 It is calculated by: GDP + income earned outside
the U. S. – income earned by foreign firms and
citizens inside the U. S. = GNP
 GNP does not account for depreciation – the loss
of the value of capital equipment that results
from normal wear and tear
 So, GNP – Depreciation = Net National Product (NNP)
 NNP is the output made after the adjustment for
depreciation

14.  NNP does not account for another factor that
reflects the cost of doing business – taxes
 So NNP – taxes (sales and exercise) = National
Income (NI)
 We can then figure out how much individuals
make that they can then spend, called Personal
Income (PI)
 So PI = Other household income + Money business
pays out (SS, Income taxes, etc.) – National
Income
 Then, we look at how much a person actually has
to spend after taxes, called Disposable Personal
Income (DPI) = Personal income – taxes
 Personal Taxes include income, property, estate,
etc.

15. Unit 6, Lesson 3
Notes

16. (Reading and Discussion)

17. A business cycle is a period of economic
expansion followed by a period of economic
contraction
 These are not minor ups and downs – they
are major changes to GDP
 There are typically 4 phases of a business
cycle:
 Expansion
 Peak
 Contraction
 Trough

18.  Expansion is a period of economic growth
measured by a rise of in real GDP
 In this phase the economy as a whole enjoys
plentiful jobs and a falling unemployment
rate
 Economic growth is a steady, long-term
increase in GDP

19.  Peakoccurs when GDP stops rising – it has
reached the pinnacle of economic expansion

20.  Contraction occurs after a peak, when the
economy enters a period of economic decline
marked by falling GDP
 Other conditions may like unemployment and
price may vary
 Economists have different terms to describe the
severity of a contraction:
 Recession – exists if real GDP falls for 2 consecutive
quarters (6 months) – unemployment normally 6 to 10
months
 Depression – exists if a recession is esp. long and
severe – high unemployment and low output
 Stagflation – exists if real GDP declines (output) and
prices rise (inflation)

21.  When the economy has “bottomed-out” it
has reached the trough.
 This is the lowest point of economic
contraction
 GDP stops falling

22.  Business investment: When the economy is
good, businesses invest in new capital. When
economy isn’t so good, businesses stop
investing and this creates a drop in the
output of other sectors of the economy – can
also begin firing workers
 Interest rates and credit: When interest
rates are low, consumers and business are
inclined to make purchases. When interest
rates are high, they are less likely to spend
money, lowering GDP

23.  Consumer Expectations: When expectations are
that we are in a “good” economy, they expect
higher wages and available jobs – increase in
spending. When expectations are poor,
consumers don’t spend money because they
expect lay-off and lower incomes – can start a
contraction
 External Shocks: Negative shocks (drought,
hurricane, oil supply) can cause increase in
prices and a decline in GDP. Positive shocks
(good growing season, finding of new oil supply)
can increase GDP and decrease prices

24. Unit 6, Lesson 4
Notes

25.  The basic measure of a nation’s economic
growth rate is the percentage of change of
GDP over a given period time
 GDP must also keep up with population
growth in order for it to keep being positive
 Taking into account population, most
economist prefer to rely on real GDP per
capita into account
 This is the GDP per person in the country

26.  Real GDP per capita is considered the best
measure of a nation’s standard of living
 If GDP rises faster than population, the
standard of living will go up
 Factorssuch as population, government and
foreign trade are taken under consideration.

27.  Population Growth
 If the population grows while the supply of
capital remains constant, the amount of capital
per worker will shrink.
 Leads to lower living standards
 Government
 If a government raises tax rates to pay for a war,
households will have less money and people will
reduce savings.
 This reduces the money available for businesses.
 Foreign Trade
 Trade Deficit- situation where the value of goods
a country imports is higher than the value of
goods it exports.

28.  An
increase in efficiency gained by producing
more output without using more inputs.
 New inventions
 New ways of performing a task
 New scientific knowledge
 New methods for organizing production
 Increased productivity means producing more
output with the same amounts of land, labor
and capital.
 This equals higher rates of GDP per capita,
and thus higher standards of living!

29. Unit 6, Lesson 5
Notes

30.  Economists can measure the strength of the
economy at any given time by counting the
number of unemployed people
 There are 4 kinds of unemployment:
 Frictional
 Seasonal
 Structural
 Cyclical

31.  Unemployment always exists, even in a good
economy
 Frictional unemployment occurs when people
take time to find a job
 For example: changing jobs, time to find job
after finishing school, etc.
 In an economy as large as the U. S.,
economists expect to find a large number of
unemployed falling into this category

32.  Seasonal unemployment occurs when
industries slow or shut down for a season or
make a seasonal shift in production
schedules
 For example, summer jobs, harvests, etc.
 Economists expect to see people in this
category as well

33.  When the type of economy shifts from one sector
to another, the skills workers need to have a job
also changes
 Workers who lack the necessary skills will lose
their jobs – this is structural unemployment
 There are 5 causes of structural unemployment:
 New technology
 New resources
 Changes in consumer demand
 Globalization
 Lack of education

34.  Unemployment that rises when the economy
is down and falls when the economy is good
is called cyclical unemployment
 For example – Great Depression (1 out of 4
unemployed) and today’s recession (10%
unemployment)

35.  The amount of unemployment in the nation
is an important clue to the nation’s health
 Each month, the Bureau of Labor and
Statistics polls a portion of the population
that tracks unemployment
 They compute the unemployment rate:
percentage of nation’s labor force that is
unemployed
 The unemployment rate is a national average
and doesn’t take into account regional or
local differences

36.  0% unemployment rate is not possible in a
market economy – 4-6% is normal
 Full employment can occur if there is no
cyclical unemployment