Name: Ethan McGee
Macroeconomics
Chapter 5 Guided Reading
Define macroeconomics.
The part of economic concerned with large-scale or general economic factors
After reading the passage, summarize the effect of macroeconomic policy on
presidential campaigns.
A president’s odds for reelection will depend on how well the economy
performs during their term.
What two basic issues do macroeconomics focus on?
Long-run economic growth and economic fluctuations
Define inflation.
Sustained increases in the average prices of all goods and services
List and define the “flip” sides of the macroeconomic coin.
Production – What a person or company produces
Income – Your paycheck
Which two economic measures are critical to a nation’s economic health?
A country’s production and income
Draw the circular flow of production and income. (also known as the circular flow
of economics). Provide a brief description of what this diagram means.
Define gross domestic product. (GDP) What things are included in GDP? What
things are not included in GDP?
GDP – The total market value of final goods and services produced within an
economy in a given year.
A car produced in the United States and sold to someone in the United States.
Intermediate goods are not included in the GDP to prevent the “double
counting” of an item. For example, if you buy a phone, the gold and precious
metals inside are not counted in the GDP
What is real GDP?
A measure of GDP that controls for changes in prices
What is nominal GDP and what are the two reasons it can increase?
The value of GDP in current dollars.
1. Production of goods and services has increased
2. The prices of goods and services have increased
List the four broad categories of GDP.
1.
2.
3.
4.
Consumption and expenditures
Private investment expenditures
Government Purchases
Net Exports
What are the three categories consumption expenditures can be broken down
into?
1. Durable goods
2. Non-Durable goods
3. Services
What are the three components of Private Investment Expenditures? (Often
times known as Business Expenditures)
1. Spending on new plants and equipment
2. Newly produced housing
3. Increase in inventories
Describe depreciation by giving an example.
The more miles you put on your vehicle the more the car depreciates in value
because the car becomes less reliable the longer it runs along with other wear
and tear factors.
What government spending categories contribute to the GDP?
Government purchases – purchases of newly produced goods and services by
local, state, and federal governments.
What are the three components of Private Investment Expenditures
1. Gross Investment
2. Depreciation
3. Net Investment
What three items make up the foreign sector of GDP?
Imports, Exports, and net Exports
What is it called when our foreign sector of the GDP is negative? Positive?
1. There is a trade deficit when imports exceed our exports
2. There is a trade surplus when we are exporting more than we are
importing
List the GDP equation.
GDP = Consumption + Investment + Government Purchases + Net Exports
How does the government go about measuring our national income?
They first add the GDP to the national income from firms and residents abroad.
Then they subtract the income from just the firms.
Describe the differences between personal income and personal disposable
income.
Personal income is the Income you earned before paying taxes, but personal
disposable income is the money you earned after taxes.
How does expanded circular flow make the economic flow more realistic?
Expanded circular flow includes both the government and the foreign sector
Describe how fluctuations in GDP occur with the business cycle.
1. A recession is a period when real GDP falls for 6 or more consecutive
months
2. Trough is then the output starts to increase again
3. Expansion is a recovery period after a trough
4. A peak is when the output starts to decline
List and describe four shortcomings of GDP measurement.
1. Housework and childcare – GDP ignores transactions that don’t take place
in organized markets
2. Leisure – Increase in leisure time will lead to higher social welfare, but not
higher GDP
3. Underground Economy – GDP ignores transactions that are not reported
to official authorities
4. Pollution – GDP does not value changes in the environment that occur in
the production of output