C HAPTER 12
Bell Work: Grab workbooks from back put in workbook, complete warm-ups on pages
109 and 110

C HAPTER 12.1
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“What does the GDP show about the nation’s economy?”
Objectives to know
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How GDP is calculated
Difference b/t nominal and real GDP
Limitations of GDP
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Factors that influence GDP
Other output/income measures
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Key Terms (3)
 http://www.pearsonsuccessnet.com/snpapp/iText/prod ucts/0-13-369833-
5/Flash/Ch12/Econ_OnlineLectureNotes_ch12_s1.swf

I NTRODUCTION
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What does the Gross Domestic Product (GDP) show about the nation’s economy?
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GDP measures the amount of money brought into a nation in a single year through the selling of that nation’s goods and services
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GDP is a measurement of how well a nation’s economy is doing for a particular year.
High GDP means nation is doing well
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Low GDP means nation is doing poorly

N ATION I NCOME A CCOUNTING
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Economists use a system called national income accounting to monitor the U.S. economy
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They collect microeconomic statistics, which the govt. uses to determine economic policies
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M/I data economists analyze is Gross Domestic
Product (GDP)
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Dollar value of all final goods and services produced w/in country’s borders in a year

W HAT IS GDP
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Tracks exchanges of money
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Need to understand which are/are not included
• Cash value of all goods/services sold
• Goods/services offered to consumers
• American or Foreign companies producing in U.S.
• Cost of producing all goods/services
• Intermediate goods used to produce others goods/services
• American Companies producing overseas

A PPROACHES : R EAD S ECTIONS
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Expenditure
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One method used to calculate GDP
Estimate annual expenditures on 4 categories of final goods/services
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Consumer goods
Business goods/services
Govt. goods/services
Net Exports
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Income
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Adding up all the incomes in the economy
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Rationale is that a sale of final good/service minus the cost of production represents income for that firms owners/employees

N OMINAL VS R EAL GDP: R EAD S ECTION
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Helps understand current conditions of GDP
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Nominal GDP is measured in current prices
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Calculated by using the current year’s prices to calculate the current years output
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Problem: Doesn’t account for rise in prices
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May show increase in GDP when output is still same
Real GDP
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GDP expressed in constant, unchanging prices
Determine a year to set base prices so they can see a
“true” change in GDP
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Figure 12.3 311

L IMITATIONS OF GDP
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Doesn’t take into account some economic activities or aspects of life.
Nonmarket activities: GDP doesn’t measure goods/services people make/do themselves
Underground Economy: GDP doesn’t account for “black market” or people paid w/out taxes
Negative externalities: unintended side effects, like pollution, not subtracted from GDP
Quality of Life: GDP doesn’t necessarily represent quality of life

O THER OUTPUT AND INCOME M EASURE
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In addition to GDP, there are other ways to measure economy

I NFLUENCES ON GDP
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Aggregate Supply
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Total amount of goods/services available at all possible price levels
In a nation’s economy, as the prices of most goods/services change, the price level changes and firms respond by changing their output
As price level rises, real GDP, or aggregate supply rises
As prices fall, so does real GDP

I NFLUENCES ON GDP
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Aggregate Demand
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Amount of goods/services that will be purchased at all possible price levels
As prices move up/down individuals/firms change how much they buy--- in the opposite direction of aggregate supply
Any shift in aggregate supply or aggregate demand will have an impact on real GDP and price level
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Aggregate supply/demand represent supply/demand on a national level.
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They show what happens to GDP and prices when aggregate supply/demand shifts.
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Figure 12.5

L ESSON C LOSING
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“Exit Card”: Identify/Explain which is/isn’t part of GDP
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Restaurant meal
Chair manufactured in Mexico by U.S. company
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Childcare provided by parent
Bike made by European company in U.S.
Childcare provided by Daycare center
Selling of 3-year old used truck
Item made this year, but not sold yet
Workbook pages
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111, 16, and 19: Quiz done for tomorrow
Visual Glossary: GDP
Action Graphs: Measurements and Agg. S & D

12.2: B ELL W ORK
Workbook pages
111, 16, and 19: Quiz done for tomorrow
Visual Glossary: GDP
Action Graphs: Measurements and Agg. S & D

12.2
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“What factors affect phases of a business cycle?”
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Objectives to know
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Phases of business cycle
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4 key factors that keep business cycle going
How economists forecast fluctuations in cycle
Impact of business cycles in U.S. history
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Key Terms(2)
 http://www.pearsonsuccessnet.com/snpapp/iText/prod ucts/0-13-369833-
5/Flash/Ch12/Econ_OnlineLectureNotes_ch12_s2.swf

I NTRODUCTION
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What factors affect the phases of a business cycle?
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Periods of economic growth
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Periods of economic decline
Business investments
Interest Rates and Credit
Consumer expectations
External Shocks

P HASES OF A B USINESS C YCLE
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Business cycles are made up of major changes in real GDP above or below normal levels
Consists of four phases
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Expansion
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Rise in real GDP, jobs abundant, unemployment low, businesses prosper
Peak
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When GDP stops rising, reaches height of expansion
Contractions
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Falling GDP; usually less output and higher unemployment
3 Types
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Recession: long contraction (16-18 mnths)
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Depression: Really long recession, high UE and output
Stagflation: Decline in real GDP w/rise in prices (inflation)

4 F ACTORS FOR B USINESS CYCLE
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Business cycles are affected by 4 main economic variables
Business Investment
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When expanding, investments increase
Keeps increasing GDP, maintaining expansion
When firms cut spending, decreases GDP
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Interest Rates/Credit
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Consumers often us credit to buy new things
If interest rates on goods rise, less likely to buy
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Same is true for businesses deciding whether or not to buy new equipment or make large investments

4 F ACTORS FOR B USINESS CYCLE
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Consumer Expectations
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If people expect economy to contract they may reduce spending, pulling down GDP
High consumer confidence may lead people to buy more goods; pushes up GDP
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External Shocks
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Negative external shocks can have a great effect on business, causing GDP to decline
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Country in War w/ heavy investments by banks/businesses
Positive External shocks can lead to increase in nations wealth
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Like oil discovery or a great growing season

F ORECASTING B USINESS C YCLES
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To predict the next phase of a cycle, forecasters must anticipate movements of real GDP before the occur
Economists use leading indicators to help them
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Stock market is one leading indicator
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Today it will turn downward sharply before recession
Conference Board: keeps index of 10 strong indicators
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Stocks, interest rates, and capital goods purchases
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None are altogether reliable

I MPACT OF C YCLES IN U.S. H ISTORY
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Great Depression
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Changed beliefs that a declining economy would recover on own.
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Led economists to belief that modern market economies could fall into long-lasting contractions
Economy didn’t recover until WWII
Declining GDP/High unemployment were 2 major signs of the Great Depression
Pic on pg. 320
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What year did GD hit its Trough?
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1933
How long did it take GDP to return to pre-depression peak?
4 years

I MPACT OF C YCLES IN U.S. H ISTORY
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OPEC Embargo
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In 1970s, U.S. experienced an external shock when the price of gasoline and heating fuels skyrocketed as a result of the OPEC embargo on oil shipped to U.S.
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U.S. economy also experienced a recession in the early 80s and another brief one in 1991
Attacks of 9/11 led to another sharp drop in consumer spending in many service industries

B USINESS C YCLE TODAY
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Economy became slow in 2001
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Surged in late 2003
Growth slowed again as a result of high gas prices in 2006
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Sub-Prime mortgage crisis caused further decline in
2007
Stock market decline in 2008 appeared to be bringing country into another recession

L ESSON C LOSING
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“Exit Card”
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Draw the business cycle with “hypothetical” peaks and troughs from the 1980s to now
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Homework
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Workbook pages: 112, 25, 27
Video
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How economy works
Tracking a business Cycle
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If any of you would like a “jump” on the Ch.12
Project go ahead. Its on Sharepoint! Under the
“announcements”

C HAPTER 12 S ECTION 3
BW: Section 2 Quiz
Video
How economy works
Tracking a business Cycle

C HAPTER 12 S ECTION 3
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“How does the economy grow?”
Objectives to learn
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How economic growth is measured
What capital deepening is and how it contributes to economic growth
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Analyze how saving and investment are related to economic growth
Impact of population growth, government, and foreign trade on economic growth
Causes and impact of technological progress
Key Terms (1)
 http://www.pearsonsuccessnet.com/snpapp/iText/prod ucts/0-13-369833-
5/Flash/Ch12/Econ_OnlineLectureNotes_ch12_s3.swf

I NTRODUCTION
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How does the economy grow?
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The economy grows through
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Increase in capital deepening
Higher savings rate
Population that grows along w/capital growth
Government intervention
Technological Progress

M EASURING E CONOMIC G ROWTH
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Basic measure is the % change in Real GDP over a period of time
Economists prefer a measuring system that takes population growth into account
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GDP per capita is used then instead
Example: Imagine there are 2 families both living on
$60,000/yr
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Family 1: 5 in family, Family 2: 3 in family
Which family has a higher standard of living?
GDP measures standard of living, not quality
GDP also tells us nothing about output distributed across population
In general, nations w/high GDP per capita experience greater Quality of life; even though it tells us little about individuals other than a starting point
Watch Action Graph

W HAT IS C APITAL
D EEPENING ?
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Nation w/large amount of physical capital will experience economic growth
CD is process of increasing amount of capital/worker.
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One of most important sources for econ. growth

S AVING AND I NVESTING
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Amnt of $$ people save increases, then more investment funds are there for businesses
Funds can be used for capital investment and expand stock of capitol in business sector
Link to Cap.Deepening?
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Provides more funds for financial institutions to invest

E FFECTS ON E CONOMIC G ROWTH
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Population Growth
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High pop. Growth w/supply of capital same = less capital per worker
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Opposite of capital deepening, lower standards of living
Low pop. Growth and expanding capital = greater capital deepening
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Government (Taxes)
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Raising Taxes
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People have less money, reduce savings
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Reduces money for investment
HOWEVER
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If Govt. invests revenue in public goods this will increase investment
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Results in capital deepening

E FFECTS ON E CONOMIC G ROWTH
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Foreign Trade
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Can result in a trade deficit
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Value of goods a country imports is higher than exported
If imports consist of investment type goods, running a trade deficit can help capital deepening
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If funds are used for long-term investments, Capital
Deepening can offset negatives of a trade deficit by helping generate economic growth
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Popcorn Read Foreign Trade: pg. 327

T ECHNICAL P ROGRESS
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Key source for Economic
Growth
Can result from new scientific knowledge, inventions, and production methods
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Measuring technological progress can be done by determining how much growth in output comes from increases in capitol and how much comes from increases in labor
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Any remaining growth in output comes from technological progress
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Causes
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Scientific Research
Innovation
Scale of Market
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Larger markets provide more incentives for innovation
Education and Experience
Natural Resources
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Increases need for new technology
Read Case Study: pg.329

L ESSON C LOSING
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Watch Case Study Video
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Watch Essential Question Video
Answer Questions for Quiz…… fill in workbook

F RIDAY
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Project Work
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This is your Project Grade for Ch.12
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Go to http://www.econedlink.org/lessons/index.php?lesson=904&p age=student
Or just go to share-point and choose the site.
Follow directions
Print off results….
May work w/partner but need to print off separate results