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1 Name Date Period MEASURING ECONOMIC PERFORMANCE Chapter 12 BEFORE YOU BEGIN Looking at the Chapter Fill in the blank spaces with the missing words. GDP is the total value of all goods and services produced annually in an economy. National Income Accounting GDP excludes goods and services, legal goods and services with no record, goods and services, used goods, stock and transactions, payments. GDP = government purchases Measuring GDP Higher GDP does not necessarily mean a of life. Study Guide 125 NTC/Contemporary Publishing Group, Inc.
2 The CPI compares prices consumers paid for a of goods. Measuring Price Changes Determining output and price levels Percent change in CPI = CPI later year CPI earlier year 100 CPI earlier year Aggregate and Aggregate Study Guide 126 NTC/Contemporary Publishing Group, Inc.
3 Chapter 12 Outlining the Chapter Look over the chapter paying attention to the main topics in the chapter. As you look over each section in the chapter, fill in the missing words in the outline below. I. National Income Accounting A. (GDP) is the total market value of all goods and services produced annually in an economy. 1. How to measure GDP a. Find the for each final good produced. (price of each good times the quantity of the good produced) b. Sum the market values. B. GDP includes only final goods to avoid, which is counting a good more than once. 1. A final good is a good sold to its user. 2. An good has not reached its user. C. What GDP omits 1. goods and services cannot be counted, so they are excluded from GDP. 2. Legal goods and services for which there is no record of a 3. Some goods and services like cooking and cleaning at home where people are not paid is excluded from GDP. 4. Sales of goods 5. transactions and other transactions 6. Government payments, such as Social Security checks E. The difference between GDP and GNP 1. Gross national product (GNP) measures the total market value of final goods and services produced by U.S. citizens no matter where in the world they reside. 2. GDP is the total market value of final goods and services produced within the of the United States whoever produces them. Study Guide 127 NTC/Contemporary Publishing Group, Inc.
4 II. Measuring GDP A. How is GDP measured? 1. Economists break the economy into four sectors: the sector, the sector, the sector, and the sector. 2. Expenditures made by the household sector (or by consumers) are called. 3. Expenditures made by the business sector are called. 4. Expenditures made by the government sector are called purchases. 5. Expenditures made by the residents of foreign countries on U.S.-produced goods are called. 6. GDP equals the sum of (C), (I), purchases (G), and (EX), minus (IM). B. Even goods that are produced but not are included in GDP. C. GDP versus quality of life 1. Higher GDP does not necessarily mean greater. 2. There are many things, such as leisure time, that go into being better off or possessing greater well-being. Greater production of goods and services is only one of those things. 3. Higher GDP does not necessarily mean higher GDP. One country may have higher GDP, but each person could have fewer goods and services per-person (on average). III. Real GDP A. The two variables of GDP: Price (P) and Quantity (Q) 1. Economists keep constant in computing the GDP for each year. 2. They do this by using the prices that existed in one particular year in the past. called the year. This computation is called real GDP. 3. GDP = P current year Q current year 4. Real GDP = P base year Q current year B. The base year 1. The base year is the year used to price the output of different years. 2. Another name for Real GDP is GDP in. Study Guide 128 NTC/Contemporary Publishing Group, Inc.
5 IV. Measuring Price Changes A. Calculating the change in a single price 1. The formula to find a change in price is: Percentage change in price = Price in later year Price in earlier year 100 Price in earlier year 2. A calculates the change in prices from one year to the next. 3. The most widely cited price index is the. B. The consumer price index (CPI) 1. U.S. Bureau of Labor Statistics calculates the CPI. 2. The bureau samples thousands of households and determines what these consumers paid for a representative group of goods called the. 3. This is compared with what a typical consumer unit paid for the same market basket in Calculating the CPI a. Step 1: Calculate the total on the market basket in the year and the total on the market basket in the year. b. Step 2: Divide the total current-year expenditure by the total base-year expenditure and multiply by Two CPI numbers can be used to figure out the by which prices increased between two years: Percentage change in CPI CPI in later year CPI in earlier year 100 CPI in earlier year C. The determination of the quantity of goods and services and the price level 1. (AD) curves show the quantity of goods and services buyers are willing and able to buy at different price. a. AD is sloping. This means that people are willing and able to buy a quantity of goods and services (more output) at price levels than at higher price levels. Study Guide 129 NTC/Contemporary Publishing Group, Inc.
6 2. (AS) curves show the quantity of goods and services, or output, producers are willing and able to supply at different price levels. a. AS is sloping, meaning that producers are willing and able to produce and offer to sell a quantity of goods and services (more output) at price levels than at lower price levels. 3 price level and quantity of goods and services are determined by aggregate demand and aggregate supply. a. At price levels equilibrium price there is a of goods and services. As a result, the price level, people buy goods and services and producers produce, and the surplus disappears. b. At price levels equilibrium price there is a of goods and services. As a result, the price level, people buy goods and services and producers produce, and the shortage disappears. Study Guide 130 NTC/Contemporary Publishing Group, Inc.
7 Chapter 12 Building Vocabulary Fill in the blanks below with the correct terms from the following list of economic concepts. aggregate demand curve aggregate supply curve base year consumer price index (CPI) double-counting gross domestic product (GDP) intermediate goods investment consumption price index real GDP 1. When real GDP is computed, the output of different years is priced at levels. 2. The total market value of all final goods and services produced annually in an economy is known as. 3. occurs when a good is counted more than once in computing GDP. 4. The shows the quantity of goods and services buyers are willing and able to buy at different price levels. 5. A measure of the price level, or the average level or prices, is called a. 6. The is the most widely cited price index. 7. The quantity of goods and services producers are willing and able to supply at different price levels is represented by the. 8. has been adjusted for price changes; it is measured in base-year, or constant, prices. 9. Expenditure made by the household sector is called. 10. are expenditures made by the business sector. Study Guide 131 NTC/Contemporary Publishing Group, Inc.
8 Chapter 12 AS YOU STUDY Illustrating Economic Skills Answer each of the following questions about aggregate demand and aggregate supply from chapter twelve. AS Price level (P) P 1 P E P 2 A AD 0 Q 1 Q E Q 2 Quantity of goods and services (Q) 1. What is the aggregate demand curve? 2. What is the aggregate supply curve? 3. What will happen to the quantities of aggregate demand and supply if the price level is P 1? 4. What will happen to the quantities of aggregate demand and supply if the price level is P 2? Study Guide 132 NTC/Contemporary Publishing Group, Inc.
9 Chapter 12 Using Economic Concepts Suppose you are the director of the Bureau of Labor Statistics and you want to measure changes in the prices of goods and services. You decide to include only three items in the market basket of goods and services pizzas, cappuccinos, and sodas. The prices and quantities of the goods for three years are given below. Year Price Quantity Price Quantity Price Quantity of of of of of of Pizza Pizzas Cappuccinos Cappuccinos Sodas Sodas 2000 $10 20 $5 50 $ $12 20 $5 55 $ $12 30 $7 60 $ The total dollar expenditure for year 2000 = 2. The total dollar expenditure for year 2001 = 3. The total dollar expenditure for year 2002 = 4. Let the year 2000 be the base year. What is the CPI for year 2001? The CPI for year 2002? 5. The percentage change in the CPI from 2001 to 2002 = percent Study Guide 133 NTC/Contemporary Publishing Group, Inc.
10 Chapter 12 AS YOU REVIEW Practicing for the Test Multiple Choice: Choose the letter of the correct answer and write it in the space provided. 1. Suppose the CPI in 2000 was 85 and the CPI in 1999 was 100. Which of the following is true? a. The CPI increased 15 percent in b. The CPI decreased 15 percent in c. The CPI increased 17.6 percent in d. The CPI increased 17.6 percent in Which of the following would be included in the measurement of GDP in the U.S.? a. the value of the steel used to produce new cars b. the value of used textbooks sold to your school c. the value of illegal activities d. the value of new shoes produced in the U.S. 3. Why does the aggregate demand curve slope downward? a. At higher prices, firms will offer more output to be sold. b. As the price level increases, it costs more to produce goods. c. People are willing and able to buy a greater quantity of goods and services at lower prices. d. All of the above explain why the aggregate demand curve slopes downward. 4. A measure of the price level, or the average level of prices is called a. a. price index b. aggregate demand curve c. real GDP d. inflation 5. The equilibrium price level will rise if. a. the aggregate demand curve shifts to the left b. the aggregate supply curve shifts to the right c. the aggregate demand curve shifts to the right d. the aggregate supply curve becomes flatter Study Guide 134 NTC/Contemporary Publishing Group, Inc.
11 6. The household sector makes expenditures called. a. investment b. exports c. imports d. consumption 7. and together will determine the equilibrium price level and the equilibrium quantity of goods and services in an economy. a. Real GDP, GDP b. Imports, exports c. Investment consumption d. Aggregate demand, aggregate supply. 8. Here are some statistics for an economy: Consumption $200 billion; Government purchases $200 billion; Exports $230 billion; Imports $150; Investment $600 billion. What does GDP equal? a. $1,590 billion b. $1,200 billion c. $1,380 billion d. none of the above 9. The collects and reports the CPI. a. Department of Treasury b. Congress c. Bureau of the Census d. Bureau of Labor Statistics 10. Expenditures made by businesses are called. a. investment b. consumption c. imports d. exports Short Answer: 1. Explain the difference between real GDP and actual GDP figures. Study Guide 135 NTC/Contemporary Publishing Group, Inc.
12 2. Describe the steps in computing the CPI. 3. Does greater GDP necessarily mean a country is better off? Explain your answer. Study Guide 136 NTC/Contemporary Publishing Group, Inc.
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