This chapter contains a discussion of gross domestic product and its components--consumption, gross investment, government purchases, and net exports. This discussion is particularly important for the development of aggregate demand and supply curves.
| This chapter also introduces readers to the distinction between nominal and real GDP. The price index concept is introduced in this context and the GDP deflator is discussed.
| | The nation's economic performance over time is considered and the business cycle concept is introduced. This concept is used in subsequent chapters.
| | Finally, aggregate demand and supply curves are derived in this chapter. Various factors that cause them to shift are discussed. This analysis is very important in subsequent chapters.
| | Instructional Objectives |
| After completing this chapter, your students should know:
1. How the nation's output is measured.
2. The importance of distinguishing between nominal and real magnitudes.
3. How price indexes are constructed and interpreted.
4. Why it is difficult to compare the nation's output in one year with its output in another year or to compare the output of one country with that of another country.
5. That the nation's level of economic activity doesn't increase steadily.
6. How aggregate demand and supply curves are defined and derived and how to apply them with regard to the determination of the GDP deflator, real GDP, and employment levels.
| Terms from Previous Chapters |
| You should review the terms in this section at the beginning of your discussion of the chapter.
demand curve (Chapter 1)
supply curve (Chapter 1)
equilibrium (Chapter 1)
| Key Terms |
| These terms are introduced in this chapter:
gross domestic product (GDP)
final goods
intermediate goods
personal consumption expenditures
gross private domestic investment
net private domestic investment
consumption of fixed capital
capital stock
government purchases of goods and services
government transfer payments
net exports of goods and services
exports
imports
price index
nominal GDP
real GDP
GDP deflator
business cycles
expansion phase
peak
contraction phase
trough
recovery
recession
depression
leading indicator
composite index of leading indicators
aggregate demand curve
real balance effect
fiscal policy
disposable income
expansionary fiscal policy
contractionary fiscal policy
money supply
monetary policy
expansionary monetary policy
contractionary monetary policy
aggregate supply curve
| Additional References |
| In addition to the references in the text, instructors may wish to read or assign one or more of the following:
1. Carol S. Carson, "GNP: An Overview of Source Data and Estimating Methods," Survey of Current Business 76 (July 1987), pp. 103-126.
2. Clifford W. Cobb and John B. Cobb, Jr., The Green National Product: A Proposed Index of Sustainable Economic Welfare, Lanham, Maryland: University Press of America, 1994.
3. Robert Eisner, "Extended Accounts for National Income and Product," Journal of Economic Literature 26 (December 1988), pp. 1611-1684.
4. Irving B. Kravis, "Comparative Studies of National Incomes and Prices," Journal of Economic Literature 22 (March 1984), pp. 1-39.
5. Robin Marris, "Comparing the Incomes of Nations: A Critique of the International Comparison Project," Journal of Economic Literature 22 (March 1984), pp. 40-57.
6. Ronald A. Ratti, "A Descriptive Analysis of Economic Indicators," Federal Reserve Bank of St. Louis, Review 67 (January 1985), pp. 14-24.
7. Albert T. Sommers with Lucie R. Blau, The U.S. Economy Demystified, third edition (New York: Lexington Books, 1993).
8. Alan L. Sorkin, Monetary and Fiscal Policy and Business Cycles in the Modern Era (Lexington, Mass.: Lexington Books, 1988).
9. Roy H. Webb, "The National Income and Product Accounts," Federal Reserve Bank
of Richmond, Economic Review 72 (May/June 1986), pp. 11-17.
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