BUSINESS 9

CHAPTER 1 PART 3
ECONOMIC GROWTH,
AGGREGATE OUTPUT, AND
STANDARD OF LIVING
MS. CECILLE
 WHAT IS A BUSINESS
CYCLE?
A short-term pattern of
economic expansions
(ups) and contractions
(downs).
 AGGREGATE
Aggregate Output - isOUTPUT
the primary measure of growth in
the business cycle.
-it is the total quantity of goods and services produced
by an economic system during a given period.
-an increase in aggregate output means economic
growth.
 AGGREGATE
OUTPUT
When output grows more quickly than the population, 2 things
usually follow: 1. Output per
capita goes up.
Output per capita is the quantity of goods and services per
person
2. The system provides more of the goods and services that
people want.
***When these 2 things occur, people living in an economic
system benefit from a higher standard of living.
 STANDARD OF
The totalquantityLIVING
and quality of goods and
services people can purchase (buy) with the
currency used in their economic system.
 GROSS DOMESTIC
PRODUCT (GDP)
-The total value of all goods and services produced within
a given period by a national economy through domestic
factors of production.

-GDP is a measure of aggregate output.

-high GDP means high aggregate output and economic
growth.
-GDP is for measuring domestic production within the
country‘s geographical boundaries.
 GROSS NATIONAL
PRODUCT (GNP)
-The total value of all goods and services produced by a
national economy within a given period regardless of
where the factors of production are located.

-GNP is for measuring all production by the country’s

nationals.
-GNP measures the contribution of citizens towards the
country‘s economy.
 DIFFERENCES BETWEEN
GDP AND GNP
-GDP is for measuring domestic production within geographical
boundaries of a country while GNP is for measuring all production
by the country’s nationals.
-GDP is geographically confined while GNP is not.
-In GDP, production is measured in a domestic scale while in GNP,
production is measured on an international scale.
-In GDP, services and goods produced outside the domestic
economy are excluded while in GNP, services and goods produced
by foreigners residing within the country are excluded.
 REAL GROWTH RATE

-GDP and GNP usually differ by less than 1%, but

economists argue that GDP is a more accurate indicator
of domestic economic performance because it focuses
only on domestic factors of production.
 GDP PER CAPITA

-the GDP per individual person

-gross domestic product divided by total population
Example: US GDP- $17.95 trillion
US population- 322 million
GDP per capita = 17, 950, 000, 000, 000/322, 000, 000
GDP per capita = $55,745. 34 per individual
 REAL GDP

-Real GDP means that GDP has been adjusted to account for
changes in currency values and price changes.
-it is important to adjust GDP in order not to be misled
about the country‘s economy
-if it is not adjusted, local GDP is nominal GDP -GDP
measured in current dollars or with all components valued at
current prices.
 PURCHASING POWER
PARITY
-the principle that exchange rates are set so that the prices
of similar products in different countries are about the same.
-it gives us a better idea of what people can actually buy
with the financial resources alloted to them by their
respective economic systems.
 PRODUCTIVITY

-a major factor in the growth of an economic system.

-it is a measure of economic growth that compares how
much a system produces with the resources needed to
produce it.
 PRODUCTIVITY

Example: It takes 1 US worker and $1 to make 10 soccer

balls in an 8-hour workday. Consequently, it takes 1.2
Mexican workers and an equivalent $1.5 in Mexican peso to
make 10 soccer balls in the same 8-hour workday. This
shows that the US soccer-ball industry is more productive as
compared to Mexico.
The factors of production in the given example are labor and
capital.
 PRODUCTIVITY

If more products are being produced with fewer factors of production,

the prices of these products will likely go down.
-this means that the consumer will need less currency to buy the
products which then improves the standard of living.
-increase in economic productivity means an improved overall
standard of living.
-standard of living improves only through increases in productivity.
-Real growth in GDP reflects growth in productivity.
 FACTORS THAT INHIBIT
THE GROWTH OF
• Balance ofECONOMIC
Trade- the economic SYSTEM
value of all the products that
a country exports minus the economic value of all the
products it imports.

Balance of Trade = Exports - Imports

Positive balance of trade means that a countrty‘s exports are greater
than its imports
Negative balance of trade means that a country‘s imports are greater
than its exports ( trade deficit )
 FACTORS THAT INHIBIT
THE GROWTH OF
ECONOMIC
2. National Debt- SYSTEM
the amount of money the government owes its
creditors.
• a country raises money through taxes
• it can also sell bonds-securities through which it promises to
pay certain buyers amounts of money by specified future
dates. ( a bond is an IOU with interest ), but the US does not
default on them ( defaults means fail to make payments when
due) so it offers a decent return on the buyer ’s investments
by paying competitive interest rates.