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# 14 - Chapter 14 Economics and the External Environment...

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Copyright© 2011 Money Education, LLC Chapter 14 Economics and the External Environment Chapter 14 External Environment Copyright© 2011 Money Education, LLC Chapter 14 2 Macroeconomics is the study of economic factors that are reflective of the entire economy such as gross domestic product (GDP), the unemployment rate, and the inflation rate. Microeconomics is the study of factors that impact small or individual economies, such as supply and demand for a product. Economic Output Copyright© 2011 Money Education, LLC Chapter 14 3 Gross National Product (GNP) measures the total final output by the citizens of a country, whether produced domestically or in a foreign country. Gross Domestic Product (GDP) represents the total final output of a country, by its citizens and foreigners in the country, over a period of time. A positive GDP is generally a sign that the economy is expanding, a negative GDP is a sign that the economy is contracting.

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Gross Domestic Product Copyright© 2011 Money Education, LLC Chapter 14 4 Nominal GDP measures the value of goods and services in current prices. Real GDP measures the value of goods and services at a base year price. The GDP deflator measures the current price of goods and services (nominal GDP) relative to a base year (real GDP). The formula for the GDP deflator is: GD Deflator = The GDP deflator could also be thought of as a measure of price increases or decreases. Nominal GDP Real GDP Gross Domestic Product Copyright© 2011 Money Education, LLC Chapter 14 5 Source: http://www.bea.gov/national/ 0.0 2,000.0 4,000.0 6,000.0 8,000.0 10,000.0 12,000.0 14,000.0 16,000.0 GDP in billions of current dollars Inflation Copyright© 2011 Money Education, LLC Chapter 14 6 Inflation represents an increase in the general level of prices of goods and services. The biggest risks inflation presents are the loss of purchasing power. Inflation causes a decline in the real value of money. A primary cause of inflation is when the money supply increases faster than the growth in real GDP. Disinflation is a slowdown in the rate of inflation. Deflation is a decrease in overall price levels of goods and services.
Measures of Inflation Copyright© 2011 Money Education, LLC Chapter 14 7 The Consumer Price Index (CPI) measures the overall price levels for a basket of goods and services. The CPI is the most widely quoted and relied upon measure of inflation. The Producer Price Index (PPI) measures the inflation rate for raw materials used in the manufacturing process. Inflation Rate = P 1 – P 0 P 0 Interest Rates Copyright© 2011 Money Education, LLC Chapter 14 8 An interest rate is the price that a borrower pays to borrow money. The nominal interest rate represents the real rate of return plus an adjustment for anticipated future inflation.

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14 - Chapter 14 Economics and the External Environment...

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