bell ringer how do we know that america’s economy is not doing well? what evidence to people...
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Bell Ringer
How do we know that America’s economy is not doing well?
What evidence to people cite when they say we’re not/are doing well?
Where do you find credible sources to get this information?
If you do not, make an educated guess
Measuring Domestic Output and National
IncomeChapter 24
Assessing the Economy’s Performance National Income Accounting measures the
economy’s overall performance This allows policymakers to do the following:
Assess the health of the economy by comparing levels of production at regular intervals
Track the long-run course of the economy to see whether it has grown, been constant, or declined
Formulate policies that will safeguard and improve the economy’s health
Gross Domestic Product
The economy’s performance is its annual total of output of goods and services (aggregate output)
Gross Domestic Product (GDP) defines aggregate output as the dollar value of all FINAL goods and services produced within the borders of a country during 1 year
Would a Toyota produced in Ohio count in the United States GDP?
Would a furby made in China count in the US GDP?
GDP-A Monetary Measure
Everything has to be put into monetary terms in order for it to be measured
If we simply say this year we made 3 couches and 2 computers when last year we made 2 couches and 3 computers there is no way to tell which year had greater output
But when we say that couches were $500 and computers were $2000 we can now figure out which year was a better year
GDP-A Monetary Measure
Year Annual Output
Market Value
2011 3 couches + 2 computers
3(500) + 2(2000) = $5500
2012 2 couches + 3 computers
2(500) + 3(2000) = $7000
Which year was better? GDP is of course more
complicated than this since we do not just produce 2 products/services but rather billions of goods/services
Avoiding Multiple Accounting Because most manufactured goods go through stages
we must avoid counting things that are used in the production of a good, and only count the final good
You do not add the value of the wood in the pencil, rather, GDP calculates on the pencil itself
Intermediate Goods are those purchased for resale or further processing/manufacturing
Crude oil is the intermediate good, gasoline is a final good
Steel beams are intermediate goods, high-rise apartments are final goods
On your sheet of paper write some other examples
GDP Excludes Nonproduction Transactions Nonproduction (purely financial) transactions that are
not included in GDP Public transfer payments: Social Security, welfare, and
veteran’s payments that go from the government to households
They contribute nothing to current production Private transfer payments: financial gifts given to people Stock Market transactions: buying and selling stocks is simply
swapping bits of paper—nothing is PRODUCED Stockbrokers services DO count since it is a service
Secondhand sales also do NOT count since they were already counted in a previous GDP cycle (used cars, etc)
Two Ways to Measure GDP
And you only have to learn one of them! Do NOT spend time on Income Approach
You will be learning Expenditure Approach C + I + G + Xn = GDP What does that mean?
We add up our economy based on how much we spent in each of those categories
C = Personal Consumption Expenditures Personal consumption is all the goods/services
that households buy Durable goods—cars, appliances, furniture, etc. Nondurable goods—food, clothing, etc. Services—lawyers, hairdressers, etc.
I = Investments
This refers to the following items: All final purchases for machinery, equipment, and tools
by business enterprises All construction Changes in inventories
This is unsold inventory—if it was sold, it would likely fall under “C” for personal consumption
Depreciation must be accounted for here Net Investment = gross investment-depreciation
G = Government Purchases You’re not the only one who spends money The Government spends money on goods and
services that it needs to provide public services Needs labor and materials to build roads
It also spends money on providing you an education (service) and lunch (goods) at a reduced cost
IT DOES NOT INCLUDE the money spent on transfer payments (welfare, social security, etc.)
Xn = Net Exports
We want to exclude the goods/services that were bought here but produced elsewhere
Likewise, we want to INCLUDE goods/services that were made here but sold elsewhere
In other words, if you bought a book from China, it would count in China’s GDP
If an English citizen purchased a car from the US it would count in our GDP even though it was bought by someone overseas
Thus, we have to use the following formula when calculating Net Exports
Net Exports = exports-imports In 2009 Americans spent $392 billion on imports than we
made in exports (in other words, or Xn = -$392B)
All Together
C + I + G+ Xn = GDP
Homework
Read the provided article from CNN Money Summarize the article Analyze the article—is it accurate? How can you
tell? What sources can you look at to see if they are telling the truth?
Based on this article and your analysis—what advice to you have for Congress and the President?
Other National Accounts
There are other measurements we can use to see how well we are performing:
Net Domestic Product National Income Personal Income Disposable Income
Net Domestic Product
Net Domestic Product (NDP) is when we look at GDP and subtract depreciation from it
NDP = GDP – consumption of fixed capital (depreciation)
It is not likely you will have to know this on the test but just in case
National Income
How much money did we make as a country
What we are looking at in this situation is how much money was made by Americans using their land, labor, capital and entrepreneurial talent
Personal and Disposable Income Personal Income (PI) is how much money people
made overall It does not matter if the money was earned or
unearned In other words, transfer payments count in this
category What were transfer payments?
Disposable Income (DI) is how much money people made after personal taxes
How much money you have to spend on consumption (C) or savings (S)
Circular Flow Model
GDP
Real v. Nominal GDP
http://www.youtube.com/watch?v=29S7FzI7s7g&feature=share&list=PLF2A3693D8481F442
Nominal v. Real GDP
In order to know whether we are comparing apples to apples we have to know that the value of the money we compare from one year to the next is equivalent
The way we do this is by using a price index A price index measures the value of a “market
basket” of one year and compares the price of that same basket to a different year
By doing this math, you end up with an understanding of inflation
Nominal v. Real GDP
To calculate a price index you have to look at the price of the market basket for two years—your baseline year and the year in question
The formula is Price Index = $ market basket in current year x 100
$ of market basket in base year
Year Market Basket Value
2000 $8000
2012 $10000
Nominal v. Real GDP
Price Index = $ market basket in current year x 100 $ of market basket in base year
Price Index = 10000/8000 = .80 x 100 = 80Price Index = 80
Year Market Basket Value
2000 $8000
2012 $10000
Real GDP
Real GDP (RGDP) = GDP adjusted for inflation
The formula: RGDP = [nominal GDP/price index (in hundreths)] x 100
Using our previous example if nominal GDP is $10,000
RGDP = [10,000/80] RGPD = 12,500
We can then take other years’ RGDP and compare them based on this number which provides an accurate depiction of the value of goods compared to the value of those same goods in a previous year
Shortcomings of GDP
Nonmarket Activities Your babysitting service is not likely to be counted in
GDP, neither is unpaid work Leisure
Doesn’t account for the value of time off Underground Economy
Black markets are not reported to the government and therefore items like drugs and weapons which should be part of GDP are not
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