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