GNP & CONSUMER PRICE INDEX (CPI)

PROBLEM WITH GDPGDP can measure total output but cannot measure total incomemainly because of goods produced here by foreigners being counted and goods produced abroad by Americans that are not countedMoney that Ford makes in Mexico still makes its way back to stocks and executive pay checks

Gross National Product (GNP)The dollar value of all final goods and services produced in one year with labor and property supplied by US residentsTakes into consideration imports and exports

HOW TO CALCULATE GNPStart with the GDP andadd in all payments Americans receive from outside the USsubtract all payment made to foreign-owned resources in the USEconomists prefer GDP because it focuses on production within United States borders

PRICE INDICES Examine the chart on page 342Compare it to the chart on page 351If the total production is the same, why has the total GDP increased by $900 billion?

PRICE INDEXA major problem with GDP is it is subject to distortions because of inflationInflation is a rise in the general price levelThe problem comes when you attempt to compare GDP levels from one year to the next as in charts 13.1 and 13.4 GDP can increase from one year to the next with no real increase in the amount of goods and services produced

PURPOSE OF PRICE INDEXA price index is used to reduce the distortions of inflationIt is a statistical series that can be used to measure changes in price over timeWe can measure inflation 3 different ways

CPI-CONSUMER PRICE INDEXStart with a market basketselection of just about everything you can imagine the average household might purchase in a yearCompare the total cost of everything in that group today in comparison to everything in that basket in the time period between 1982-1984 (average cost)

Different IndicesCPI- focuses on consumer goods (computer monthly)Producer Price Index- Is computed monthly and focuses only on purchase of goods by producers (natural resources and capital)Price Deflator- takes into consideration the inflation of ALL goods and services and is computed quarterly

REAL vs. NOMINAL GDPWe know that inflation can distort GDPWe know how to measure GDPIf we use this knowledge we can discover the REAL GDPChart 13.4 is an example of Nominal GDP because it does not take inflation into consideration

ADVANTAGE TO REAL GDPAllows us to measure changes in production rather than changes in price

IMPORTANCE FOR GROWTH1. Improved standard of livingMore time with family, hobbies, etc. and more luxuries to make life easierGovernment Spending- more money means more taxes which equals nicer roads, parks, police, etc.Domestic Problems- growth equals more jobs and thus less poverty and crime

IMPORTANCE FOR GROWTH4. Helping other Nations- purchasing of products as well as aid to other countries helps both the US and foreign countries 5. Global Role Model- Want developing nations to see that capitalism works and promote market economies over communism

CLOSURERead the Business Week article on page 362What impact will immigrants have on our GDP?Based upon the contributions that legal and illegal immigrants can provide, should we or should we not limit immigration in the United States? Share with a partnerTurn-in on your way out the door