MEASURING ECONOMIC

PERFORMANCEUnit 6 Notes

Unit 6, Lesson 1Notes

NATIONAL INCOME AND PRODUCT ACCOUNTS Economists monitor economic data of

the country using national income accounting – collects statistics on production, income, investments, and savings

This data is collected and presented to the government and maintained by the Department of Commerce

GROSS DOMESTIC PRODUCT The MOST IMPORTANT measure that is

collected is GDP – the dollar value of all final goods and services produced within a country’s borders in a given year

The definition itself is worded that each piece must be looked at individually

GROSS DOMESTIC PRODUCT Dollar value is the total selling prices of

all goods and services produced in a country in a given year

Final goods and services are the products sold to consumers in a given year

Produced within a country’s borders means that anything produced in the U. S. is counted (Kia plant in Ohio)

GDP DOES NOT INCLUDE:

1. Intermediate goods – products/services used to make final products.

a. Ex: Car tires (intermediate good) aren’t counted if they are going onto a brand new car (final good).

b. Avoids multiple counting

2. Nonproduction Transactionsa. Transfer Payments (public or private) – money is given for

no service/product. Ex: $ as a gift, welfare, social security.b. Stocks & Bonds transactions

3. Sale of USED goods4. Non-market Transactions

Ex: Time & effort you spend fixing up your car.5. Underground Economy – no record exists of the

transaction.Ex: babysitting, lawn mowing, maid services, drug trade

GROSS DOMESTIC PRODUCTGDP Basics:

Always expressed in terms of $. Primary measure of economy’s

performance. Calculated using either the expenditure

approach or the income approach. Increases in GDP are desirable When the government looks at GDP, the

measurement must be as accurate as possible

EXPENDITURE APPROACH To calculate GDP, one way is the

Expenditure approach Economists estimate the annual

expenditures ($ spent) on four categories:ConsumerBusinessGovernmentNet imports/exports

This total equals GDP – practical approach

INCOME APPROACH Another way to measure GDP is the

income approach – provides better accuracy

This approach adds up all the incomes in the economy (ex. Income from selling a house for $115,000)

WHAT COUNT’S FOR GDP?

Warm up on worksheet…

Ana Maria began a greeting card company in 2007. She produces greeting cards for businesses. The year she started, she purchased all the necessary art supplies and special papers used in producing her cards. The supplies and papers were all made in the United States in 2007. She bought used desks and chairs that were made in Tennessee in 2007 and new bookcases that were made in Canada. She also paid a local advertising company $10,000 to create ads and promote her company in business magazines. At the end of the year, she had $420 worth of cards still in inventory.

Which items would be counted in determining U.S. GDP for 2007? Explain your answer.-The Greeting Cards Ana sells in 2007?

- The desk and chairs?- The bookcases?- The advertising Ana purchases?- Her remaining inventory of cards?

Unit 6, Lesson 2Notes

REAL VS. NOMINAL GDP Nominal GDP is GDP measured in

current prices - GDP unadjusted for inflation or deflation of prices. Uses current year’s prices

Real GDP is GDP expressed in constant, or unchanging, prices - GDP that has been adjusted for inflation/deflation. Reflects price changes so that you

may compare if production increased or if higher prices simply caused a higher nominal GDP. (Remember: GDP measures the goods/service produced in one year.)

OTHER INCOME AND OUTPUT MEASURES Even though GDP is the primary

economic measure, others are also taken

GDP is used to determine other economic measures including:GNPDepreciation

GROSS NATIONAL PRODUCT (GNP) GNP is the annual income earned by U. S.-

owned firms and U. S. citizens It is calculated by: GDP + income earned

outside the U. S. – income earned by foreign firms and citizens inside the U. S. = GNP

GNP does not account for depreciation – the loss of the value of capital equipment that results from normal wear and tear So, GNP – Depreciation = Net National Product

(NNP) NNP is the output made after the adjustment for

depreciation

GROSS NATIONAL PRODUCT NNP does not account for another factor that

reflects the cost of doing business – taxes So NNP – taxes (sales and exercise) = National

Income (NI) We can then figure out how much individuals make

that they can then spend, called Personal Income (PI)

So PI = Other household income + Money business pays out (SS, Income taxes, etc.) – National Income

Then, we look at how much a person actually has to spend after taxes, called Disposable Personal Income (DPI) = Personal income – taxes Personal Taxes include income, property, estate, etc.

Unit 6, Lesson 3Notes

BUSINESS CYCLE A business cycle is a period of economic

expansion followed by a period of economic contraction

These are not minor ups and downs – they are major changes to GDP

There are typically 4 phases of a business cycle:ExpansionPeakContractionTrough

EXPANSION Expansion is a period of economic

growth measured by a rise of in real GDP

In this phase the economy as a whole enjoys plentiful jobs and a falling unemployment rate

Economic growth is a steady, long-term increase in GDP

PEAK Peak occurs when GDP stops rising – it

has reached the pinnacle of economic expansion

CONTRACTION Contraction occurs after a peak, when the

economy enters a period of economic decline marked by falling GDP

Other conditions may like unemployment and price may vary

Economists have different terms to describe the severity of a contraction: Recession – exists if real GDP falls for 2

consecutive quarters (6 months) – unemployment normally 6 to 10 months

Depression – exists if a recession is esp. long and severe – high unemployment and low output

Stagflation – exists if real GDP declines (output) and prices rise (inflation)

TROUGH When the economy has “bottomed-out”

it has reached the trough. This is the lowest point of economic

contraction GDP stops falling

FACTORS THAT AFFECT THE BUSINESS CYCLE Business investment: When the

economy is good, businesses invest in new capital. When economy isn’t so good, businesses stop investing and this creates a drop in the output of other sectors of the economy – can also begin firing workers

Interest rates and credit: When interest rates are low, consumers and business are inclined to make purchases. When interest rates are high, they are less likely to spend money, lowering GDP

FACTORS THAT AFFECT THE BUSINESS CYCLE Consumer Expectations: When expectations

are that we are in a “good” economy, they expect higher wages and available jobs – increase in spending. When expectations are poor, consumers don’t spend money because they expect lay-off and lower incomes – can start a contraction

External Shocks: Negative shocks (drought, hurricane, oil supply) can cause increase in prices and a decline in GDP. Positive shocks (good growing season, finding of new oil supply) can increase GDP and decrease prices

Unit 6, Lesson 4Notes

ECONOMIC GROWTH The basic measure of a nation’s

economic growth rate is the percentage of change of GDP over a given period time

GDP must also keep up with population growth in order for it to keep being positive

Taking into account population, most economist prefer to rely on real GDP per capita into accountThis is the GDP per person in the country

ECONOMIC GROWTH Real GDP per capita is considered the

best measure of a nation’s standard of living

If GDP rises faster than population, the standard of living will go up

ECONOMIC CHALLENGES - UNEMPLOYMENT Economists can measure the strength of

the economy at any given time by counting the number of unemployed people

There are 4 kinds of unemployment: FrictionalSeasonalStructuralCyclical

FRICTIONAL UNEMPLOYMENT Unemployment always exists, even in a

good economy Frictional unemployment occurs when

people take time to find a job For example: changing jobs, time to

find job after finishing school, etc. In an economy as large as the U. S.,

economists expect to find a large number of unemployed falling into this category

SEASONAL UNEMPLOYMENT Seasonal unemployment occurs when

industries slow or shut down for a season or make a seasonal shift in production schedules

For example, summer jobs, harvests, etc.

Economists expect to see people in this category as well

STRUCTURAL UNEMPLOYMENT When the type of economy shifts from one

sector to another, the skills workers need to have a job also changes

Workers who lack the necessary skills will lose their jobs – this is structural unemployment

There are 5 causes of structural unemployment: New technology New resources Changes in consumer demand Globalization Lack of education

CYCLICAL UNEMPLOYMENT Unemployment that rises when the

economy is down and falls when the economy is good is called cyclical unemployment

For example – Great Depression (1 out of 4 unemployed) and today’s recession (10% unemployment)

Unit 6, Lesson 5Notes

MEASURING UNEMPLOYMENT The amount of unemployment in the

nation is an important clue to the nation’s health

Each month, the Bureau of Labor and Statistics polls a portion of the population that tracks unemployment

They compute the unemployment rate: percentage of nation’s labor force that is unemployed

The unemployment rate is a national average and doesn’t take into account regional or local differences

FULL EMPLOYMENT 0% unemployment rate is not possible

in a market economy – 4-6% is normal Full employment can occur if there is no

cyclical unemployment

INFLATION Inflation is a sustained increase in the

average price level of a country The rate of inflation is measured by the

annual percentage change in the level of prices as measured by the consumer price index (measures changes in the cost of living of a typical household)

A sustained fall in the general price level is called deflation – rate of inflation is negative

INFLATION CPI – Consumer Price Index is the

quantity of goods and services that a given amount of money will buy for a typical householdWith inflation, purchasing power will

decrease With inflation, prices rise faster than

income, reducing the standard of living Real income and buying power will

decrease for an individual

CAUSES OF INFLATION Quantity Theory – Too much money in

the economy Demand-Pull Theory – Inflation occurs

when demand for goods and services exceeds existing supplies – prices go up

Cost-Push Theory – Inflation occurs because producers increase prices in order to meet increasing costsThis can lead to the spiral effect – cycle that

keeps repeating

SO WHAT DOES ONE TRILLION LOOK LIKE?