Measuring Economic Performance Economics (11.1 / 11.2)

Introduction Writing “Suppose the government wants to measure all the production that occurs in the U.S. economy. How do you think the government would do this?”

Macroeconomics Measuring economic performance on a large scale: the big picture Economic Indicators tell us a story: GDP/Real GDP, consumer price index (CPI) – market basket, unemployment, inflation More data= better overall picture

Product=FINAL GOODS / SERVICES GDP Gross= TOTAL Domestic= IN THE U.S. Product=FINAL GOODS / SERVICES Market value of all goods and services produced in the country in one year Final goods purchased for final use

Gross Domestic Product (GDP) What can GDP tell us about a country? GDP is used as an indicator of a country’s economic health. What is it? Basic measure of a nation’s economic output and income Total market value ($) of all final goods and services produced annually in a country

Final v. Intermediate Goods all products are used to produce something else that will be sold to a final buyer Cloth for making dresses Siding used in new house Flour for making bread Screws used in army tanks Silicon used in solar panels

Final v. Intermediate Goods Final goods and services: a good sold to its final user. Dresses New house Bread Army tanks Highway repairs Solar panel roof for a local restaurant Hamburger

Gross Domestic Product (GDP) Why Count Only Final Goods? An intermediate good is a good that is not ready for use or purchase. It could be a good that is partially assembled. It could even be the components that are used in producing a final product. Suppose economists counted both final and intermediate goods and services when they computed GDP. Then they would be double counting, or counting goods more than once.

Does GDP Omit Anything? We do not count illegal goods and services in GDP because we do not have any records of their sale or purchase. Any legal transaction that is not recorded also cannot be counted. If someone is paid in cash, with no sales receipt, the transaction is not likely to be recorded. The sale of used goods is not counted in GDP. Stock transactions and other financial transactions are also not included in GDP. Government transfer payments, such as social security checks, are not exchanged for goods or services, and are also not counted in GDP. We do not count goods and services that are traded outside official market settings.

The Difference Between GDP and GNP GNP is the gross national product. GNP is a measure of the total market value of final goods and services produced by U.S. citizens, no matter where in the world they live. GDP is the total market value of all final goods and services produced within the borders of the United States, no matter who produces them.

How Is GDP Measured? The GDP of the United States in 2005 was more than $12 trillion. Economists determined this number by adding up the amount spent by four sectors: household, business, government, and foreign. All goods produced in the economy must be bought by someone in one of the four sectors of the economy. Summing the spending of the four sectors and subtracting import spending will give a good estimate of GDP. Gross domestic product can be determined by multiplying the price of each good by the quantity produced of that good.

How Is GDP Measured? The expenditures made by the four sectors of the economy GDP = C + I + G + (EX – IM) 1) Consumption (household sector) - New cars, groceries, doctor visits 2) Investment (business sector) - New factories, equipment, tools 3) Government spending - Military, schools, highways 4) Net exports (Exports – Imports) Spending by people abroad on things made on U.S. good and services (exports) minus spending by people in the U.S. on foreign goods and services (imports)

How Is GDP Measured?

How Is GDP Measured? GDP = C + I + G + EX - IM IM

U.S. GDP: 2007

GDP vs. Quality of Life A higher GDP does not necessarily mean greater well-being In assessing a countries GDP, the population must also be considered. Per capita = per person Per capita GDP = GDP/Population This is a better way of comparing one country to another

Comparing GDP Guess the total GDP of the United States Gapminder Compare and research the different countries http://www.gapminder.org/tools/bubbles#_