ECONOMIC PERFORMANCE

Measuring a Nations Output Gross Domestic Product. (GDP) – the dollar amount of, all final goods and services produced within a country’s borders, in a year. Generally when GDP is , the economy is . (measures production) GDP counts foreign company products produced in the U.S., but does not count American products produced abroad! GDP is calculated by: multiplying all final goods, services, and structures (houses, apartments, commercial buildings) produced in a 12-month period by their prices, and then add them up to get total dollar value of productions. (See figure 13.1 p.342)

Some things are excluded from GDP data: Intermediate products – products used to make other products already counted in GDP. Ex. Tires on a new car , replacement tires  are counted. (don’t want them to be counted twice) Secondhand sales – the sale of used goods. No new production in created. Non-market transactions - transactions that do not take place in the market; no one gets paid for it. Ex. Doing your own home maintenance, homemakers (cooking, cleaning, laundering, child care, etc.) Underground economy – illegal and or unreported activities. (gambling, smuggling, prostitution, drugs, and counterfeiting)

Limitations to GDP Tells nothing about the composition of output. Increase in GDP could be due to production of weapons of mass destruction; not schools, library or parks. Tells little about the impact of production on the quality of life. (Construction of 10,000 new homes may appear , but maybe the homes threaten a wildlife reserve, or destroy the natural beauty of an area.)

GROSS NATIONAL PRODUCT the dollar value of all final, goods and services, and structures produced in one year, with labor and property supplied by a country’s residents. GNP measures income from American products, made domestically or in foreign countries. GNP is calculated by: adding all payments Americans receive from outside the U.S., then subtract all payments made to foreign-owned resources in the U.S. (figure 13.2 p. 345)

ECONOMIC SECTORS and CIRCULAR FLOW Consumer/Private sector- largest sector. Made of Households. Spend disposable income on goods and services (groceries, rent, clothes, etc.) Investment/Business sector – made up of the 3 kinds of businesses, and responsible for bringing together the factors of production to create output. Spend income on plants, offices, equipment, and other investment goods. Expenditures represent total value of capital goods. Government/Public sector – includes all level of govt., receives income from taxes to the Consumer sector. Spend income on national defense, entitlements, interest on debt, etc. Foreign sector – includes all consumers and producers outside the U.S. They buy many goods and services that make up GDP, and supply goods and services to the U.S. Foreign sectors purchases are called net exports of goods and services, refers to the differences between U.S. exports and imports.

GDP and CHANGES in PRICE LEVES The government works hard to track inflation (rise in general price level), because it distorts the economic statistics. The distortions are removed with: Price index - statistical series that can be used to measure changes in prices over time. Base year – a year that serves as the basis of comparison for all years. It is expressed as a percentage. Market basket – representative selection of commonly purchased goods and services (soap, milk, meat, bread, etc.). Total price of items is the market basket price, and is assigned a value of 100 % = index # for that year. (Figure 13.5 p. 352) To track inflation, compare market basket of certain years to the base year. (Ex. Fig.13.5, MB in 1998 =2,920.96 – or 163 % higher that the MB in base year. 1982)

MAJOR PRICE INDICES Consumer Price Index (CPI)- reports on price changes for about 90,000 items in 364 categories of goods and services. (p.352) CPI = Base MB(1,792.00) / Current MB(2,920.00) = 1.63 or 163% Producer Price Index (PPI) – measures price changes paid by domestic producers for their inputs. Implicit GDP Price Deflator – an index of average levels of prices for all goods and services in the economy. Measures inflation quarterly. (formed same as CPI)

REAL VS. CURRENT GDP Current GDP / GDP – not adjusted to remove distortions of inflation. Real GDP / GDP in constant dollars – distortions of inflation are removed. CONVERTING GDP TO REAL GDP (GDP in Constant Dollars) GDP in current dollars Real GDP = ___________________ x 100 = Implicit GDP price deflator (% diff. between MB’s)[CPI] Ex. 8,799.7 billion (1999) Real GDP = _______________ x 100 = 7,755.1 billion (In 1992 $) 113.47 p.353

MEASURING ECONOMIC GROWTH Real GDP is a good measure of short term growth (1-5 years); but not so good for long term growth, because of population growth. Real GDP per Capita - the dollar amount of real GDP produced on a per person basis. It adjusts for changes in inflation and population. It is calculated by dividing real GDP by population.

IMPORTANCE OF ECONOMIC GROWTH A free enterprise economy has the ability to increase real GDP per capita output to raise their standard of living – quality of life based on possessions that make life easier. Benefits all levels of government by enlarging the tax base. Creates more jobs and income for people and eliminates social ills. (poverty, inadequate medical care, economic insecurity) Increases our demand for foreign products – creates jobs abroad, and increases foreigner’s ability to purchase from America. Global Role Model, nations tend to copy success.

Factors That Influence Economic Growth Land – abundance of natural resources, renewable energies. Capital – growing supply of high quality capital for large production. Labor – skilled and growing labor force. Hire workers from other countries If needed. Entrepreneurs – Agents of change. Innovate and take risks, without, economy lags. end