Measuring Economic Performance

Gross Domestic Product Gross Domestic product (GDP)  dollar value of all final goods and services produced within a country’s borders in a given year Dollar value: total of the selling prices of all goods and services Final goods and services  sold to consumers Intermediate goods and services  used in the production of final goods Within a country’s borders  For US, all goods made in US, even if by a foreign company

How GDP is Calculated Expenditure Approach Income Approach Estimate of amount spend on: Consumer, business, and government goods and services Net exports or imports of goods and services Durable goods  last a long time Nondurable goods  don’t last a long time Income Approach Adding all incomes in an economy Selling price of goods represents income for a businesses’ owners and employees

Nominal vs. Real GDP Nominal GDP  GDP measured at current prices Real GDP  GDP expresses in constant prices Ex. Economy only produces shoes 2010  1,000 shoes at $50 = $50,000 2011  900 shoes at $60 = $54,000 Price has increased, but output has not As expressed in 2010 prices 2010  1,000 shoes at $50  $50,000 2011  900 shoes at $50  $45,000 Real GDP = $45,000

Limitations Does not account for: Nonmarket activities Mow yard, cook, wash car Underground economy Black market Paying someone to mow your yard Negative externalities Value of clean environment not counted Quality of life More stuff doesn’t always make us better off

Other measures Gross National Product  annual income earned by U.S. owned firms and US citizens By subtracting taxes from GNP we get our National Income Personal Income  Money paid to households after reinvesting and paying additional taxes Disposable Personal Income  Money people have after they pay their taxes Personal income – income taxes = DPI

Economic Growth Measure of a nation’s economic growth rate is the % change of real GDP over a given period of time Real GDP per capita  real GDP divided by the total population Starting point, but does not indicate quality of life

Most recent estimate Rank Country Intl. $ Year 1 Luxembourg 89,769 2010 2  Qatar 80,229 2009 —  Macau 60,633 3  Singapore 57,505 4  Norway 56,894 5  Kuwait 52,657 2007 6  Brunei 49,494 7  United States 47,184 8  Switzerland 46,215  Hong Kong 46,157 9  Netherlands 42,475 10  Ireland 39,727 http://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_mktp_cd&idim=country:USA&dl=en&hl=en&q=current+gdp

Influences on GDP Supply and demand on a nationwide scale Aggregate Supply  the total amount of goods and services in the economy available at all possible prices Total supply of all goods and services for sale in an economy As prices change, firms respond by changing production Changes output  Changes GDP

Aggregate Demand Aggregate Demand  amount of goods and services in the economy that will be purchased at all possible price levels Lower prices = increase demand Consumers make up majority of aggregate demand A change in AS or AD will cause a change in real GDP and price level

Saving and investment Saving  disposable income that is not used for consumption Savings rate  % of disposable income saved If savings rise, most $ for invest is available to businesses  higher output  higher income  save more US  low savings rate Borrow from other countries

Business Cycles Business cycle  period of macroeconomic expansion followed by a period of macroeconomic contraction Four Phase Expansion Economic growth (rise in real GDP) Peak Height of expansion Contraction Economic decline (fall in real GDP) Trough Lowest point of economic contraction

Contraction Recession  prolonged economic contraction Depression Real GDP falls for two consecutive quarters 6 months (6-18 months) 6-10% unemployment Depression Recession that is long and severe High unemployment Stagflation Combination of stagnant and inflation Decline in GDP, Rise in prices

Influences on business cycle Business investment Invest in capital Interest Rates Interest high, don’t buy Consumer expectations If future looks bad, save don’t spend External shocks War, drought, disruption in oil supply

Unemployment

Unemployment Frictional Unemployment Seasonal unemployment Occurs when people take time to find a job Change jobs, after college Seasonal unemployment When industries shut down for a season or make seasonal shifts Summer job when school is out

Unemployment Structural Unemployment  Occurs when workers skills do not match the jobs that are available New technology Changes in consumer demand Lack of education Cyclical unemployment  Rises during economy downturns and falls when the economy improves

Measuring employment Unemployment Rate  percentage of the nation’s labor force that is unemployed Average for the nation Full employment  level of employment reached when no cyclical unemployment exists Underemployed  working at a job you are over-qualified for, or working part-time but want full-time

Inflation

Inflation Inflation  general increase in prices Prices have increased, wages have too Inflation rate  % rate of change in prices over time Deflation  drop in price level Consumer Price Index (CPI) determined by measuring the price of a standard group of goods meant to represent the “market basket” of a typical urban consumer Compare prices from diff. years Base year = 100 Market basket  representative collection of goods and services 8 categories Updated every 10 years Inflation rates Inflation Calculator

Market basket FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks) HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture) APPAREL (men's shirts and sweaters, women's dresses, jewelry) TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance) MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services) RECREATION (televisions, toys, pets and pet products, sports equipment, admissions); EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories); OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses)

Effects of inflation Wage increases matches inflation rate  real income remains constant If wage does not increase with inflation, real income falls Fixed income  does not increase as prices go up

POVERTY

Poverty Poverty threshold (line)  income level below which income is sufficient to support a family or household Poor=total income is less than the amount required to satisfy family’s minimum needs Poverty rate  % of people who live in households with incomes below the poverty threshold Race and ethnicity, type of family, age, residence

For each additional person, add Poverty Threshold Persons in Family 48 Contiguous States and D.C. Alaska Hawaii 1 $10,890 $13,600 $12,540 2  14,710  18,380  16,930 3  18,530  23,160  21,320 4  22,350  27,940  25,710 5  26,170  32,720  30,100 6  29,990  37,500  34,490 7  33,810  42,280  38,880 8  37,630  47,060  43,270 For each additional person, add    3,820    4,780    4,390

Causes of poverty Lack of education and skills Location Economic shifts Location Racial minorities, inner cities  earn less Racial and gender discrimination Shifts in family structure

Income distribution Income distribution  how the nation’s income is distributed among its population Wealthiest 1/5 earns more than lowest 4/5ths Government spends billions to help reduce poverty Cash assistance, education, medical benefits, food stamps, subsidized housing