Chapter 13: Economic Performance

Macroeconomics = study of any nation’s economy as a whole. Focus is on unemployment, inflation, growth, trade, and gross domestic product Two basic issues in Macroeconomics 1. Long-run economic growth 2. Fluctuations in economic performance

Real gross domestic product (GDP) increased 2.0 percent in the third quarter of 2012 after increasing 1.3 percent in the second quarter, according to estimates released today (10/26/12) by the Bureau of Economic Analysis.

Third-quarter highlights Behind the acceleration in real GDP growth: Consumer spending on goods accelerated, mainly reflecting an upturn in durable goods; spending on motor vehicles and parts turned up. Federal government spending increased, as national defense spending increased in the 3 rd quarter after decreasing in the 2 nd quarter Inventory investment also contributed to the acceleration in economic growth. An upturn in nonfarm inventory investment was partly offset by a decline (larger than in the 2 nd quarter) in farm inventory investment, reflecting the effects of the drought in the Midwest on crop production. Residential housing investment accelerated, as single-family structures picked up.

A.In calculating GDP, economists include the following economic sectors: Consumer goods— 1. Consumer goods—goods and services bought by consumers for their direct use 2. Business/Producer goods—business purchases of tools, machines, and other capital items used to produce other goods 2. Business/Producer goods—business purchases of tools, machines, and other capital items used to produce other goods 3. Government goods—goods and services bought by federal, state, and local governments 4. Net Exports—difference between what the nation sells and what it buys from other countries

B. Not included in the calculation Intermediate goods, secondhand sales, and non-market transactions

C. National Income Accounting: measure of the national economy’s performance – deals with the overall economy’s income and output and measures the interaction of consumers, businesses, and governments C. National Income Accounting: measure of the national economy’s performance – deals with the overall economy’s income and output and measures the interaction of consumers, businesses, and governments 1. A larger GDP = indicates that more people are better off than before 2. If GDP does not grow, this may be an indicator that the people are not better off

II. Other Income and Output Measures: these are derived from GDP and are smaller than GDP II. Other Income and Output Measures: these are derived from GDP and are smaller than GDP A. Gross National Product ( (( (GNP)—Measure of National Income: Annual income earned by US-owned firms and US citizens and is equal to GDP + all payments that Americans receive from outside the United States minus all payments made to foreign-owned resources inside the United States.

Net National Product (NNP) B. Net National Product (NNP)=GNP minus depreciation ·Depreciation = loss of value due to wear and tear to consumer durable B. N et National Product (NNP)=GNP minus depreciation ·Depreciation = loss of value due to wear and tear to consumer durable (NI) C. National Income (NI) = NNP minus all taxes paid by businesses other than corporate profits tax Personal Income (PI) D. Personal Income (PI) = the total amount of income received by individuals before taxes are paid Personal Income (PI) D. Personal Income (PI) = the total amount of income received by individuals before taxes are paid E. Disposable Personal Income ( (( (DI) = PI minus taxes ·An important indicator of the economy’s health; measures the actual amount of money income people have available to spend.

Monthly data: updated Sept

III.Economic Sectors and Circular Flows: Output-Expenditure Model includes four categories of GDP in terms of types of goods produced A. Used by economists as a model to measure the annual output and expenditures by all economic sectors of the economy at once.

1.Consumer goods sector (C)—purchases by consumers of currently produced goods and services, either domestic or foreign—largest sector Durable goods Nondurable goods Services 2. Investment Sector (I)—includes businesses: * Purchases of newly produced goods and services by firms * income derived from depreciation and retained earnings

3. Government goods and services sector (G)— purchases by federal, state, and local governments: income derived from taxes 4. Foreign Sector=Net exports: net purchases by the foreign sector, or domestic exports (X) minus domestic imports (M) * Does not have a source of income specific – instead we look at the balance of trade * Trade deficits occur when we buy more goods from abroad than we sell abroad. GDP = C + I + G + (X – M)

13.2 Inflation is a prolonged rise in the general price level of goods and services, which creates a decline in purchasing power. To get a true measure of a nation’s output inflation must be taken into account.

A. A price index is necessary to remove distortions of inflation: measures changes in prices over time 1. Consumer Price Index (CPI) – measurement of the change in price of a group of goods and services over time that the average household uses I. Measures of Inflation I. Measures of Inflation B.A price index is created by selecting a base year, and a representative market basket of goods, and the price of the market basket items (market basket = representative collection of goods and services) Formula: CPI= updated cost X 100 base period cost Formula: CPI= updated cost X 100 base period cost

2. Producer Price Index (PPI) – measure of the change in price over time of a specific group of goods used by domestic businesses 3. Implicit GDP Price Deflator – removes the effect of inflation from GDP so that the overall economy in one year can be compared to another year (this number is called REAL GDP)

II.Real vs. Current GDP: converting current GDP into real GDP is useful for comparing GDP over time A.Real GDP reflects what the GDP would be if the purchasing power of the dollar had not changed from what it was in its base year B. Real GDP removes the distortion of inflation from GDP B. Real GDP removes the distortion of inflation from GDP C. Real GDP is the same as GDP in constant dollars

D. Real GDP is calculated by dividing current GDP by the implicit GDP price deflator and multiplying by 100 E. Only by comparing real GDP can real changes in economic growth be identified. Real GDP = GDP in current dollars X 100 Implicit GDP price deflator Implicit GDP price deflator Real GDP = GDP in current dollars X 100 Implicit GDP price deflator Implicit GDP price deflator

Calculate the following GDP: Consumer Spending = 6.81 trillion dollars Government Spending = 1.75 trillion dollars Investment Spending = 1.85 trillion dollars Imports = 1.52 trillion dollars Exports = 1.13 trillion dollars Formula: GDP = C + I + G + (X – M) Total = trillion dollars

13.4 I. Economic Growth = a steady, long-term increase in real GDP

A.Economic growth is best measured by real GDP per capita, which measures how much output increased per person, is the single most important measure of long-term growth * it adjusts for changes in both inflation and population

B. Real GDP per capita has grown somewhat more slowly than total real GDP

II.Importance of economic growth A. increases the standard of living B.increases the tax base C. helps reduce poverty and related problems D.increases US demand for imports, which helps create jobs and generate income in foreign countries E.encourages other countries to adopt market economies

IV. Productivity and Growth A.Productivity has increased in the US since 1959, with large increases occurring since 1996; we continue to see increases in productivity in spite of the recent economic issues. B. Declines in productivity hurt the economy