Economic Performance. Judging the Economy...... Indictators Leading Predict what the economy will do Coincident Current status of the economy Lagging.

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Presentation transcript:

Economic Performance

Judging the Economy......

Indictators Leading Predict what the economy will do Coincident Current status of the economy Lagging After the fact, explains what has happened.

GDP Gross Domestic Product Final Output. EG Sale of pen included, but not the manufacture of casing or ink. Manufactured during current year. Used cars or second hand clothes excluded. National Borders.

GDP Continued National Borders Includes all production regardless of who produces it. Toyotas built in U.S. factories. Excludes items built or financed by Americans outside of the U.S. Coke Plant in Europe.

U. S. GDP Quarterly Data

How to measure GDP 3 Ways 1 - Expenditure Approach Sum of purchases by final users. 2 - Income Approach If final price = all income & costs incurred. 3 - Value-added Approach Total sales - value of intermediate goods.

How to measure GDP

Expenditure Approach to GDP GDP = C + I + G + ( X - M ) C = Personal Consumption Expenditures I = Gross Investment G = Government Purchases X = Exports M = Imports

Expenditure Method Components C = Consumption All final products I = Investments Capital investments Inventory investments G = Government Purchases Excludes transfer payments X = Exports M = Imports Trade surplus is a positive number Trade deficit is a negative number

Other Points of Notes Inflation Nominal GDP Not adjusted for inflation. Real GDP Adjusted for inflation

Nominal vs. Real GDP YearNominalReal 2006$44,572$37, $46,328$38, $46,674$37,954

Calculating Nominal GDP Nominal GDP = Sum of TR (P*Q) of all goods = (A P2 )*(A Q2 )+(B P2 )*(B Q2 ) Nominal Prices * Quantity Nominal prices are prices from tear of sale. Calculates size of economy for a period in dollars from that period EG GDP for 2007 in 2007 dollars.

Calculating Real GDP Real GDP = Sum of TR using original prices with current quanity = (A P1 )*(A Q2 )+(B P1 )*(B Q2 ) Real Prices * Quantity Real prices are prices from original or base year Calculates size of economy for a period in dollars from a base period EG GDP for 2007 in 2001 dollars.

Inflation & Deflators Inflation – Amount that prices rise for the same goods. Deflator – A measure that adjusts the GDP for inflation. (Nominal GDP / Real GDP) * 100

Example – BBQ GDP Hot Dogs Hamburgers Year Price Amount Price Amount 2006 $1 100 $ $2 150 $ $3 200 $4 150

Nominal GDP Nominal GDP = (P 1 )*(Q 1 )+(P 2 )*(Q 2 ) Nominal Prices * Quantity 2006 = 1*100+2*50 = $ = 2*150+3*100 = $ = 3*200+4*150 = $1,200

Real GDP Real GDP = (P B )*(Q 1 )+(P B )*(Q 2 ) Real (base year) prices * quantity 2006 = 1*100+2*50 = $ = 1*150+2*100 = $ = 1*200+2*150 = $500

GDP Deflator (Nominal GDP)/(Real GDP)* = (200/200)*100 = = (600/350)*100 = = (1,200/500)*100 = 240

Other Points of Note Limitations Accuracy of information Timeliness of information Non-market activities Underground economy

Related Production Measurements GNP - Gross National Product NNP - Net National Product NI - National Income PI - Personal Income DPI - Disposable Personal Income See hand-out for mathematical relationships.