Economic Goals and how we measure them Growth Growth Unemployment Unemployment Inflation Inflation

Growth—measured in GDP Gross Domestic Product Gross Domestic Product GDP is the monetary measure of the total market value of all final goods and services produced within a country in one year.GDP is the monetary measure of the total market value of all final goods and services produced within a country in one year.

GDP includes only final products and services GDP includes only final products and services it avoids double or multiple counting by eliminating any intermediate goodsit avoids double or multiple counting by eliminating any intermediate goods GDP is the value of what has been produced, not what was actually sold GDP is the value of what has been produced, not what was actually sold

What does GDP exclude? Purely financial transactions are excluded. Purely financial transactions are excluded. stocks or money transfers (they are not producing anything)stocks or money transfers (they are not producing anything) Intermediate products Intermediate products Secondhand sales are excluded Secondhand sales are excluded Non-market transactions—mowing your lawn, the work of a homemaker or other home repair Non-market transactions—mowing your lawn, the work of a homemaker or other home repair Underground economy Underground economy

Two methods of measuring GDP Expenditures Approach Expenditures Approach How much did all of the things produced costHow much did all of the things produced cost Income Approach Income Approach How much was earned in the process of making all of the things that were produced.How much was earned in the process of making all of the things that were produced.

GDP = C + I + G + Xn GDP is divided into the categories of buyers in the market GDP is divided into the categories of buyers in the market 1. Personal Consumption—(C) Durable consumer goods—cars, TV's.Durable consumer goods—cars, TV's. Non-durable consumer goods—food, fuelNon-durable consumer goods—food, fuel Services—doctors, lawyersServices—doctors, lawyers 2. Gross Private Domestic Investment—(I) All final purchases of machines, tools, and equipment used by businessesAll final purchases of machines, tools, and equipment used by businesses All constructionAll construction Changes in inventoriesChanges in inventories

GDP = C + I + G + Xn 3. Government Purchases– (G) Includes Federal, State, and Local Includes Federal, State, and Local 4. Net Exports—(Xn) Exports (X) – Imports (M) Exports (X) – Imports (M) If it is not made here it is not part of GDP If it is not made here it is not part of GDP if it is a factory owned by the U.S. but is outside the boarders, it does not count. if it is a factory owned by the U.S. but is outside the boarders, it does not count.

How do we compare one year to the next? Real Vs. Nominal GDP Real Vs. Nominal GDP Real GDP is what GDP would be if prices had not changed from the base year.Real GDP is what GDP would be if prices had not changed from the base year. A.K.A. GDP adjusted for inflationA.K.A. GDP adjusted for inflation Consumer Price Index, measures inflation Consumer Price Index, measures inflation Select a base year to compare price changesSelect a base year to compare price changes Market basket of goods (aprox. 80,000 goods in 364 categories)Market basket of goods (aprox. 80,000 goods in 364 categories) Changes occasionally in order to modernize the market basketChanges occasionally in order to modernize the market basket

Price index Price index in given year = X Price of same market basket in base year 100 The base year index will always be 100 The base year index will always be 100 Price of market basket in _____specific year____

How do we use the index number to find Real GDP? Real GDP = _Nominal GDP X 100__ Price index

What does GDP miss? The Underground Economy The Underground Economy Who has the largest underground economy based on a percentage of GDP?Who has the largest underground economy based on a percentage of GDP? Greece ~ 30%Greece ~ 30% Increase in leisure (decrease in work) Increase in leisure (decrease in work) Increased product quality Increased product quality Impact of production on the environment Impact of production on the environment Is the production good for society and is it distributed equitably Is the production good for society and is it distributed equitably