GNP & CONSUMER PRICE INDEX (CPI)

PROBLEM WITH GDP GDP can measure total output but cannot measure total income mainly because of goods produced here by foreigners being counted and goods produced abroad by Americans that are not counted Money that Ford makes in Mexico still makes its way back to stocks and executive pay checks

Gross National Product (GNP) The dollar value of all final goods and services produced in one year with labor and property supplied by US residents Takes into consideration imports and exports

HOW TO CALCULATE GNP Start with the GDP and… add in all payments Americans receive from outside the US subtract all payment made to foreign-owned resources in the US Economists prefer GDP because it focuses on production within United States borders

PRICE INDICES Examine the chart on page 342 Compare it to the chart on page 351 If the total production is the same, why has the total GDP increased by $900 billion?

PRICE INDEX A major problem with GDP is it is subject to distortions because of inflation Inflation is a rise in the general price level The problem comes when you attempt to compare GDP levels from one year to the next as in charts 13.1 and 13.4 GDP can increase from one year to the next with no real increase in the amount of goods and services produced

PURPOSE OF PRICE INDEX A price index is used to reduce the distortions of inflation It is a statistical series that can be used to measure changes in price over time We can measure inflation 3 different ways

CPI-CONSUMER PRICE INDEX Start with a market basket selection of just about everything you can imagine the average household might purchase in a year Compare the total cost of everything in that group today in comparison to everything in that basket in the time period between (average cost)

Different Indices CPI- focuses on consumer goods (computer monthly) Producer Price Index- Is computed monthly and focuses only on purchase of goods by producers (natural resources and capital) Price Deflator- takes into consideration the inflation of ALL goods and services and is computed quarterly

REAL vs. NOMINAL GDP We know that inflation can distort GDP We know how to measure GDP If we use this knowledge we can discover the REAL GDP Chart 13.4 is an example of Nominal GDP because it does not take inflation into consideration

ADVANTAGE TO REAL GDP Allows us to measure changes in production rather than changes in price

IMPORTANCE FOR GROWTH 1. Improved standard of living More time with family, hobbies, etc. and more luxuries to make life easier 2. Government Spending- more money means more taxes which equals nicer roads, parks, police, etc. 3. Domestic Problems- growth equals more jobs and thus less poverty and crime

IMPORTANCE FOR GROWTH 4. Helping other Nations- purchasing of products as well as aid to other countries helps both the US and foreign countries 5. Global Role Model- Want developing nations to see that capitalism works and promote market economies over communism

CLOSURE 1. Read the Business Week article on page 362 a. What impact will immigrants have on our GDP? b. Based upon the contributions that legal and illegal immigrants can provide, should we or should we not limit immigration in the United States? c. Share with a partner d. Turn-in on your way out the door