Measuring the Economy’s Performance Chapter 13

National Income Accounting Measurement of the national economy’s performance, dealing with the overall economy’s output and income Five major statistics

Gross Domestic Product (GDP) Total dollar value of all FINAL goods and services produced in the nation in a single year List some goods and services List the top ten countries

Avoid double accounting Do not count things twice!

Computing GDP Consumer sector(c) Investment sector(I) Government sector (G) NET EXPORTS(X)

Net Exports Difference between what the nation sells to other countries and what it buys from other countries This can be negative, and in the USA, it has been recently Section 1 Chapter 13 figure & Video

Net domestic product (NDP) Another way to measure an economy The value of the nation’s total output (GDP) minus the total value lost through depreciation on equipment Depreciation – loss of value because of wear and tear to durable goods and capital goods NDP = Consumption + Government Expenditures + Investment+Exports - Imports - Depreciation

National Income Total income earned by everyone in the economy List the five different sources of NI

Personal Income Total income that individuals receive before personal taxes are paid Transfer Payments- welfare and other supplementary payments that a state of the federal government makes to individuals - BLS stats Transfer payments are added to NI and PI

Disposable personal income (DPI) Income remaining for people to spend or save after all taxes have been paid Important factor in economy’s well being

Correcting Statistics for Inflation I will read to you Issues In The News on page 341 Prolonged rise in the general price level of final goods and services = = Purchasing power – the real goods and services that money can buy; determines the value of money During inflation, people spend more than they are making, have to take out loans they cannot pay back, and cannot save or invest Inflation Video

The opposite of inflation Deflation – prolonged decline in the general price level of goods and services Why is this such a bad thing? Think about the psychology about falling prices. Examples: Housing, cars, debtors Rich people like it, debtors hate it Stagflation (Prices up, production down) Hyper inflation (money supply)

Measures of inflation Consumer Price Index (CPI) – a statistical measure of the average of prices of a specific set of goods and services purchased by typical consumers in city areas Market basket – representative group of goods and services used to compile the consumer price index Market basket is used to measure the CPI

Market Basket The BLS compiles the CPI monthly They start with the base year – year used as a point of comparison for other years in a series of statistics (Current year price) - (Base year price) = Inflation Usually the base years are from which the market basket was 100.

Producer Price Index (PPI) Measure of change in the price over time that US producers charge for their goods and services Real GDP – GDP that is adjusted for inflation to compare years

Business Fluctuations Business Cycle – Irregular changes in the level of total output measured by real GDP

Largest fluctuation ever? October 29, 1929 – Black Tuesday Call-in loans

Why do business fluctuations? Innovations Gov. Policies Wars Trade Psychology

Indicators that show fluctuations Leading – Statistics that point to what will happen in the economy Coincident – Economic indicators that usually change at the same time as changes in overall business activity Lagging – Indicators that seem to lag behind changes in overall business activity - tell duration of the phases in the cycle Book page 358