©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 1 CHAPTER 5 “Measuring National Output”

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 2 Learning Objectives 1.Present three widely accepted goals for the macro economy. 2.Delineate gross domestic product (GDP) and its components. 3.Distinguish real GDP from nominal GDP. 1.Present three widely accepted goals for the macro economy. 2.Delineate gross domestic product (GDP) and its components. 3.Distinguish real GDP from nominal GDP.

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 3 Learning Objectives 4.Track the stages of the business cycle. 5.(E&A) Identify the advantages and disadvantages of static and dynamic scoring. 4.Track the stages of the business cycle. 5.(E&A) Identify the advantages and disadvantages of static and dynamic scoring.

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e MACROECONOMIC GOALS 4 Economic Growth occurs when the economy’s total output of goods and services increase. 4 Full Employment occurs when jobs are available for those who are willing and able to work. 4 Low Inflation when prices are relatively low and stable. 4 Economic Growth occurs when the economy’s total output of goods and services increase. 4 Full Employment occurs when jobs are available for those who are willing and able to work. 4 Low Inflation when prices are relatively low and stable.

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 5 Effects of Growth: Selected Changes in the U.S. Standard of Living IndicatorYears ComparedIndicator Values Computer Ownership 1994: 24% 2001: 57% Internet Access1998: 26% 2001: 50% Consumer Credit1997: $1272 billion 2001: $1701 billion Infant Mortality Rate 1980: 12.6 per : 6.7 per 1000

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 6 Effects of Growth: Selected Changes in the U.S. Standard of Living IndicatorYears ComparedIndicator Values Life expectancy at Birth 1970: 70.8 years 2000: 76.9 years Work Fatalities1992: 6, : 5,915 Homeownership Rates 1965: : 67.8 College Graduate or More 1970: 11% 2000: 26%

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e MEASURING NATIONAL OUTPUT Outputis usually measured by tallying the value of final goods and services - those which are sold to their final owners. Output is usually measured by tallying the value of final goods and services - those which are sold to their final owners.

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 8 Gross Domestic Product (GDP) The most widely reported measure of the economy’s output is gross domestic product (GDP) which is the market value of the final goods and services produced in the economy within some time period (usually one year or one quarter).

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 9 Gross Domestic Product (GDP) Spending on final goods and services may be attributed to four sources: 4Consumption 4Investment 4Government 4Foreign Commerce Spending on intermediate goods is not included in GDP so as to avoid double counting. Spending on final goods and services may be attributed to four sources: 4Consumption 4Investment 4Government 4Foreign Commerce Spending on intermediate goods is not included in GDP so as to avoid double counting.

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 10 Consumption (C) 4Purchasing by households 4The majority of spending in the U.S. economy - about 68% 4Consumer durable goods, 4Consumer nondurable goods 4Services 4Purchasing by households 4The majority of spending in the U.S. economy - about 68% 4Consumer durable goods, 4Consumer nondurable goods 4Services

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 11 Investment (I) Spending now in order to increase output or productivity later: 4Purchases by firms of capital 4Consumers’ purchases of new housing 4Market value of changes in inventories Spending now in order to increase output or productivity later: 4Purchases by firms of capital 4Consumers’ purchases of new housing 4Market value of changes in inventories

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 12 Gross Investment, Net Investment, and Net Domestic Product Gross Investment = Total Amount of Investment Net Investment = Gross Investment minus Depreciation NDP = GDP minus Depreciation

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 13 Government (G) åAt federal, state, and local levels account for 18% of total purchasing in the U.S. economy. åApproximately 1/10 of government spending could be investment. åGovernment purchases of goods and services must be distinguished from transfer payments such as Social Security and unemployment benefits. åAt federal, state, and local levels account for 18% of total purchasing in the U.S. economy. åApproximately 1/10 of government spending could be investment. åGovernment purchases of goods and services must be distinguished from transfer payments such as Social Security and unemployment benefits.

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 14 Foreign Commerce (NX) Net Exports = Exports - Imports Because a portion of spending by consumers, businesses, and government is on imports, it is useful to subtract imports from exports.

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e Gross Domestic Product (GDP) GDP is the sum of purchases by the four sectors of the economy. GDP=C + I + G + NX (69%)$7,064.5(16%)+$1,633.9(18%)+$1,839.5(-3%) + -$329.8 =$10, Data

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 16 The Four Components of GDP

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 17 Potential GDP Potential GDPis the value of GDP that would exist if all resources in the economy were fully and efficiently employed. Actual GDP equals potential GDP only if there is no unemployment or underemployment of resources. Potential GDP is the value of GDP that would exist if all resources in the economy were fully and efficiently employed. Actual GDP equals potential GDP only if there is no unemployment or underemployment of resources.

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 18 Per Capita GDP Per capita GDP is GDP per person å Per capita GDP is GDP per person å In 2001, total GDP was $10.2 trillion å In 2001, the U.S. population was over 284 million people å Per capita GDP for 2001 was $35,843 - the amount of output produced and equally divided among every man, woman, and child in the U.S. Per capita GDP is GDP per person å Per capita GDP is GDP per person å In 2001, total GDP was $10.2 trillion å In 2001, the U.S. population was over 284 million people å Per capita GDP for 2001 was $35,843 - the amount of output produced and equally divided among every man, woman, and child in the U.S.

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 19 GDP and Value Added 4GDP may also be viewed as the sum of value added in the economy. 4Each firm takes inputs of materials and intermediate goods and increases their value through the firm’s production process. 4Value added equals the revenue from the sale of output minus the cost of purchased inputs. 4GDP may also be viewed as the sum of value added in the economy. 4Each firm takes inputs of materials and intermediate goods and increases their value through the firm’s production process. 4Value added equals the revenue from the sale of output minus the cost of purchased inputs.

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 20 Underground Economy The underground economy refers to the market transactions which go unreported. 4 The underground economy refers to the market transactions which go unreported. 4 Some of these goods and services are illegal and thus not recorded in GDP. 4 Others are legal, but not reported so that their producers may avoid paying taxes on the output. The underground economy refers to the market transactions which go unreported. 4 The underground economy refers to the market transactions which go unreported. 4 Some of these goods and services are illegal and thus not recorded in GDP. 4 Others are legal, but not reported so that their producers may avoid paying taxes on the output.

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 21 Nominal versus Real GDP Nominal GDP is the value of GDP expressed in current dollars terms. Real GDP adjust for inflation the nominal value of GDP. The chain-type price index is an index of prices that measure price changes over time. Nominal GDP is the value of GDP expressed in current dollars terms. Real GDP adjust for inflation the nominal value of GDP. The chain-type price index is an index of prices that measure price changes over time.

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 22 Nominal versus Real GDP Real GDP = Nominal GDP divided by GDP chain price index x 100

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 23 Nominal and Real GDP

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 24 The business cycle refers to the expansions and contractions in economic activity that take place over time. 5.4 THE BUSINESS CYCLE

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 25 Stages of the Business Cycle Time Real GDP Trough Expansion Peak Recession Trough Trend Line

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 26 Rising Trend of GDP

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 27 The Upward Trend of Real GDP

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 28 Economic Indicators åLeading Indicators: index of building permits, housing starts, and manufacturers’ new orders for durable goods. åLagging indicators: unemployment rate and expenditures on new plant and equipment. åCoincident indicators: index of industrial production and the prime interest rate. åLeading Indicators: index of building permits, housing starts, and manufacturers’ new orders for durable goods. åLagging indicators: unemployment rate and expenditures on new plant and equipment. åCoincident indicators: index of industrial production and the prime interest rate.

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e EXPLORE & APPLY Static vs. Dynamic Scoring åStatic scoring: the traditional method of computing the effects of federal actions. Static scoring assumes no general change in behavior as a result of government policy changes. åDynamic scoring: allows for the consideration of all behavioral changes caused by changes in government policy. åStatic scoring: the traditional method of computing the effects of federal actions. Static scoring assumes no general change in behavior as a result of government policy changes. åDynamic scoring: allows for the consideration of all behavioral changes caused by changes in government policy.

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 30 Terms along the Way gross domestic product (GDP) consumption spending investment gross investment net investment net domestic product (NDP) value added potential GDP gross domestic product (GDP) consumption spending investment gross investment net investment net domestic product (NDP) value added potential GDP underground economy GDP chain price index nominal GDP real GDP potential GDP business cycle leading indicators static scoring dynamic scoring

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 31 Test Yourself 1.The consumption spending portion of GDP includes a.durables, nondurables, and services b.goods, services, and new houses. c.intermediate foods, but not final goods. d.about 90% of all production that occurs in the economy. 1.The consumption spending portion of GDP includes a.durables, nondurables, and services b.goods, services, and new houses. c.intermediate foods, but not final goods. d.about 90% of all production that occurs in the economy.

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 32 Test Yourself 2. Gross Investment equals a.net investment plus depreciation. b.investment adjusted for the effects of inflation. c.a negative component of GDP. d.the change in business inventories. 2. Gross Investment equals a.net investment plus depreciation. b.investment adjusted for the effects of inflation. c.a negative component of GDP. d.the change in business inventories.

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 33 Test Yourself 3. The value of a new house is included in a.consumption. b.investment. c.government purchases. d.net exports. 3. The value of a new house is included in a.consumption. b.investment. c.government purchases. d.net exports.

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 34 Test Yourself 4. Which of the following is an example of a transfer payment? a.A school district pays the salary of a school teacher. b.A senior citizen is issued a Social Security check by the government. c.A farmer raises a field of corn from seed.. d.A little boy and girl spend their allowances at Chuck E. Cheese’s pizza restaurant. 4. Which of the following is an example of a transfer payment? a.A school district pays the salary of a school teacher. b.A senior citizen is issued a Social Security check by the government. c.A farmer raises a field of corn from seed.. d.A little boy and girl spend their allowances at Chuck E. Cheese’s pizza restaurant.

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 35 Test Yourself 5. Net exports are computed as a.exports minus depreciation. b.export minus imports. c.export minus GDP. d.imports minus exports. 5. Net exports are computed as a.exports minus depreciation. b.export minus imports. c.export minus GDP. d.imports minus exports.

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 36 Test Yourself 6. To compute real GDP when given nominal GDP we must also know a.nothing else, since real GDP and nominal GDP are generally equal. b.the value of consumption spending. c.the value of gross investment. d.the value of the GDP chain-type price index. 6. To compute real GDP when given nominal GDP we must also know a.nothing else, since real GDP and nominal GDP are generally equal. b.the value of consumption spending. c.the value of gross investment. d.the value of the GDP chain-type price index.

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 37 The End! Next Chapter 6 “Unemployment"