1. Measuring Economic Performance

3. Gross Domestic Product
Gross Domestic product (GDP)  dollar value of all final goods and services produced within a country’s borders in a given year
Dollar value: total of the selling prices of all goods and services
Final goods and services  sold to consumers
Intermediate goods and services  used in the production of final goods
Within a country’s borders  For US, all goods made in US, even if by a foreign company

6. How GDP is Calculated Expenditure Approach Income Approach
Estimate of amount spend on:
Consumer, business, and government goods and services
Net exports or imports of goods and services
Durable goods  last a long time
Nondurable goods  don’t last a long time
Income Approach
Adding all incomes in an economy
Selling price of goods represents income for a businesses’ owners and employees

7. Nominal vs. Real GDP Nominal GDP  GDP measured at current prices
Real GDP  GDP expresses in constant prices
Ex. Economy only produces shoes
2010  1,000 shoes at $50 = $50,000
2011  900 shoes at $60 = $54,000
Price has increased, but output has not
As expressed in 2010 prices
2010  1,000 shoes at $50  $50,000
2011  900 shoes at $50  $45,000
Real GDP = $45,000

8. Limitations Does not account for: Nonmarket activities
Mow yard, cook, wash car
Underground economy
Black market
Paying someone to mow your yard
Negative externalities
Value of clean environment not counted
Quality of life
More stuff doesn’t always make us better off

9. Other measures
Gross National Product  annual income earned by U.S. owned firms and US citizens
By subtracting taxes from GNP we get our National Income
Personal Income  Money paid to households after reinvesting and paying additional taxes
Disposable Personal Income  Money people have after they pay their taxes
Personal income – income taxes = DPI

11. Economic Growth
Measure of a nation’s economic growth rate is the % change of real GDP over a given period of time
Real GDP per capita  real GDP divided by the total population
Starting point, but does not indicate quality of life

17. Most recent estimate Rank Country Intl. $ Year 1 Luxembourg 89,769
2010 2
 Qatar
80,229
2009 —
 Macau
60,633 3
 Singapore
57,505 4
 Norway
56,894 5
 Kuwait
52,657
2007 6
 Brunei
49,494 7
 United States
47,184 8
 Switzerland
46,215
 Hong Kong
46,157 9
 Netherlands
42,475 10
 Ireland
39,727

18. Influences on GDP Supply and demand on a nationwide scale
Aggregate Supply  the total amount of goods and services in the economy available at all possible prices
Total supply of all goods and services for sale in an economy
As prices change, firms respond by changing production
Changes output  Changes GDP

19. Aggregate Demand
Aggregate Demand  amount of goods and services in the economy that will be purchased at all possible price levels
Lower prices = increase demand
Consumers make up majority of aggregate demand
A change in AS or AD will cause a change in real GDP and price level

20. Saving and investment
Saving  disposable income that is not used for consumption
Savings rate  % of disposable income saved
If savings rise, most $ for invest is available to businesses  higher output  higher income  save more
US  low savings rate
Borrow from other countries

22. Business Cycles
Business cycle  period of macroeconomic expansion followed by a period of macroeconomic contraction
Four Phase
Expansion
Economic growth (rise in real GDP)
Peak
Height of expansion
Contraction
Economic decline (fall in real GDP)
Trough
Lowest point of economic contraction

23. Contraction Recession  prolonged economic contraction Depression
Real GDP falls for two consecutive quarters
6 months (6-18 months)
6-10% unemployment
Depression
Recession that is long and severe
High unemployment
Stagflation
Combination of stagnant and inflation
Decline in GDP, Rise in prices

24. Influences on business cycle
Business investment
Invest in capital
Interest Rates
Interest high, don’t buy
Consumer expectations
If future looks bad, save don’t spend
External shocks
War, drought, disruption in oil supply

25. Unemployment

26. Unemployment Frictional Unemployment Seasonal unemployment
Occurs when people take time to find a job
Change jobs, after college
Seasonal unemployment
When industries shut down for a season or make seasonal shifts
Summer job when school is out

27. Unemployment
Structural Unemployment  Occurs when workers skills do not match the jobs that are available
New technology
Changes in consumer demand
Lack of education
Cyclical unemployment  Rises during economy downturns and falls when the economy improves

28. Measuring employment
Unemployment Rate  percentage of the nation’s labor force that is unemployed
Average for the nation
Full employment  level of employment reached when no cyclical unemployment exists
Underemployed  working at a job you are over-qualified for, or working part-time but want full-time

31. Inflation

32. Inflation Inflation  general increase in prices
Prices have increased, wages have too
Inflation rate  % rate of change in prices over time
Deflation  drop in price level
Consumer Price Index (CPI) determined by measuring the price of a standard group of goods meant to represent the “market basket” of a typical urban consumer
Compare prices from diff. years
Base year = 100
Market basket  representative collection of goods and services
8 categories
Updated every 10 years
Inflation rates
Inflation Calculator

34. Market basket
FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks)
HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture)
APPAREL (men's shirts and sweaters, women's dresses, jewelry)
TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance)
MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services)
RECREATION (televisions, toys, pets and pet products, sports equipment, admissions);
EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories);
OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses)

36. Effects of inflation
Wage increases matches inflation rate  real income remains constant
If wage does not increase with inflation, real income falls
Fixed income  does not increase as prices go up

37. POVERTY

38. Poverty
Poverty threshold (line)  income level below which income is sufficient to support a family or household
Poor=total income is less than the amount required to satisfy family’s minimum needs
Poverty rate  % of people who live in households with incomes below the poverty threshold
Race and ethnicity, type of family, age, residence

39. For each additional person, add
Poverty Threshold
Persons in Family
48 Contiguous States and D.C.
Alaska
Hawaii 1
$10,890
$13,600
$12,540 2
 14,710
 18,380
 16,930 3
 18,530
 23,160
 21,320 4
 22,350
 27,940
 25,710 5
 26,170
 32,720
 30,100 6
 29,990
 37,500
 34,490 7
 33,810
 42,280
 38,880 8
 37,630
 47,060
 43,270
For each additional person, add
   3,820
   4,780
   4,390

40. Causes of poverty Lack of education and skills Location
Economic shifts
Location
Racial minorities, inner cities  earn less
Racial and gender discrimination
Shifts in family structure

42. Income distribution
Income distribution  how the nation’s income is distributed among its population
Wealthiest 1/5 earns more than lowest 4/5ths
Government spends billions to help reduce poverty
Cash assistance, education, medical benefits, food stamps, subsidized housing