1. National Finances/ GDP

2. National Income Accounting
National Income Accounting – The measurement of the national economy’s performance.
Five major statistics measure national economy:
Gross Domestic Product (GDP)
Net Domestic Product (NDP)
Takes into account that some businesses simply repair and replace goods that depreciate
Depreciation – Loss of value because of wear and tear
Includes Vehicles, Technology, etc.

3. Five Statistics of National Economy
National Income
Sum of wages, income of self-employed persons, rental income, corporate profits, interest on savings and investments
Personal Income
Money prior to taxes
Disposable Personal Income
Money left after taxes
More important than PI, since it shows how much money people really have to spend

4. Measuring GDP
GDP – Total dollar value of all goods produced in a country in a year.
Always expressed in dollars
Only accounts for final products, so parts are not double counted
Only new products are counted
Does not count used products since they are considered a transfer in ownership
Computed by adding products purchased by consumers, by businesses, by gov’t and net exports
Net Exports – Difference between imports and exports)

5. Weaknesses of GDP Some figures used to compute GDP are estimates
GDP omits some areas of economy
Only measures quantity, not quality

6. It’s What You Know
When Hurricane Andrew blew through Southern Florida it was a disaster, but the GDP recorded it as a $15 billion boon to the economy.
What does GDP measure?
Under what circumstances would the labor of preparing a meal be included in GDP

7. Something To Think About
Why do you think it is important to measure the nation’s economy in a variety of ways?
Why do you suppose that GDP does not include used products that were sold that year?

8. Power of Money
Inflation – Prices of goods and services rise, and the purchasing power of the dollar goes down.
Purchasing power of a dollar – equal to all goods and services the dollar can buy.
Faster the rate of inflation, greater drop in power of the dollar
Has to be calculated for GDP
Deflation – A prolonged decline in the general price level.

9. Measures of Inflation
Consumer Price Index (CPI) – measures change in price of a specific group of products and services (market basket) of the average household
Producer Price Index (PPI) – measures the average change in prices that companies charge the consumer
Mostly shows prices in mining, manufacturing, and agriculture)
PPI usually rises before the CPI
GDP price deflator is used to remove effects of inflation from a GDP so that different years can be compared in terms of spending value
Number achieved after the GDP deflator is the real GDP

10. Aggregate Demand
Aggregate Demand – Total quantity of goods and services demanded by all people in economy
Related to the price level or average of all prices measured by the price index
If price level goes down, larger quantity of real domestic output is demanded per year
The effect of inflation on the power of cash and relative price of goods and services sold to other countries affects the aggregate demand curve.

11. Aggregate Supply
Aggregate Supply – Quantity of all goods and services being produced
If price goes up but wages do not, overall profits will rise and producers will want to supply more.
Combining Supply and Demand
If combined, the aggregate supply and demand curves can show the equilibrium point.

12. It’s What You Know
In the 1970s the primary goal of the Federal Reserve was to lower inflation. Interest rates went up. Buttons were distributed that said WIN, and acronym for Whip Inflation Now.
What is inflation?
Why is it considered harmful?
How does it skew DGP figures?

13. Something to Think About
Institute for the Future is a marketing firm that predicts trends in consumer demands. They are specifically interested in sophisticated consumers which they define as having three of the four following characteristics: 1) one year of college; 2) works as a manager, professional, or technician in an information-intensive job; 3) lives in a household with spending power of more than $50,000; and 4) has access to high-speed, interactive, multimedia communication devices at home. Sophisticated consumers accounted for 20% of households in 1980, 45% in 1999, and are expected to reach 60% by 2020.
How might the above changes in demographics impact aggregate demand and supply curves?

14. Model of Business Cycle
Begins with growth that leads to an economic peak, boom, or period of prosperity.
When business slows, real GDP levels off and declines
Recession – business activity falls and real GDP does not grow for 6 months
If recession gets worse, it’s considered a depression.
Downward direction of economy levels off in a trough (lowest point in the cycle)
Real GDP stops going down
Business activity increases and economy begins expansion or recovery.

18. Business – Ups and Downs
The 2008 Financial Crisis was the worst stock market crash in US history.
Dropped farther than in the 1930s
Government infusion of money helped end the contraction of period.
Economy still is not good.

19. Something to Think About
Business Cycles are difficult for economist to explain, but Jeffery A. Miron, author of The Economics of Seasonal Cycles, says that they might better be understood if we looked more closely at seasonal fluctuations. Since the 1930s macroeconomists have largely focused on business cycle, However, Miron suggests that seasonal and business cycles are driven by similar economic mechanisms and raise many of the same questions for welfare and policy analysis.
Why is it difficult to explain business fluctuations?
What might it mean to a nation’s economy if business fluctuations were more fully understood?

20. Causes of Business Fluctuations
Business Investment – Companies expanding or cutting back, or using innovations in business practices
Government Activity – Taxing and spending policies, control of money supply in economy
External Factors – non-economy related factors, such as wars and raw material costs
Psychological Factors – People’s outlook on the future and economy can influence their spending and saving habits

21. Indicators
Economists and gov’t create forecasts to try to predict the future of the economy
Economists turn to indicators help w/ prediction
It can take a while before indicators are felt in economy
Leading indicators – Seem to lead to a change in overall business
Coincident indicators – Change at the same time as the economy changes
Lagging indicators – Change after the economic change has already begun

22. Something to Think About
In 1998 Jacob M. Schlesinger, an economics reporter for The Wall Street Journal, wrote:
“Through the mid-1990s, pundits liked to talk of America’s perfectly balanced Goldilocks economy. Like the porridge that the girl of fable devoured, it was not too hot and not too cold, but just right. . . The boom, it seemed, would never end.”
What is a boom in the business cycle?
How do business fluctuations affect the real GDP?