1. Tracking the Macroeconomy
Chapter 7

2. National Accounts
Accuracy of country’s accounting is remarkably reliable indicator of its state of economic development.
More reliable—more economically advanced
National Accounts
Income and product accounts
Track spending of consumers, sales of producers, business investment spending, government purchases, and other flows of money between sectors of economy
Calculated by US Department of Commerce

3. Expanded Circular Flow Diagram

4. Economic Terms
Households engage in consumer spending buying goods and services from domestic and international firms.
Households also save (private savings) and/or` purchase stocks and bonds in the financial markets to derive additional income in the form of dividends and interest.
Households also pay part of their income to state and local governments in the form of income tax, social security tax, and sales tax.
Some households receive government transfers—payments like social security benefits and unemployment insurance.
Disposable income = income + government transfers – taxes.

5. Economic Terms
Government borrowing is the total amount of funds borrowed by federal, state, and local governments in financial markets.
Government purchases of goods and services are total expenditures on goods and services by federal, state, and local governments.
Goods and services sold to other countries are exports. Goods and services purchased from other countries are imports.
Inventories are stocks of goods and raw materials held to facilitate business operations.
Investment spending is spending on productive physical capital—such as machinery and construction of buildings, and on changes to inventories.

6. Gross Domestic Product (GDP)
The primary measure of the overall output of the U.S. economy.
The total market value of all final goods and services produced in a given year within the United States.
Includes U.S. and foreign owned firms.

7. GDP
GDP only measures final goods and services in order to avoid multiple counting – double counting.
In other words, the final value of the Ford automobile, NOT the tires, brakes, stereo equipment, etc.
Brakes, tires, stereo equipment, etc. is classified as INTERMEDIATE GOODS.
Intermediate goods are NOT counted.

8. GDP GDP is a measure of productive output.
These do NOT count toward GDP because they do not involve the output of final goods and services:
Purely financial transactions
Government transfer payments: social security, veterans benefits, welfare payments
Private financial transactions: gifts/cash parents or relatives
Stock market transactions: purchasing or selling securities
Second-hand sales
Used car sales
Garage sales
Intermediate goods and services
Foreign-produced goods and services

9. Calculating the GDP
Add up total value of all final goods and services produced. (Value-added approach)
Add up spending on all domestically produced goods and services. (Expenditures approach)
Add to total factor income earned by households from firms in the economy. (Income approach)

10. Components of GDP (billions $)
2010

11. Three Approaches to GDP
Income
Approach =
Expenditure
Approach =
Value-Added
Approach
Consumption by
Households
Wages
Government
Value-Added + + +
Rents
Investment by
Businesses + +
Households
Value-Added +
Interest +
Government
Purchases +
Business
Value-Added
Profits
Net Exports
(Exports Minus Imports)

12. Calculating GDP in Simple Economy
American Ore, Inc.
American Steel, Inc.
American Motors, Inc.
Total factor income
Value of sales
$4,200
(ore)
$9,000
(steel)
$21,500
(car)
Intermediate goods
4,200
9,000
Wages
2,000
3,700
10,000
$15,700
Interest pay.
1,000
600
2,600
Rent
200
300
500
Profit
2,200
Total Expend. by Firm
21,500
Value added
4,800
12,500
How is value added calculated?
What is the sum of the value added? ($21,500)
What is the value of the expenditure approach? ($21,500)
Where is the Income approach? What is its value? ($21,500)
Where is expenditures in this economy?

13. Calculating GDP in Simple Economy

14. Practice
Pages 209 – 210, Problems 2 – 4, 6

15. GDP
Most important use of GDP is a measure of the size of the economy—scale to compare economic performance of other
Years or
Countries.

16. US Gross Domestic Product

17. GDP of Countries: 2011

18. GDP Grows Because
Economy grows OR
Inflation

19. GDP: 2007 – 2012 Q2

20. Economic Terms
Nominal GDP is the value of all final goods and services (aggregate output) produced in the economy during a given year, calculated using the prices current in the year in which the output is produced.
Real GDP is the total value of all final goods and services produced in the economy during a given year calculated using prices of a selected base year.
Chained dollars is the method of calculating changes in real GDP using the average between the growth rate calculated using an early base year and the growth rate calculates using a late base year.
GDP per capita: GDP divided by the population

21. Real GDP
A way of comparing GDP statistics from one year to another (apples to apples).
Economists identify a BASE YEAR, then convert all GDP amounts to what that value would be in the base year’s dollars.
Use the GDP Deflator (a tool to allow comparison of GDP from one year to another)

22. Economic Growth
Increase in REAL GDP.
Increase in real GDP per capita.

23. Weaknesses of GDP
Does not count certain productive output (homemakers, home repairs, etc.)
Ignores the value of leisure/quality of life
Vacation, environmental damage
Does not measure the quality of products
Does not measure the underground economy (8-10%)

24. GDP and Well-Being

25. Price Indexes and Aggregate Price Levels
The aggregate price level is a measure of the overall level of prices in the economy.
A market basket is a hypothetical set of consumer purchases of goods and services.
A price index measures the cost of purchasing a given market basket in a given year, where the cost is normalized so that it is equal to 100 in the selected base year. Price Index CY = X 100
Cost of market basket CY
Cost of market basket BY

26. Calculating Price Index and Inflation Rate
Cost of market basket CY
Price Index CY = X 100
Cost of market basket BY
Price Index CY =184.2

27. Price Indexes and Aggregate Price Levels
The inflation rate is the percent change per year in a price index—typically the consumer price index. Inflation rate = x 100
Price index Y2 – Price index Y1
Price index Y1

28. Consumer Price Index (CPI)
The main measurement of inflation is the CONSUMER PRICE INDEX (CPI).
Compiled by the Bureau of Labor Statistics (BLS).
The consumer price index, or CPI, measures the cost of the market basket of a typical urban American family.

29. Calculating Inflation Rate from Price Index
Price index Y2 – Price index Y1
Price index Y1
Inflation rate = x 100
Year 1: PI = 126
Year 2: PI = 132
Year 3: PI =140
Year 4: PI =149
Year 5: PI = 152
Year 1 to Year 2
Year 2 to Year 3
Year 3 to Year 4
Year 4 to Year 5
Year 1 to Year 5
Year 2 to Year 4
4.5%
6.1%
6.4%
2.0%
20.6%
12.9%

30. Changes in CPI,

31. Other Price Measures
The producer price index, PPI, measures the cost of a typical basket of goods and services purchased by producers.
The GDP deflator Y1 = X 100
Nominal GDP Y1
Real GDP Y1
Nominal GDP is GDP at current prices.
Real GDP is Nominal GDP
Price Level

32. CPI, PPI, and GDP Deflator
What do you notice in the graph?
When were periods of inflation?
When were periods of price stability?
Which index usually moves first when prices rise?

33. Practice
Page 210 – 212, Problems 12, 13

34. E(N) = 50 – 20 = 30
Disposable Income =
Income + GT – Tx =
$800 + $10 - $100
Flow Out of HH =
$510 + $100 +$200
Into HH =
$800 + $10
Income Approach: Wages + Rents + Interest + Profits = $800
Expenditure: Consumer + Investment + Government + Exports (net)
$510 + $110 + $150 + ($50 – $20) = $800

35. GDP Deflator 2006 2007 2008 2009 2010 GDP deflator Y1 = X 100
Nominal GDP Y1
Real GDP Y1
2006
2007
2008
2009
2010
Real GDP (billion 2005 $)
12,958.5
13,206.4
13,161.9
12,703.1
13,088.0
Nominal GDP (billion 2005 $)
13,377.2
14,028.7
14,291.5
13,939.0
14,526.5
13,377.2
14,028.7
Price index Y2 – Price index Y1
Price index Y1
Inflation rate = x 100
12,958.5
13,206.4
106 – 103
103
1.03 X100
1.06 X100
103
106
= .029 X 100 =2.9%