1. Macroeconomic Performance
Chapter 12
Section 1- Measuring the Nation’s Output & Income
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2. Macroeconomics
Part of economics that deals with the economy as a whole
Uses aggregate (total) measures of output, income, prices, and employment
Gross Domestic Product (GDP) is one of our most important macro measures in our economy
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3. GDP – The Measure of National Output
Dollar value of all final goods and services produced within a country’s borders during a one-year period
Can include foreign companies as long as the products are produced in the U.S.
Does not include U.S. firms producing in other countries.
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4. Things that are excluded
Intermediate products
Secondhand sales
Nonmarket transactions
Underground economy
If they were counted, the product would be counted twice (I.e. tires on your new car…the value of the tires was already included in the price of the car)
Sale of used goods…no new production is created when the product was already in existence.
Economic activities that do not generate expenditures in the market (I.e. value of your services when you mow your own lawn or do your own home repairs)…these activities are only counted when they are done for pay outside the home.
Economic activities that are not reported for legal or tax collection purposes…I.e. gambling, smuggling, etc.
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5. Current GDP vs. Real GDP
In order to make accurate comparisons over time, GDP must be adjusted for inflation
Base year- year that serves as the basis of comparison for all other years.
Real GDP- GDP after adjustments for inflation
Current GDP- GDP in current prices, unadjusted for inflation
First…because of the way it is computed, GDP can appear to increase whenever prices go up.
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6. GDP per Capita GDP on a per person basis Limitations of GDP
GDP/Population
Why is per capita GDP a better measure of a country’s prosperity than total GDP?
Limitations of GDP
Tells us nothing about composition of output
Tells little about impact of production on quality of life
Describes the average prosperity per person…total GDP says nothing about the share of the prosperity of an individual person; larger countries may have higher total GDP’s, but if the individual’s per capita GDP is lower than that of an individual in a smaller country, that person has a lower standard of living.
Last…even with these minor limitations, GDP is still our best measure of overall economic performance and well-being.
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7. GNP- The Measure of National Income
Dollar value of final goods & services produced in one year with labor & property owned by a country’s residents
Measures income of all Americans whether the goods & services are produced in the U.S. or other countries.
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8. GNP (Cont.) Net national product (NNP) National income (NI)
GNP less depreciation
National income (NI)
Income left after all taxes are subtracted from NNP (except corporate profits tax)
Personal income (PI)
Total amount of income going to the consumer sector before taxes
Disposable personal income (DPI)
Personal income less individual income taxes
4. Smallest measure of income…important because it reflects the actual amount of money consumers are able to spend.
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9. Economic sectors & circular flows
Types of sectors
Consumer (largest sector in the economy)
Investment
Government
Foreign
Summarizing -Why might the foreign sector appear to be insignificant when, in fact, large numbers of goods & services may be traded?
2. Made up of proprietorships, partnerships, & corporations responsible for producing the nation’s output
3. Includes all local, state, & federal levels of government. Receives income from business taxes, social security contributions, and individual income taxes
4. All consumers & producers outside the U.S. This sector represents the difference between exports & imports.
If imports & exports are equal, the foreign sector of the economy will appear small.
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10. Output-Expenditures Model
Macroeconomic model describing aggregate demand by the consumer, investment, government, & foreign sectors
GDP = C + I + G + (X-M)
Net exports of goods & services
= total exports – total imports
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11. Population & Economic Growth
Section 2
Population is important for a # of reasons. First, a country’s population is the source of its labor, one of the four factors of production. Second, the population is the primary consumer of the nation’s output and has a direct effect on how much is produced.
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12. Census Complete count of the population, including place of residence
The Constitution of the U.S. requires the government to conduct a census every 10 years
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13. Population of the U.S. Counting the Population Historical growth
Urban population
Rural population
Historical growth
Regional change
Center of population
Consequences of growth
First…one of the first uses of the census was to determine the # of representatives that each state elects to Congress.
Census is conducted by the U.S. Census Bureau.
1a. People living in incorporated cities with at least 2,500 inhabitants.
1b. Those persons not living in urban areas
2. Rate of growth has slowly declined. When the country first became independent, the rate of growth was around 3%…today it is less than 1%. Also of note is that the size of the household has fallen from 5.8 people to 2.6 today.
3. Since the 1970’s, the population has shifted (migrated) to the west and south. Those regions have grown quite rapidly while most of the older industrial areas of the North & East have grown more slowly or even lost population.
3a. The point where the country would balance if it could be laid flat…see figure 12.4
4. If a nation’s population grows faster than its output, the economy will not grow as fast and the country will end up with more mouths to feed. When a growing population shifts toward certain areas, it puts pressure on the city’s resources (I.e. water supply, freeways, etc.)
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14. Infrastructure
Highways, mass transit, communications, power, water, sewerage, and other public goods needed to support a population
Important to pay attention to future population trends so there are not problems in the future
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15. Projected Population Trends
Age & gender
Baby boom
Population pyramid
Dependency ratio
Race & ethnicity
Population growth
Fertility rate
Life expectancy
Future population growth
1a. Currently makes up a very large % of the population…people born between
1b. Diagram showing the breakdown of population by age & gender…figure 12.5
1c. # of children and elderly people in the population for every 100 persons in the working-age bracket…there is going to be a very heavy strain on the working age people in regards to transfer payments of Social Security & Medicare benefits. May not be enough taxes being collected to support these people when the retire since they make up such a large % of the population.
2. By the year 2050, the portions of the Asian & Hispanic population are expected to double.
3a. # of births that 1,000 women are expected to undergo in their lifetime
3b. Average remaining life span in years for persons who attain a given age…today it is 75.9 but by 2050 it is expected to increase to 82.1 years.
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16. Poverty & the Distribution of Income
Section 3
First…in the world today, poverty can be viewed as an indicator of macroeconomic performance. Approx. 1/8 of people live in poverty. Govt on all levels has initiated programs to reduce poverty.
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17. Poverty threshold
Annual dollar income used to determine the # of people in poverty.
Poverty guidelines- administrative guidelines used to determine eligibility for certain federal programs
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18. Distribution of Income
Lorenz curve- graph showing how the actual distribution of income differs from an equal distribution
Only money income is counted (not Medicaid, food stamps, subsidized housing)
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19. Household Income Ranked by Quintiles
1980
2004
Quintiles
Cumulative
Lowest fifth
4.2%
3.4%
2nd fifth
10.2%
8.7%
12.1%
3rd fifth
16.8%
14.7%
26.8%
4th fifth
24.7%
23.1%
49.9%
Highest fifth
44.1%
50.1%
100.0%
Top 5 %
16.5%
21.8%
Plot Lorenz curve on page 339. This is income inequality.
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20. Reasons for Income Inequality
Education
Wealth
Tax law changes
Decline of unions
More service jobs
Monopoly power
Discrimination
Changing family structure
People’s income normally goes up as they get more education.
Wealthy people can afford to send their children to the best colleges and set them up in businesses where they can earn a better income.
Tax rates for the wealthy have been reduced than on lower incomes, thereby adding to the growing inequality of income.
Many mfg jobs are not available anymore so we are losing the “middle class”
These jobs pay less than mfg
Some unions and professional orgs limit the supply of workers for a job which increases the pay for the people that are already wealthy
Especially women…denied opportunities for advancement…also some unions deny membership to immigrants or ethnic minorities.
Many single – parent families raising children with less income.
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21. Antipoverty programs Welfare Income assistance General assistance
Food stamps
Medicaid
Social service programs
Tax credits
Earned income tax credit
Enterprise zones
Workfare programs
Negative income tax
Govt or private agency programs that provide general economic & social assistance to needy individuals
Provide direct cash assistance to those in need
Programs that assist poor people but do not provide cash assistance
3a. Govt-issued coupons that can be exchanged for food
3b. Joint federal-state medical insurance program for low-income people. Fed govt pays a majority of the health-care costs and the state govt pays the rest.
4. I.e. child abuse prevention, foster care, job training, child welfare & day care.
5a. Federal tax credits & cash payments for low-income workers.
6. Area free of tax laws and other operating restrictions. Are established in run-down or depressed areas. Benefits – residents can find work without worrying about transportation
7. Requiring welfare recipients to work in exchange for benefits. I.e. assist law enforcement officials or sanitation and highway crews, work in schools or hospitals, or perform other types of community service.
8. Tax system that would make cash payments to individuals with incomes below certain levels. Is not in use today.
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