1. ECONOMIC MEASURES
In order to ensure that our economic goals of full employment, stable prices and economic growth are met our government constantly takes measurements of the economy.
Three important measurements are
Gross Domestic Product (GDP)
Unemployment rate
Inflation rate

2. Gross Domestic Product
What’s a Gross Domestic Product?
Broccoli?
I was gonna say “Preparation H.”
GDP
This is the most important measure of economic activity.

3. GDP is used to compare economies’ standard of living world wide

4. The Definition of GDP
GDP is the dollar value of all final goods and services produced within a country in a given year.

5. GDP is a measure of the spending and income of an economy.
Expenditures
Expenditures
Market for
Goods
and Services
Goods & Services
Firms
Households
Income
Labor, land, and capital
Inputs for production
Market for
Factors
of Production
Income 7

6. EXPENDITURES APPROACH
Consumer Spending 70% (Consumption)
+Business Spending 17 % (Investment)
+Government Spending 18%
+Foreign Spending -5% (Net Exports)
Net Exports = Exports – Imports
[Imports represent production outside a country]

7. Wages (income from labor) + Rents (income from natural resources)
THE INCOME APPROACH
This approach adds together all the income earned in the production of goods & services
Wages (income from labor)
+ Rents (income from natural resources)
+ Interest (income from capital investments)
+ Owner’s Income (profit earned by sole proprietorship and partnerships)
+ Corporate Profits
= TOTAL INCOME EARNED

8. The Expenditure Approach
In calculating GDP we need to be careful to not double-count items, so we leave out the value of the following:
Intermediate goods
Second-hand sales
Transfer payments

9. GDP measures FINAL GOODS AND SERVICES (products in the form sold to consumers) not intermediate goods
Intermediate Goods – components of the final good.
A. Ford buys batteries or tires for its cars.
B. KFC buys chickens to eventually sell to customers.

10. Second Hand Sales = no current production.
It includes goods and services CURRENTLY PRODUCED, not transactions involving goods produced in the past.
Second Hand Sales = no current production.
A. If a 1957 Chevy is bought in 2009
Chevy
[It has not been produced again so would not count.]
B. Boots produced in 2000 are bought in a Resale Store in 09.
They also have not been produced again.
A salesman’s commission on a used good
would count. You are buying his services.

11. – what is not counted
Transfer Payments –welfare, unemployment, social security.
[This money will be counted when the unemployed or
Grandma go spend it]
“Now that I’ve gotten my welfare check, I can get a mini iPod.”

12. The Expenditure Approach
Since GDP measures the dollar value of goods and services produced, purchased and reported within a year, there are several other things that are left out of the calculations.
Purely financial transactions
Unreported legal and illegal market activities
Non-market activities

13. – what is not counted
Purely Financial Transactions – stocks, bonds, CDs.
There is no current production.
A. If 100 shares of Dell stock is bought
I’m going to buy 100 shares of Dell Stock.
Exchanging one financial asset for another

14. Unreported Legal Business Activity
Unreported “legal” business activity does not count.
This is two-thirds of the “underground economy.”
And what if the
dentist doesn’t
report $400 for
teeth whitening?
What if an eye surgeon
doesn’t report $500 of his
his $3,400 IntraLASIK bill?
And what if this
waitress doesn’t
report all tips?

15. Illegal business activity is also not counted.
Illegal business activity, because it goes unreported,
also does not count. Making up 1/3 of the “underground
economy,” it includes murder for hire, gambling,
and drugs
Illegal business activity is also not counted.
“I’m getting $1,000 to kill
you, Ziggy, but at least it
will not count in GDP.”

16. Non-market Transactions Are Not Counted
Work in your own household or volunteer work
in the community does not count because there was
no payment.
So, don’t marry your maid, gardener, or
fitness instructor, or you will hurt GDP.

17. The Measurement of GDP
It measures the value of production WITHIN A COUNTRY’S BORDERS regardless of who owns the company.
It does NOT measure production by U.S. companies outside the U.S.
Provo,UT
Europe
in Chicago
China
BMW in Waco
Nike in
Indonesia

18. The Measurement of GDP
It measures the value of production that takes place WITHIN A SPECIFIC TIME PERIOD, usually a year or a quarter (three months).

19. Nominal GDP versus Real GDP
We use GDP to evaluate whether or not our economy is growing.
If we produce more goods and services this year than last year we can conclude that we are growing.
Because GDP is measured by adding up our spending on output (PRICE X quantity) this is not always clear since prices tend to rise from year to year.

20. Nominal GDP versus Real GDP
Nominal GDP is the dollar amount we spent this year on goods and services.
It is found by multiplying output bought at current price level. If we have inflation nominal GDP goes up.
Real GDP is corrected for the effects of inflation.
It is found by multiplying output bought at a constant price level. If Real GDP has increased then output has increased.

21. Year 1 Nominal GDP 10 cars at $15,000 each = $150,000
Suppose an economy‘s entire output is cars and trucks.
This year the economy produces:
10 cars at $15,000 each = $150,000
+ 10 trucks at $20,000 each = $200,000
Total = $350,000
Since we have used the current year’s prices to express the current year’s output, the result is a nominal GDP of $350,000.

22. Year 2 Nominal GDP 10 cars at $16,000 each = $160,000
In the second year, the economy’s output does not increase, but the prices of the cars and trucks do:
10 cars at $16,000 each = $160,000
+ 10 trucks at $21,000 each = $210,000
Total = $370,000
This new GDP figure of $370,000 is misleading. GDP rises because of an increase in prices. Economists prefer to have a measure of GDP that is not affected by changes in prices. So they calculate real GDP.

23. Year 3 Real GDP 10 cars at $15,000 each = $150,000
To correct for an increase in prices, economists establish a set of constant prices by choosing one year as a base year. When they calculate real GDP for other years, they use the prices
from the base year. So we calculate the real GDP for Year 2 using the prices from Year 1:
10 cars at $15,000 each = $150,000
+ 10 trucks at $20,000 each = $200,000
Total = $350,000
Real GDP for Year 2, therefore, is $350,000

24. CHANGES IN GDP Price Level o Real Gross Domestic Product
The level of output (income and expenditures) is changed if there is a change in AGGREGATE DEMAND.
AS1
Price Level b P2 P1 a
AD2
AD1 o Q1 Q2
Real Gross Domestic Product

25. CHANGES IN GDP Price Level o Real Gross Domestic Product
The level of output (income and expenditures) is changed if there is a change in AGGREGATE SUPPLY.
AS1
AS2
Price Level P1 a P2 b
AD1 o Q1 Q2
Real Gross Domestic Product

26. EXPENDITURES APPROACH Spending by Households
Personal Spending ( Consumption )
Spending by Households
Durable Goods[12%]
Nondurable Goods[29%][soup & soap]
Services[59%]

27. EXPENDITURES APPROACH
Investment - Spending by Businesses
4 Subcategories
A. Tools, equipment , machinery
B. Buildings (offices, factories)
C. Residential buildings (your house)
C. Inventory adjustments

28. EXPENDITURES APPROACH
Government Purchases [state/local & federal]
Government purchases of goods/services produced (not transfer payments)
3 Subcategories
A. Federal government 37%
B. 50 State governments
C. 84,000 local governments 63% for state and local

29. EXPENDITURES APPROACH
Net Exports
Net Exports = Exports – Imports
[Imports represent production outside a country]