1. Measuring Economic Performance
Unit 6 Notes

2. Unit 6, Lesson 1 Notes

3. National Income and Product Accounts
Economists monitor economic data of the country using national income accounting – collects statistics on production, income, investments, and savings
This data is collected and presented to the government and maintained by the Department of Commerce

4. Gross Domestic Product
The MOST IMPORTANT measure that is collected is GDP – the dollar value of all final goods and services produced within a country’s borders in a given year
The definition itself is worded that each piece must be looked at individually

5. Gross Domestic Product
Dollar value is the total selling prices of all goods and services produced in a country in a given year
Final goods and services are the products sold to consumers in a given year
Produced within a country’s borders means that anything produced in the U. S. is counted (Kia plant in Ohio)

6. GDP does NOT include:
Intermediate goods – products/services used to make final products.
Ex: Car tires (intermediate good) aren’t counted if they are going onto a brand new car (final good).
Avoids multiple counting
Nonproduction Transactions
Transfer Payments (public or private) – money is given for no service/product. Ex: $ as a gift, welfare, social security.
Stocks & Bonds transactions
Sale of USED goods
Non-market Transactions Ex: Time & effort you spend fixing up your car.
Underground Economy – no record exists of the transaction. Ex: babysitting, lawn mowing, maid services, drug trade

7. Gross Domestic Product
GDP Basics:
Always expressed in terms of $.
Primary measure of economy’s performance.
Calculated using either the expenditure approach or the income approach.
Increases in GDP are desirable
When the government looks at GDP, the measurement must be as accurate as possible

8. Expenditure Approach
To calculate GDP, one way is the Expenditure approach
Economists estimate the annual expenditures ($ spent) on four categories:
Consumer
Business
Government
Net imports/exports
This total equals GDP – practical approach

9. Income Approach
Another way to measure GDP is the income approach – provides better accuracy
This approach adds up all the incomes in the economy (ex. Income from selling a house for $115,000)

10. What count’s for GDP?
Warm up on worksheet…

11. The Greeting Cards Ana sells in 2007?
Ana Maria began a greeting card company in She produces greeting cards for businesses. The year she started, she purchased all the necessary art supplies and special papers used in producing her cards. The supplies and papers were all made in the United States in She bought used desks and chairs that were made in Tennessee in 2007 and new bookcases that were made in Canada. She also paid a local advertising company $10,000 to create ads and promote her company in business magazines. At the end of the year, she had $420 worth of cards still in inventory.
Which items would be counted in determining U.S. GDP for 2007? Explain your answer.
The Greeting Cards Ana sells in 2007?
- The desk and chairs?
- The bookcases?
- The advertising Ana purchases?
- Her remaining inventory of cards?

12. Unit 6, Lesson 2 Notes

13. Real vs. Nominal GDP
Nominal GDP is GDP measured in current prices - GDP unadjusted for inflation or deflation of prices.
Uses current year’s prices
Real GDP is GDP expressed in constant, or unchanging, prices - GDP that has been adjusted for inflation/deflation.
Reflects price changes so that you may compare if production increased or if higher prices simply caused a higher nominal GDP. (Remember: GDP measures the goods/service produced in one year.)

14. Other Income and Output Measures
Even though GDP is the primary economic measure, others are also taken
GDP is used to determine other economic measures including:
GNP
Depreciation

15. Gross National Product (GNP)
GNP is the annual income earned by U. S.-owned firms and U. S. citizens
It is calculated by: GDP + income earned outside the U. S. – income earned by foreign firms and citizens inside the U. S. = GNP
GNP does not account for depreciation – the loss of the value of capital equipment that results from normal wear and tear
So, GNP – Depreciation = Net National Product (NNP)
NNP is the output made after the adjustment for depreciation

16. Gross national Product
NNP does not account for another factor that reflects the cost of doing business – taxes
So NNP – taxes (sales and exercise) = National Income (NI)
We can then figure out how much individuals make that they can then spend, called Personal Income (PI)
So PI = Other household income + Money business pays out (SS, Income taxes, etc.) – National Income
Then, we look at how much a person actually has to spend after taxes, called Disposable Personal Income (DPI) = Personal income – taxes
Personal Taxes include income, property, estate, etc.

17. Unit 6, Lesson 3 Notes

18. Business Cycle
A business cycle is a period of economic expansion followed by a period of economic contraction
These are not minor ups and downs – they are major changes to GDP
There are typically 4 phases of a business cycle:
Expansion
Peak
Contraction
Trough

19. Expansion
Expansion is a period of economic growth measured by a rise of in real GDP
In this phase the economy as a whole enjoys plentiful jobs and a falling unemployment rate
Economic growth is a steady, long-term increase in GDP

20. Peak
Peak occurs when GDP stops rising – it has reached the pinnacle of economic expansion

21. Contraction
Contraction occurs after a peak, when the economy enters a period of economic decline marked by falling GDP
Other conditions may like unemployment and price may vary
Economists have different terms to describe the severity of a contraction:
Recession – exists if real GDP falls for 2 consecutive quarters (6 months) – unemployment normally 6 to 10 months
Depression – exists if a recession is esp. long and severe – high unemployment and low output
Stagflation – exists if real GDP declines (output) and prices rise (inflation)

22. Trough When the economy has “bottomed-out” it has reached the trough.
This is the lowest point of economic contraction
GDP stops falling

23. Factors that Affect the business cycle
Business investment: When the economy is good, businesses invest in new capital. When economy isn’t so good, businesses stop investing and this creates a drop in the output of other sectors of the economy – can also begin firing workers
Interest rates and credit: When interest rates are low, consumers and business are inclined to make purchases. When interest rates are high, they are less likely to spend money, lowering GDP

24. Factors that Affect the business cycle
Consumer Expectations: When expectations are that we are in a “good” economy, they expect higher wages and available jobs – increase in spending. When expectations are poor, consumers don’t spend money because they expect lay-off and lower incomes – can start a contraction
External Shocks: Negative shocks (drought, hurricane, oil supply) can cause increase in prices and a decline in GDP. Positive shocks (good growing season, finding of new oil supply) can increase GDP and decrease prices

25. Unit 6, Lesson 4 Notes

26. Economic Growth
The basic measure of a nation’s economic growth rate is the percentage of change of GDP over a given period time
GDP must also keep up with population growth in order for it to keep being positive
Taking into account population, most economist prefer to rely on real GDP per capita into account
This is the GDP per person in the country

27. Economic Growth
Real GDP per capita is considered the best measure of a nation’s standard of living
If GDP rises faster than population, the standard of living will go up

28. Economic Challenges - unemployment
Economists can measure the strength of the economy at any given time by counting the number of unemployed people
There are 4 kinds of unemployment:
Frictional
Seasonal
Structural
Cyclical

29. Frictional Unemployment
Unemployment always exists, even in a good economy
Frictional unemployment occurs when people take time to find a job
For example: changing jobs, time to find job after finishing school, etc.
In an economy as large as the U. S., economists expect to find a large number of unemployed falling into this category

30. Seasonal Unemployment
Seasonal unemployment occurs when industries slow or shut down for a season or make a seasonal shift in production schedules
For example, summer jobs, harvests, etc.
Economists expect to see people in this category as well

31. Structural unemployment
When the type of economy shifts from one sector to another, the skills workers need to have a job also changes
Workers who lack the necessary skills will lose their jobs – this is structural unemployment
There are 5 causes of structural unemployment:
New technology
New resources
Changes in consumer demand
Globalization
Lack of education

32. Cyclical Unemployment
Unemployment that rises when the economy is down and falls when the economy is good is called cyclical unemployment
For example – Great Depression (1 out of 4 unemployed) and today’s recession (10% unemployment)

33. Unit 6, Lesson 5 Notes

34. Measuring unemployment
The amount of unemployment in the nation is an important clue to the nation’s health
Each month, the Bureau of Labor and Statistics polls a portion of the population that tracks unemployment
They compute the unemployment rate: percentage of nation’s labor force that is unemployed
The unemployment rate is a national average and doesn’t take into account regional or local differences

35. Full employment
0% unemployment rate is not possible in a market economy – 4-6% is normal
Full employment can occur if there is no cyclical unemployment

36. Inflation
Inflation is a sustained increase in the average price level of a country
The rate of inflation is measured by the annual percentage change in the level of prices as measured by the consumer price index (measures changes in the cost of living of a typical household)
A sustained fall in the general price level is called deflation – rate of inflation is negative

37. Inflation
CPI – Consumer Price Index is the quantity of goods and services that a given amount of money will buy for a typical household
With inflation, purchasing power will decrease
With inflation, prices rise faster than income, reducing the standard of living
Real income and buying power will decrease for an individual

38. Causes of Inflation Quantity Theory – Too much money in the economy
Demand-Pull Theory – Inflation occurs when demand for goods and services exceeds existing supplies – prices go up
Cost-Push Theory – Inflation occurs because producers increase prices in order to meet increasing costs
This can lead to the spiral effect – cycle that keeps repeating

39. So what does One Trillion Look like?