1. CHAPTER 11 Measuring Economic Activity

2. Business Cycle Alternating periods of economic expansion and contraction Recovery Inflation Peak Recession Depression

3. GDP GDP measures the market value of final goods and services produced within a country’s border during a given time period

4. Three approaches to measurement Value added Expenditure method Income method

5. What is not included in GDP? Used goods Financial transactions Underground transactions Transfer payments Barter transactions Some non-market production

6. Expenditure Method GDP = C + I + G + (x - m) C =Personal consumption expenditure I =Gross private domestic investment G =Government consumption expenditures and investment (x-m)= net exports

7. Components of GDP Personal consumption expenditures Durable goods Non-durable goods Services Spending on durable goods tends to be highly volatile during business cycles

8. Components of GDP Gross private domestic investment Fixed investment Non-residential (structures equipment & software) Residential (new houses by HH and landlords) Changes in private inventories Goods produced but not sold during a given year

9. Components of GDP Govt. consumption Exp. & Gross investment Federal National defense Non-defense State and local

10. Components of GDP Exports Goods Services Imports Goods Services

11. Income Method Gross domestic product Less:Depreciation Plus:Statistical discrepancy Equals:National income Compensation of employees Proprietor’s income Rental income Corporate profits Net interest

12. Income Method cont… Less:Income earned but not received Plus:Income received but not earned Equal:Personal income Less:personal taxes Equals:disposable income personal consumption personal savings

13. Measurement of Price level Inflation A sustained increase in price level Deflation A sustained decrease in price level Main Indices Consumer price index (CPI) Producer price index (PPI) GDP deflator

14. Measurement of Employment Population 16 years of age or older Less: members of armed forces Less: Institutionalized persons (in jails or nursing homes) Equals: Civilian Non-institutional population Cont….

15. Measurement of Employment Less: Persons who are not actively seeking jobs (housewives, retirees, students, discouraged workers) Equals:Civilian labor force

16. Unemployment Natural rate of unemployment Minimum level of unemployment that can be achieved with current institutions without causing inflation to accelerate Unemployment rate = # of persons unemployed Labor force X100

17. Relevance for the manager inflation recession In contraction phase, generally, GDP, P, employment, profits & production show a downward trend

18. Relevance for the manager In Expansion phase, generally, GDP, P, employment, profits and production show an upward trend Demand for firm’s product is influenced by the business cycle. Policy changes also take place