1. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 1 “Foundations of Economics” Measuring the Overall Performance of Economic Systems

2. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 2 Introduction Microeconomic Analysis – supply and demand in a particular market or industry. Macroeconomic Analysis – performance of the overall economy. Gross Domestic Product – best indicator of overall economic performance.

3. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko Some Figures World GDP comparison GDP per capita

4. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 4 Gross Domestic Product GDP – market value of final goods and services produced within a country in a particular time period. –Market values. –Final good – purchased by ultimate user. –Within a country. –Time period is usually a year.

5. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 5 Gross Domestic Product Market Value –GDP is a market value—goods and services are valued at their market prices. –To add apples and oranges, computers and popcorn, we add the market values so we have a total value of output in dollars.

6. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 6 Gross Domestic Product Final Goods –Intermediate goods doesn’t count –Intermediate Goods Goods used up entirely in the production of final goods. Not included in the calculation of GDP.

7. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 7 Gross Domestic Product Final Goods –Add value-added at each stage of the production process. Value Added –The dollar value of an industry’s sales minus the value of intermediate goods used in production –Example: farmer, miller, baker, consumer

8. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 8 Gross Domestic Product Within a country –Output produced abroad by domestically owned factors of production doesn’t count. (e.g. Lululemon factory in China ) -Output produced domestically by foreign owned factors of production should be included. (e.g. General Motor Cars manufactured in Ontario)

9. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 9 Gross Domestic Product In the course of a year –Used goods and second-hand sales do NOT count. (e.g. selling a used car ) -inventory should be included. inventories: goods that are produced but unsold count as firms’ own investment

10. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 10 Gross Domestic Product Three ways of measuring GDP: –Product approach: the total of the value added by each producer in the course of contributing to the year’s total output of final goods; –Income approach: the total income received, in the form of wages and salaries, interest, rent, and profits, by those who contributed the resources used to produce the year’s total output; –Expenditure approach: the total purchases of final goods by households, business firms and government, plus the purchases by foreigners in excess of what the foreigners sold us in return.

11. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 11 Calculating GDP Expenditure approach –Consumption (C) –Investment (I) –Government purchases of Goods and Services (G) –Net Exports - net spending by the Rest of the World on domestic production (NX)

12. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko Copyright © 2013 Pearson Canada Inc., Toronto, Ontario

13. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko Copyright © 2013 Pearson Canada Inc., Toronto, Ontario

14. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 14 Nominal and Real GDP Nominal GDP –Product of prices and quantities (P x Q). –If prices increase and quantities remain unchanged nominal GDP increases. Question –If prices increase and quantities remain the same, has the real output of the economy increased?

15. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 15 Nominal and Real GDP Adjusting GDP for Price Changes –Real GDP The value of all final goods and services produced in a year stated in unchanging prices (base year’s price).

16. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 16 Example: 2003 2004 GoodQuantityPrice QuantityPrice Milk500$2900$3 Cheese1000$51000$4 Butter2000$1 3000$2

17. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 17 Appendix: Limitations of National Income Accounting GDP –Only attempts to measure economic performance. –Ignores all non-market forms of production. –Ignores illegal production.

18. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko Limitations of GDP Copyright © 2014 by Nelson Education Ltd. 5-18

19. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko In each of the following cases, determine how much GDP and each of its components is affected (if at all). A. Debbie spends $200 to buy her husband dinner at the finest restaurant in Toronto. B. Sarah spends $1800 on a new laptop to use in her publishing business. The laptop was built in China. C. Jane spends $1200 on a computer to use in her editing business. She got last year’s model on sale for a great price from a local manufacturer. D. General Motors builds $500 million worth of cars, but consumers only buy $470 million worth of them. 5-19 Copyright © 2014 by Nelson Education Ltd. Active Learning GDP and Its Components

20. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko A. Debbie spends $200 to buy her husband dinner at the finest restaurant in Toronto. Consumption and GDP rise by $200. B. Sarah spends $1800 on a new laptop to use in her publishing business. The laptop was built in China. Investment rises by $1800, net exports fall by $1800, GDP is unchanged. 5-20 Copyright © 2014 by Nelson Education Ltd. Active Learning Answers

21. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko C. Jane spends $1200 on a computer to use in her editing business. She got last year’s model on sale for a great price from a local manufacturer. Current GDP and investment do not change because the computer was built last year. D. General Motors builds $500 million worth of cars, but consumers only buy $470 million of them. Consumption rises by $470 million, inventory investment rises by $30 million, and GDP rises by $500 million. 5-21 Copyright © 2014 by Nelson Education Ltd. Active Learning Answers