Chapter 13Chapter 13Measuring the Economy’s PerformanceMeasuring the Economy’s Performance Section 1Section 1 National Income AccountingNational Income Accounting

Section 2Section 2 Correcting Statistics for Correcting Statistics for InflationInflation

Section 3Section 3 Aggregate Demand & SupplyAggregate Demand & Supply

Section 4Section 4 Business FluctuationsBusiness Fluctuations

National Income Accounting National Income Accounting

national income accounting – national income accounting – measurement of the national measurement of the national economy’s performance, dealing with economy’s performance, dealing with the overall economy’s output and the overall economy’s output and incomeincome

National Income AccountingNational Income Accounting

5 major statistics that measure the 5 major statistics that measure the national economynational economy– 1.1. gross domestic product (GDP)gross domestic product (GDP)– 2.2. net domestic product (NDP)net domestic product (NDP)– 3.3. national income (NI)national income (NI)– 4.4. personal income (PI)personal income (PI)– 5.5. disposable personal income (DI)disposable personal income (DI)

Gross Domestic Product (GDP)Gross Domestic Product (GDP)

gross domestic product – total value gross domestic product – total value of all final goods and services of all final goods and services produced in a nation in one yearproduced in a nation in one year

Value is measured in dollars ($9 Value is measured in dollars ($9 trillion in 1999)trillion in 1999)

Counts only final items and new Counts only final items and new items to avoid double counting and items to avoid double counting and transfer of productstransfer of products

Gross Domestic Product (GDP)Gross Domestic Product (GDP) 4 categories for calculating GDP4 categories for calculating GDP

– 1.1. consumer sector (C) – goods & services bought consumer sector (C) – goods & services bought by the consumer for their direct useby the consumer for their direct use

– 2.2. investment sector (I) – business purchases to investment sector (I) – business purchases to produce other goods & keep an inventoryproduce other goods & keep an inventory

– 3.3. government sector (G) – goods & services bought government sector (G) – goods & services bought by federal, state & local governmentsby federal, state & local governments

– 4.4. net exports (X) – difference between exports and net exports (X) – difference between exports and importsimports

GDP is only an estimate and omits areas such as unpaid GDP is only an estimate and omits areas such as unpaid work work

Net Domestic Product (NDP)Net Domestic Product (NDP)

net domestic product – value of the net domestic product – value of the nation’s total output (GDP) minus the nation’s total output (GDP) minus the total value lost through depreciation total value lost through depreciation on equipmenton equipment

depreciation – loss of value because depreciation – loss of value because of wear and tear to durable and of wear and tear to durable and capital goodscapital goods

National Income (NI)National Income (NI)

national income – total income national income – total income earned by everyone in the economyearned by everyone in the economy

IncludesIncludes– wages & salarieswages & salaries– self-employed incomeself-employed income– rental incomerental income– corporate profitscorporate profits– interest on savings & investmentsinterest on savings & investments

Personal Income (PI)Personal Income (PI)

personal income – total income that personal income – total income that individuals receive before personal individuals receive before personal taxes are paidtaxes are paid

transfer payments – welfare & other transfer payments – welfare & other supplementary payments that govt. supplementary payments that govt. makes to individualsmakes to individuals

Disposable Personal Income (DI)Disposable Personal Income (DI)

disposable personal income – income disposable personal income – income people have after taxes and Social people have after taxes and Social Security paymentsSecurity payments

Measures the actual amount of Measures the actual amount of money people have available to save money people have available to save and spend.and spend.

Section 2 – Correcting Statistics for InflationSection 2 – Correcting Statistics for Inflation

Unpaid work, depreciation & inflation Unpaid work, depreciation & inflation make GDP inaccuratemake GDP inaccurate

inflation – a prolonged rise in the inflation – a prolonged rise in the general price level of goods and general price level of goods and servicesservices

Purchasing Power of MoneyPurchasing Power of Money

purchasing power – real goods & purchasing power – real goods & services that money can buyservices that money can buy

Dollar cannot buy the same amount Dollar cannot buy the same amount as it did before inflationas it did before inflation

Price may rise but output doesn’t Price may rise but output doesn’t changechange

deflation – prolonged decline in deflation – prolonged decline in general price level – rarely occursgeneral price level – rarely occurs

Measures of InflationMeasures of Inflation

3 Measures of Inflation3 Measures of Inflation– 1.1. consumer price index (CPI)consumer price index (CPI)– 2.2. producer price index (PPI)producer price index (PPI)– 3.3. implicit GDP price deflatorimplicit GDP price deflator

Consumer Price Index (CPI)Consumer Price Index (CPI) CPI – measure of the change in price over CPI – measure of the change in price over

time of a specific group of goods and time of a specific group of goods and services used by the average householdservices used by the average household

market basket – representative group of market basket – representative group of goods & services used to compile the CPIgoods & services used to compile the CPI

90,000 items including- food, clothing, 90,000 items including- food, clothing, housing, medical, transportation, housing, medical, transportation, education & recreationeducation & recreation

Compiled by Bureau of Labor Statistics Compiled by Bureau of Labor Statistics (BLS)(BLS)

Work from a base year where index is set Work from a base year where index is set at 100at 100

Producer Price Index (PPI)Producer Price Index (PPI)

PPI – measure of the change in price PPI – measure of the change in price over time that US producers charge over time that US producers charge for their goods & servicesfor their goods & services

Ex. – mining, manufacturing & Ex. – mining, manufacturing & agricultureagriculture

Index that usually rises before CPI- Index that usually rises before CPI- ex. apples, crude oil, steel & plywoodex. apples, crude oil, steel & plywood

GDP Price DeflatorGDP Price Deflator

GDP price deflator – price index that GDP price deflator – price index that removes the effect of inflation from removes the effect of inflation from GDP so that the overall economy in GDP so that the overall economy in one year can be compared to one year can be compared to anotheranother

Real GDP is found when price Real GDP is found when price deflator is applieddeflator is applied

Section 3 – Aggregate Demand & SupplySection 3 – Aggregate Demand & Supply

Economists are interested in the Economists are interested in the demand by all consumers for all demand by all consumers for all goods and services as well as the goods and services as well as the supply by all producers for goods and supply by all producers for goods and servicesservices

aggregates – summation of all aggregates – summation of all individual parts of the economyindividual parts of the economy

Aggregate DemandAggregate Demand aggregate demand – total quantity of goods and aggregate demand – total quantity of goods and

services in the entire economy that all citizens services in the entire economy that all citizens will demand at any single timewill demand at any single time

Aggregate demand is related to a price level Aggregate demand is related to a price level instead of individual prices due to the millions of instead of individual prices due to the millions of different prices for products.different prices for products.

Aggregate demand curve – graphed line showing Aggregate demand curve – graphed line showing the relationship between the aggregate quantity the relationship between the aggregate quantity demanded and the average of all prices.demanded and the average of all prices.

Inverse relationship as average price level goes Inverse relationship as average price level goes down, more is demandeddown, more is demanded

Aggregate SupplyAggregate Supply aggregate supply – real domestic output of aggregate supply – real domestic output of

producers based on the rise and fall of the producers based on the rise and fall of the price levelprice level

If the average price level goes up, If the average price level goes up, producers will be willing to produce more producers will be willing to produce more to make more profitto make more profit

The reverse is true if the price falls.The reverse is true if the price falls. aggregate supply curve – a graphed line aggregate supply curve – a graphed line

showing the relationship between the showing the relationship between the aggregate quantity supplied and the aggregate quantity supplied and the average of all prices adjusted for inflation average of all prices adjusted for inflation

Section 4 – Business FluctutationsSection 4 – Business Fluctutations

business fluctuations – ups and downs in business fluctuations – ups and downs in an economyan economy

business cycle – irregular changes in the business cycle – irregular changes in the level of total output measured by real GDPlevel of total output measured by real GDP

See Figure 13.11 on page 361See Figure 13.11 on page 361 peak/boom – a period of prosperity where peak/boom – a period of prosperity where

economic activity is at its highest pointeconomic activity is at its highest point contraction – part of the business cycle contraction – part of the business cycle

during which economic activity is slowing during which economic activity is slowing downdown

Business Fluctuations Business Fluctuations contraction – part of the business cycle contraction – part of the business cycle

during which economic activity is slowing during which economic activity is slowing downdown

recession – part of the business cycle in recession – part of the business cycle in which the nation’s output (real GDP) does which the nation’s output (real GDP) does not grow for at least six monthsnot grow for at least six months

recession – factories cut production, recession – factories cut production, layoffs, consumers cut back purchases, layoffs, consumers cut back purchases, fewer businesses start, & businesses failfewer businesses start, & businesses fail

depression – major slowdown of economic depression – major slowdown of economic activityactivity

Business Fluctuations Business Fluctuations

trough – lowest part of the business trough – lowest part of the business cycle in which the downward spiral of cycle in which the downward spiral of the economy levels offthe economy levels off

expansion/recovery – part of the expansion/recovery – part of the business cycle in which economic business cycle in which economic activity slowly increasesactivity slowly increases