Chapter 13 Measuring the Economy’s Performance

Why do we need to know how the economy is doing ?- To ensure a healthy economy and high standard of living- To make adjustments as needed

What do we measure?- The goods and services produced- Income people have to spend

The Big 5 Statistical Measures

GDP = consumption + investment + government spending + (exports − imports)

GDP – Total value of Goods and Services produced annually.

13.3 Trillion

World = 60.6TUSA = 13.3TEuropean Union = 13.0T

GDP Comparisons

Country Population GDP (Billions) Per Capita GDP

China (Mainland) 1,296,200,000 $ 2,225 $ 1,716

China (Hong Kong) 6,900,000 $ 178 $ 25,757

France 60,400,000 $ 2,106 $ 34,865

Germany 82,500,000 $ 2,797 $ 33,907

United States 293,700,000 $ 12,486 $ 42,512

GDP Comparisons

Problems with Using GDP

1. Economist must make calculations

2. Problem of double countingComponents vs. Finished Products

Memory chips – NoComputers – Yes

3. Used products can’t be counted in GDPSale of a used carPurchase of a used appliance

4. Sale of goods and services that go unreportedTipsBlack market goods

Disposable Personal Income (DI)

Income remaining after taxes are paid

Factoring for Inflation

Inflation – Prolonged rise in cost of goods and services. Deflation – Prolonged decrease in cost of goods and services.

Purchasing Power – Amount of goods and services your money will buy.

Consumer Price Index (CPI)Price changes in a basket of goods. 90,000+ itemsItems changed every 10 years. Base year 1982-1985

1.57 - $1.50 = .075.075/150 = 5%

Producer Price Index (PPI) Changes in price producers charge to consumers.Mining, Manufacturing and AgricultureEarly indicator of Consumer inflation

GDP Price Deflator Removes effects of inflation from GDP = Real GDP1996 is base year.

$9,963.1 / 106.92 x 100 = $9,318.3

Business Fluctuations

Boom – Prosperity New businesses open Current factories producing at full capacity Jobs easy to secure

Contraction – Slowing of EconomyFlat or declining growth

Recession – At least two quarters of no growth

Depression – Prolonged recessionMillions out of workNumerous business failures

The Business Cycle

US Business Cycle History

25% Unemployment