Measuring the Economy’s PerformanceChapter 13

National Income Accounting • Measurement of the national economy’s performance, dealing

with the overall economy’s output and income

• Five major statistics

Gross Domestic Product (GDP)• Total dollar value of all FINAL goods and services produced in

the nation in a single year

• List some goods and services

• List the top ten countries

Avoid double accounting • Do not count things twice!

Computing GDP• Consumer sector (c)

• Investment sector (I)

• Government sector (G)

• NET EXPORTS (X)

Net Exports• Difference between what the nation sells to other countries

and what it buys from other countries

• This can be negative, and in the USA, it has been recently

• Section 1 Chapter 13 figure & Video

Net domestic product (NDP)• Another way to measure an economy

• The value of the nation’s total output (GDP) minus the total value lost through depreciation on equipment

• Depreciation – loss of value because of wear and tear to durable goods and capital goods

• NDP = Consumption + Government Expenditures + Investment+Exports - Imports - Depreciation

National Income• Total income earned by everyone in the economy

• List the five different sources of NI

Personal Income• Total income that individuals receive before personal taxes are

paid

• Transfer Payments- welfare and other supplementary payments that a state of the federal government makes to individuals - BLS stats

• Transfer payments are added to NI and PI

Disposable personal income (DPI)• Income remaining for people to spend or save after all taxes

have been paid

• Important factor in economy’s well being

Correcting Statistics for Inflation• I will read to you Issues In The News on page 341

• Prolonged rise in the general price level of final goods and services = =

• Purchasing power – the real goods and services that money can buy; determines the value of money

• During inflation, people spend more than they are making, have to take out loans they cannot pay back, and cannot save or invest

• Inflation Video

The opposite of inflation• Deflation – prolonged decline in the general price level of

goods and services

• Why is this such a bad thing? Think about the psychology about falling prices.

• Examples: Housing, cars, debtors • Rich people like it, debtors hate it• Stagflation (Prices up, production down)• Hyper inflation (money supply)

Measures of inflation• Consumer Price Index (CPI) – a statistical measure of the

average of prices of a specific set of goods and services purchased by typical consumers in city areas

• Market basket – representative group of goods and services used to compile the consumer price index

• Market basket is used to measure the CPI

Market Basket• The BLS compiles the CPI monthly

• They start with the base year – year used as a point of comparison for other years in a series of statistics

• (Current year price) - (Base year price) = Inflation

• Usually the base years are from 1982-1984 which the market basket was 100.

Producer Price Index (PPI)• Measure of change in the price over time that US producers

charge for their goods and services

• Real GDP – GDP that is adjusted for inflation to compare years

Business Fluctuations• Business Cycle – Irregular changes in the level of total output

measured by real GDP

Largest fluctuation ever?• October 29, 1929 – Black Tuesday• Call-in loans

Why do business fluctuations? • Innovations

• Gov. Policies

• Wars

• Trade

• Psychology

Indicators that show fluctuations

• Leading – Statistics that point to what will happen in the economy

• Coincident – Economic indicators that usually change at the same time as changes in overall business activity

• Lagging – Indicators that seem to lag behind changes in overall business activity - tell duration of the phases in the cycle

• Book page 358