Measuring the Economy’s Performance

GDP – Gross Domestic ProductDefinition: total dollar value of all final goods and services produced in a nation in a single year.

Must be:Produced within the country’s bordersMade available for purchase in this year

Expressed in dollar terms

In 2009, the US GDP totaled more than $14.2 trillion.

GDP continued…What does final mean?

Must avoid double countingExample: you don’t count the memory chips and motherboards if they are installed in computers for sale.

You count the computer.If sold separately (not in a comp.) then it’s also counted

Only new items are counted

What’s counted in GDP?C + I + G + X = GDP

C=Consumer sector -

I=Investment sector

G=Government sector

X=Net exports

Consumer Sector - DetailsDurable goods are items such as cars, furniture, and appliances, which are used for several years (9%).

Non-durable goods are items such as food, clothing, and disposable products, which are used for only a short time period (21%).

Services include rent paid on apartments (or estimated values for owner-occupied housing), airplane tickets, legal and medical advice or treatment, electricity and other utilities. Services are the fastest growing part of consumption spending (41%).

Investment - DetailsNon-residential fixed investment is the creation of tools and equipment to use in the production of other goods and services. Examples are the building of factories, the production of new machines, and the manufacturing of computers for business use (10%).

Residential investment is the building of a new homes or apartments (5%).

Inventory changes consist of changes in the level of stocks of goods necessary for production and finished goods ready to be sold (0%).

Government - DetailsConsists of federal, state, and local government spending on goods and services such as research, roads, defense, schools, and police and fire departments. (19%)

Does not include transfer payments such as Social Security, unemployment compensation, and welfare payments, which do not represent production of goods and services.

Federal defense spending now accounts for approximately (5%).

State and local spending on goods and services accounts for (12%).

US GDP – Yearly changes

Measurements of Income

National IncomePersonal IncomeDisposable Personal Income

Elements of National Income

Disposable Personal IncomeIncome people have left after taxes are paid

Important because it actually measures the amount of money people have to spend and save

InflationDefinition: prolonged rise in the general price level of final goods and services

Purchasing power of the dollar decreases

In other words, a dollar can not buy the same amount as it did before the inflation occurred.

Learn economic indicators & business cycle

Get out yesterday’s notes too

Measure of Inflation…Consumer Price Index – statistical measure of the average of prices of a specified set of goods and services purchased by typical consumers in city areas.

Bell Ringer #7

DeflationProlonged decline in the general price level of goods and services.

Rarely happens during modern times

Example – If a food item was $1 in the base year what was the average price of the item in 2005.

Producer Price Index (PPI)Measures the changes in prices that producers charge for their goods and services

PPI usually increases before CPI since most of time the time the increased cost is passed to consumers from the producer.

GDP Price DeflatorEconomists use this to remove the effects of inflation so the overall economy of one year can be compared to the overall economy of another year.

When the price deflator is applied to GDP the new figure is referred to real GDP.

Nominal & Real GDPNominal GDP – Also called current GDPReal GDP – has been adjusted for inflation using the GDP deflator.

Aggregate Supply & DemandAggregate Demand – is the quantity of goods demanded by an entire economy

Aggregate Supply – is the quantity of goods supplied by an entire economy

Aggregate Demand - Graphed

Aggregate Supply - Graphed

Business Cycle – Changes in the level of total output measured by real GDPParts

Peak/boom – level of economic activity is at it highest

Contraction – occurs when economic activity is slowing down

Trough – Point where downward spiral of economy levels off

Expansion/recovery – occurs when economic activity slowly rises

Recession – point in which the real GDP declines for at least 6 months

Depression - major slowdown in economic activity

Business Cycle

Business Cycle – Historical view

At what point was U.S. Business activity contracting most severely?

At what point did U.S. Business activity reach its highest peak?

On average about how much time passes between large drops? Large peaks?

Unemployment RateDefinition – The percentage of the population that is without jobs but actively seeking employment

When high is a a sign of a poor economy.

Maintaining a low unemployment rate is a major goal in stabilizing the economy.

FULL Employment – occurs when the unemployment rate is around 4 – 6%.

4 types of UnemploymentCyclical – unemployment caused by fluctuations in the business cycleExample: People all over the country are losing their jobs in many types of industries

Structural – Caused by changes in the economic systemExample: replaced by machines, new industries & technologies

4 types con’tSeasonal – caused by changes in weather or seasonsExample: Life guards, farm workers and snow removal

Frictional – temporary unemployment; between jobs caused by layoffs, firings, search for new job or retrainingExample: Always exists due to people changing jobs, moving and relocating.