Unit 4: Economic Performance Indicators
UNIT 4: ECONOMIC PERFORMANCE INDICATORS
CH. 14 & 16
TEST DATE:______
National Income Accounting- a system of statistics and accounts that keep track of production, consumption, saving, and investment
*Most important measure of overall economic performance is Gross Domestic Product (GDP).
GDP- dollar amount of all final goods and services produced within a country’s national boarders (regardless of who owns the resources) in one year.
-Measured by totals of:
goods
services
structures (residential housing, apartments, commercial buildings)
*Because we use methods of sampling and surveys, the figures are only estimates
Not Included in GDP
intermediate products- products used in making other products
second hand/used
do-it-yourself items/non-market activities
products produced outside boarders (EX. A Japanese owned automobile manufactory inside of US is counted, but a US owned plant in Mexico is not counted)
Limitations with GDP:
reporting delays
composition of output
quality of life
illegal activities/underground economy
Uses of GDP
measure of Economic performance (now)
compare of growth over time
compare US economy with other countries
tool for policy makers
5 Measures of Income:
GDP measures output
GNP measures input
Gross National Product (GNP)- largest measure of an economy’s total income. The dollar value of all final goods, services, and structure produced in a year with labor and property supplied by US residents.
GDP + all payments that Americans received from
outside US
all payments made to foreign-owned resources in
US
______= GNP
GNP-DEP = NNP
NNP- INDIRECT BUSINESS TAX = NI
NI- (undistributed corporation profits-corporation income
tax- social security + trans.) = PI
PI- PERSONAL TAX = DPI
NET NATIONAL PRODUCT
-National Income- ex. of indirect business taxes are excise tax, property tax, licensing fees, custom duties, sales tax
- Personal Income- total amount of income going to consumers before tax. Undistributed Corporate profits are retained earnings.
transfer payments are social security, Medicaid, unemployment insurance
Disposable Personal Income- reflects the amount of money consumers has available to spend
Four Groups With Economic Activity
goods and services purchased by consumer (C)
Nondurable goods- goods that are used up or wear out (ex.gas, clothing, food)
Durable goods- goods that last longer (ex. Cars)
goods and services purchased by business or industry (I)
Private investment- amount spent on capital goods (ex. New tools, factories)
goods and services purchased by government (Gt)
National defense- State (highways, patrol)
Local (schools, fire department)
exports of goods and services (X)
Net export- difference between value of goods and services foreign countries buy from us-what they sell to us
Balance of trade- (favorable if we export more than we import)-added to GNP
-if unfavorable balance of trade, you subtract from GNP
GNP = C + I +G + X
GDP AND CHANGES IN PRICE LEVEL
Inflation- prices increase, the value of the dollar is low
Deflation- prices decrease, the value of the dollar is high
To reduce distortion, economists construct a price index. You need a base year and a ‘market basket’ of goods.
consumer price index (CPI)- most widely used measure of inflation
-cost of living index
-measures changes in general prices of a fixed "market basket" of goods and services (90,000 items in 364 catesones)
-to construct CPI compare current prices to base year
-compiled by Bureau of Labor Statistics (BLS) monthly
producer price index (PPI)-base year is 1982
-raw materials (iron ore)
-intermediate goods (steel)
-final goods (car)
-also PPI is used for major product groups (ex. Machinery, chemicals, farm products)
implicit GDP deflator- shows average level of prices for all goods and services in economy
computed quarterly
base year is 1992
Real vs. Current GDP
-When GDP is not adjusted for inflation it is called:
Current GDP
Nominal GDP
GDP in constant dollars
GDP in chained dollars
-When GDP is adjusted for inflation it is called:
Real GDP
GDP in constant dollars
GDP in chained dollars
Real GDP = GDP in current dollars X 100
GDP deflator
CHAPTER 15: BUSINESS CYCLES AND FLUCUATIONS
BUSINESS CYCLES
Peak- period of general prosperity, demand is great, unemployment is low
Contraction/recession- slowdown marked by declining sales, decrease in GNP, increase in unemployment
a 6 month decline in GNP is called recession
Trough (depression)- low point of cycle, increase in unemployment
Expansion/recovery- GNP begins to rise along with unemployment, business investment looks optimistic
Historic Economic Background in United States
1920’s-Roaring 20’s (Boom)-Peak
1930’s- Bad Investments, poor economic policies, depression
1940’s-WWII brought United States out of depression
1950’s-GNP continued to rise, prosperity and inflation (rise in prices)
1960’s- most commonly associated with JFK and Johnson; prosperity developed through two different means:
tax policy to encourage business investment
big tax cut-Keynesian Economics inflation problem by end of decade
1970’s- (Carter) stagflation- inflation and economic economy doing poorly
inflation rate as high as 13%
1980’s- started with high inflation, slow growth but by mid 80’s OPEC fell apart. Inflation rates dropped.
1990’s- Major Economic Problems
large federal budget deficit
slow growth of productivity
international trade deficit
Balance of trade- favorable if we export more than we import
Change in Business Cycle
Capital Expenditures
Inventory Adjustments
Innovation and limitation
Monetary factors
External Shocks (world events, stock market)
PREDICTING BUSINESS CYCLES
Economic models- macroeconomic model that uses algebraic equations to describe how economy behaves
Ex. GDP = C+I+G+(X-M)
ECONOMIC FORECASTS- predictions/guesses made by the Federal Government, universities, large business firms (actually everyone has their own idea, these just publish them)
-Helpful business decisions
Lead indicators- signal economic activity
business failures
average number of hours worked
residential building contracts
orders for durable goods
Lag Indicators- follow changes in cycle
consumer installment credit
retail store sales
personal income
manufacturer’s inventories
bank interest rates on business loans
Ex. Store sales down, personal income drops, manufacturers decrease inventory to match decrease sales, companies borrow less money
MEASURING UNEMPLOYMENT
Unemployed- people available for work who made a specific effort to find a job. Also unemployed if work in family business without pay for less than 15 hours of work.
*unemployment rate- 50,000- 55,000 households surveyed by BLS-does not include:
-part timers (considered employed)
-under 16 and over 65
-disabled
-not actively seeking, discouraged (labor force dropouts)
Unemployed, Unemployed, and Not in Labor Force are Survey Categories
Types of Unemployment
fictional-temporary loss of work- "between jobs"
structural-mismatch between job skills needed and worker skills-worst kind of unemployment to try to fix, it requires retraining people
cyclical-due to changes in business cycle (may go 3-5 years)
seasonal- (every year)- holidays, fruit pickers, roofers in winter
technological unemployment- lose job to automation
*Full Employment is unobtainable-Economists generally agree a 4% unemployment rate is full employment
INFLATION
Degrees of Inflation
creeping inflation- 1-3% a year
galloping inflation- as high as 300%
hyperinflation- 500%, last stage before monetary collapse
Types of Inflation-
demand-pull- inflation that results from an increase in demand (ex. Ticket scalpers)
cost push- inflation that results from an increase in the costs of factors of production (land, labor, capital, technology)
structural inflation (demand shift)- results from changes in demand (ex. Metal to plastic containers)
excessive monetary growth
Consequences of Inflation
Purchasing Power- amount of goods and services that your money will buy
Real Income- income expressed in terms of purchasing power
- price index (used it to tell if your real income rose) is the comparison of the general level of prices in a given year with price levels at an earlier time
*Inflation reduces (hurts) value of savings accounts and bonds
*Inflation hurts those on fixed incomes
*Inflation may hurt salaried employees if wages don’t increase as fast as rate of inflation
COLA (Cost Of Living Adjustments)-an automatic increase in wages based on changes in the cost of living