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:



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


______= GNP



NI- (undistributed corporation profits-corporation income

tax- social security + trans.) = PI



-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


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



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)


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


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


-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


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