Economic measures1 (1)

Macro Measurements

Assessing the Economy’s Performance

Who does it? The Bureau of Economic Analysis

What do they do?

1. assess the health of the econ by comparing levels of production at regular intervals

2. Track the long-run course of the economy to see whether it has grown, been constant, or declined

3. Formulate policies that will safeguard and improve the economy’s health

The Gross Domestic Product (GDP)

►The total output of goods and services (aggregate output) for a year- the market value (monetary measure) of the final goods= GDP

►Does not include:

Intermediate goods (no multiple counting)

Financial transactions

Secondhand sales

2009 GDP $14,258.7 Billion

GDP: Spending vs. Income

Expenditure (Spending) Approach Income Approach

The sum of all the money spent in buying goods and services

The sum of the income earned by producing goods and services

The Expenditures Approach GDP= C+Ig+G+Xn

C= Consumer expenditures on durable goods, nondurable goods, and services (households)

**67-70% of GDP = targeting C largest

impact on GDP

Ig= gross domestic investment in capital goods (businesses)

G= government purchases of goods and services

Xn= net exports (exports-imports or X-M)

Other National Accounts (Economic Measures)

►Net Domestic Product (GDP adjusted for consumption/deprecation of physical capital)

►Personal Income (all income received by households- earned or unearned)

►Disposable Income (personal income- personal taxes)

Nominal vs. Real GDP

►Need to make adjustment for changes in the value of money- inflation

►Nominal GDP= not adjusted for inflation

►Real GDP= adjusted for inflation (comparable from year to year)

►Rate of inflation is measured using the GDP price index or the consumer price index (CPI)

GDP Price Index

►Compares the price of all goods and services included in GDP in a given year to the price of the same market basket in a reference year

Price index= (price of good in specific year/price of same good in base year) x 100

Nominal GDP= Real GDP/GDP price index (in hundredths)

Consumer Price Index separate from GDP Price Index, used to measure

inflation

►Market basket (300 goods and services purchased by typical consumer)

►Current market basket is based on spending habits of consumers 1993-1995

►The CPI for the 1982-1984 market basket is used as the base line

CPI= (price of 1993-1995 market basket in any year/price of same market basket in 1982-1984) x 100

Shortcomings of GDP ►Nonmarket transactions

► Leisure (value of free time)

► Improved product quality

►Underground economy

► Environmental effects (gross domestic by-products)

►Composition and distribution of output

► Per capita output (China GDP=$980 billion in 1999 compared to Denmark’s $170 billion, but per capita for China was $780 and $32,030 for Denmark.)

►Noneconomic sources of well being

Economic Growth and Stability

How is growth determined?

►Increase in real GDP over some period of time

►Increase in real GDP per capita over some period of time

Why is small growth significant?

►GDP= large number

►The rule of 70

Sources of Growth

►Increase inputs of resources

►Increase productivity of inputs

GDP= C+Ig+G+Xn

**67-70% of GDP= targeting C largest impact on GDP

Long-run Economic Growth The Business Cycle

Effects of the Business Cycle

►Downturns affect firms producing capital goods and consumer durables most

►Service industries and industries that produce nondurable consumer goods are affected least

Unemployment

Unemployment rate= (unemployed/labor force) x100

►Not included in unemployment rate- those who are unemployable or not looking for a job

► Issues with employment rate= part time employment and discouraged workers

►Types of unemployment

Frictional

Structural

Cyclical

Unemployment

►Full employment= when there is no cyclical unemployment (structural and frictional are unavoidable)

►When rate of unemployment = full employment, we are at the natural rate of unemployment (NRU) and the economy is producing at potential output (5%= NRU)

►NRU= when the number of job seekers = the number of job vacancies

Cost of Unemployment

Economic

►GDP gap (difference between actual GDP and potential GDP)

►Unequal distribution of burdens

Noneconomic

► Loss of skills, family stress, loss of self-respect

► Pressure for political change

► Social unrest

Inflation

►Inflation= rise in the general level of prices (CPI)

►Demand pull inflation= total spending > output (total spending pulls the price up because we demand more than is supplied)

►Cost push inflation= cost of input increases pushes price up (supply shocks= major

cause, usually unexpected)

Inflation

Inflation does not affect everyone the same way. It leads to a redistribution of real income.

►Nominal income= number of $ received as wages, rent, interest, or profit

►Real income= measure of the amount of goods and services nominal income can buy (purchasing power), adjusted for inflation

Real income= nominal income/ price index

Who is hurt by inflation?

►Fixed income receivers

►Savers

►Creditors

Who is unhurt by inflation?

►Flexible income receivers

►Debtors

Effects of anticipated inflation are less severe.

Effects of Inflation on Output

►Cost-push inflation Resource prices production costs price of goods demand output unemployment real income

►Demand-pull inflation Different view points on the benefit of demand-pull

inflation, many argue that some inflation is necessary to drive production

►Hyperinflation- rapid increase in inflation with detrimental effects on employment and real wages, encourages speculative activity