Economic Performance

Judging the Economy . . . . . .

Indictators

Leading Predict what the economy will do

CoincidentCurrent status of the economy

LaggingAfter the fact, explains what has happened.

GDP

Gross Domestic ProductFinal Output.

EG Sale of pen included, but not the manufacture of casing or ink.

Manufactured during current year. Used cars or second hand clothes excluded.

National Borders.

GDP Continued

National Borders Includes all production regardless of who

produces it. Toyotas built in U.S. factories.

Excludes items built or financed by Americans outside of the U.S. Coke Plant in Europe.

Year Quarter GDP % 2007 Q4 1.7 2008 Q1 -1.8

Q2 1.3 Q3 -3.7 Q4 -8.9

2009 Q1 -6.7 Q2 -0.7 Q3 1.7 Q4 3.8

2010 Q1 3.9 Q2 3.8 Q3 2.5 Q4 2.3

2011 Q1 0.4 Q2 1.3 Q3 1.8

U. S. GDP Quarterly Data

How to measure GDP

3 Ways1 - Expenditure Approach

Sum of purchases by final users.

2 - Income Approach If final price = all income & costs incurred.

3 - Value-added Approach Total sales - value of intermediate goods.

How to measure GDP

Expenditure Approach to GDP

GDP = C + I + G + ( X - M )C = Personal Consumption Expenditures I = Gross InvestmentG = Government PurchasesX = ExportsM = Imports

Expenditure Method Components

C = Consumption All final products

I = Investments Capital investments Inventory investments

G = Government Purchases Excludes transfer payments

X = Exports M = Imports

Trade surplus is a positive number Trade deficit is a negative number

Other Points of Notes

Inflation

Nominal GDP Not adjusted for inflation.

Real GDP Adjusted for inflation

Nominal vs. Real GDP

Year Nominal Real

2006 $44,572 $37,859

2007 $46,328 $38,369

2008 $46,674 $37,954

Calculating Nominal GDP

Nominal GDP = Sum of TR (P*Q) of all goods = (AP2)*(AQ2)+(BP2)*(BQ2) Nominal Prices * Quantity

Nominal prices are prices from tear of sale.

Calculates size of economy for a period in dollars from that period EG GDP for 2007 in 2007 dollars.

Calculating Real GDP

Real GDP = Sum of TR using original prices with current quanity = (AP1)*(AQ2)+(BP1)*(BQ2) Real Prices * Quantity Real prices are prices from original or base year

Calculates size of economy for a period in dollars from a base period EG GDP for 2007 in 2001 dollars.

Inflation & Deflators

Inflation – Amount that prices rise for the same goods.

Deflator – A measure that adjusts the GDP for inflation. (Nominal GDP / Real GDP) * 100

Example – BBQ GDP

Hot Dogs Hamburgers

Year Price Amount Price Amount

2006 $1 100 $2 50

2007 $2 150 $3 100

2008 $3 200 $4 150

Nominal GDP

Nominal GDP = (P1)*(Q1)+(P2)*(Q2)

Nominal Prices * Quantity

2006 = 1*100+2*50 = $200

2007 = 2*150+3*100 = $600

2008 = 3*200+4*150 = $1,200

Real GDP

Real GDP = (PB)*(Q1)+(PB)*(Q2)

Real (base year) prices * quantity

2006 = 1*100+2*50 = $200

2007 = 1*150+2*100 = $350

2008 = 1*200+2*150 = $500

GDP Deflator

(Nominal GDP)/(Real GDP)*100

2006 = (200/200)*100 = 100

2007 = (600/350)*100 = 171

2008 = (1,200/500)*100 = 240

Other Points of Note

Limitations

Accuracy of informationTimeliness of informationNon-market activitiesUnderground economy

Related Production Measurements

GNP - Gross National ProductNNP - Net National ProductNI - National IncomePI - Personal IncomeDPI - Disposable Personal Income

See hand-out for mathematical relationships.