Measuring Economic Performance

National Income Accounting

1

gross domestic product (GDP)

The total market value of all final goods and services produced annually in an economy.

Gross Domestic Product

Why final goods?

GDP includes final goods and servicesA final good is a good sold to the final

user.An intermediate good (ex. hamburger bun

which is put together with a hamburger to be sold as a final product)Intermediate goods are not included to

avoid double counting.

double counting

Counting a good more than once in computing GDP.

What GDP 0mits

Not in GDP –Illegal Goods & Services

Purchasing an illegal substancePurchasing an illegal

service

Not in GDP – Legal Goods & Services–No Record

BabysittingMowing Lawn or Gardening

Not in GDP – Some non-market Goods & Services

Family member cooks, cleans, does laundry

Not in GDP – Used Goods

Used carGarage SaleThrift Store

Not in GDP – Stocks

Purchase of stocks is a transfer of ownership in a company, not the purchase of a good or service.

Not in GDP – Government Transfer Payments

Social Security Checks –Not a good or service being purchased – Government receives no good or service for payment. Paid to retiree no longer producing goods or services.

Difference Between GNP & GDP

GDP vs. GNP

GDP includes goods produced within the U.S., no matter who produces them.

GDP vs. GNP

GNP includes goods produced by U.S. citizens and companies no matter where in the world they are produced.

Measuring Economic Performance

Measuring GDP

2

4 Sectors of the Economy

Household Sector

Business Sector

Government Sector

Foreign Sector

Each sector purchases goods and services (makes expenditures

consumption

Expenditures made by the household sector.

consumption

investment

Expenditures made by the business sector.

government purchases

Expenditures made by the government sector. Government

purchases do not include government transfer payments.

export spending

The amount spent by the residents of other countries for the goods produced in the United States.

Expenditures by the 4 Sectors of the Economy

Household Sector

Business Sector

Government Sector

Foreign Sector

Gov’t purchases

investmentconsumption

export spending

import spending

The amount spent by Americans for foreign-produced goods.

Computing GDP

GDP = C+I+G+E-IM

Is Every Good Produced Sold?

In calculating GDP, the assumption is made that everything produced is sold.

If a car company produces 10,000 cars and 9,000 are sold, it is assumed that the other 1,000 cars are purchased by the company that produces them.

GDP vs. Quality of Life

A higher GDP does not necessarily mean a higher quality of life. There are other factors such as leisure time, pollution, national defense, police protection.

An attempt to consider in these factors is called MEW (Measures of Economic Welfare)

Measuring Economic Performance

Real GDP

3

Wages v. Real Wages

In Chapter 8 we discussed the difference between wages and real wages.

Wages v. Real Wages

Money Wages versus Real WagesWages are the actual payments or

dollar amounts paid for laborReal wages are what you can buy

with the wagesCalculation:

Real wage = Money wage/CPI(CPI = Consumer Price Index)

aaaa

Wages v. Real Wages

gross domestic product (GDP)

The total market value of all final goods and services produced annually in an economy.

Computing GDP

GDP = C+I+G+E-IM

Gross Domestic Product

Gross Domestic Product

What if the number of items produced remain constant, but the price goes up? What happens to GDP?

10 watches at $150 each equals $1,500. Total GDP now equals $221,500. GDP goes up but has production increased?

Real GDP

Gross domestic product (GDP) that has been adjusted for price changes; GDP measured in base-year, or constant prices.

base year

In general, a benchmark year—a year chosen as a point of reference for comparison. When real GDP is computed, the outputs of different years are priced at base-year levels.

Calculating Real GDP

GDP = PCCurrent Year X Qcurrent Year

Real GDP = PCBase Year X Qcurrent Year

Real GDP

We calculate Real GDP to

adjust for inflation.

Measuring Economic Performance

Measuring Price Changes

4

Calculating the Change in a Single Price

Honda Accord

2004 Price: $20,000

2005 Price: $21,500

Percentage Change in

price=

Price in later year -- Price in earlier year

Price in earlier yearX 100

Percentage change in

price=

$21,500 - $20,000

$20,000

X 100 =$1,500

$20,000X 100 = 7.5%

Price Index

Economists compute the general changes in prices rather than the price of just a single item. To do this they first need to calculate a price index.

price index

A measure of the price level, or the average level of prices.

consumer price index (CPI)

The most widely cited price index.

Market Basket

1 gallon milk $2.97

1 loaf of bread $3,29

1 gallon of gas $4.52

Representative group of goods

Calculated by the U.S. Bureau of Labor Statistics

$ $ $

Calculating the CPI

To calculate the Consumer Price Index, the U.S. Bureau of Labor and Statistics calculates the total dollar expenditure on the market basket in the base year and the total dollar expenditure on the market basket in the current year.

Calculating the CPI

Percentage Change in

CPI=

CPI in later year -- CPI in earlier year

CPI in earlier yearX 100

aggregate demand curve

A curve that shows the quantity of goods and services that buyers are willing and able to buy at different price levels.

aggregate supply curve

A curve that shows the quantity of goods and services that producers are willing and able to supply at different price levels.

Which U.S. President earned the most money in office?

The current salary for U.S. President is $400,000 per year.

Abraham Lincoln earned $25,000 per year. Adjusted for inflation = $475,000

The Biggest Box Office Hit of All Time?

Titanic grossed $601 million at the box office. Adjusted in 2000 dollars, gross receipts would have been $640.6 million.

The Biggest Box Office Hit of All Time?

In 1940, the average cost for a movie ticket was 24 cents. Adjusting GWTW gross receipts to 2000 dollars it would be $2.4 billion

The Biggest Box Office Hit of All Time?

Using the same adjusting technique, Disney’s Snow White and the Seven Dwarfs would be No. 2 at $2.25 billion.

The Impact of the Economy on Presidential Elections

If the economy is good, the sitting president will probably be reelected.If the economy is bad, he will probably

not be elected.

“People vote their wallets.”