What do the following have in common?

• They are all forecasting something!

Bracketology

The Weather Channel

Wall Street

Brainstorm 3 predictions about YOUR economic future:

Things to consider….your skills, education, job possibilities, and future living conditions…..BE SPECIFIC!

Measuring our Nation’s output - GDP

•GDP (Gross Domestic Product) is the end result and it is the most important measure of a how a country is performing.

• It is the total amount of goods and services produced in a country in a given year.

•GDP per capita is average salary for a country.

So what does it really mean?

If GDP is up, then the economy is strong and people are HAPPY

If GDP is down, then the economy is weaker and people are SAD

GDP over GNPGDP represents total production WITHIN(domestic) a nation’s borders…..so a US company that has a factory in Spain does not count for our GDP… that is GNP (Gross National Product)

--but a Spanish company in the US would count toward our GDP!

GNP calculates total production by US labor (including a US company abroad)

Therefore, most modern economists prefer GDP over GNP because GDP only measures a nation’s production within its geographic borders.

Components of GDP1. Measurement•Personal consumption expenditures [C] + gross investment [I] +gov’ t purchases of goods and services [G] + exports – imports [X-M] = GDP

This is the formula to calculate GDP….C + I + G + [X-M] = GDP

2. Sampling and Survey Method•Gov’t uses estimates that are compiled in surveys to compute GDP….Although not perfect, the figures are reasonably complete

3. Intermediate Products•These are products that are used to make other products….they are not counted twice

**Sales of used goods are NOT included in GDP

Factors that reduce reliability

1.Reporting Delays•So much data to process…it is done quarterly (every 3 months)

• ….so a gap exists between actual GDP and reported GDP

2.Composition Output•What are we making? Schools vs. nuclear warheads…but both count

3. Quality of Life•5,000 homes may be built but where and cost?

4.Exclusion of Nonmarket Activities•Lawn mowing business that is paid under the table

5. Illegal Activities•Gambling, prostitution, drugs, gun running…….all lucrative, all illegal!

What is inaccurate about GDP?

•Major problem with GDP : distortions because of inflation (inflation can make output appear to grow without actually doing so)•Price index (indices) are used to reduce distortion of inflation

Consumer Price Index (CPI) – a measure of inflation•The gov’t measures inflation via the CPI•Reports on price changes for about 90,000 items in 364 categories•Prices for goods/services currently sampled is taken from 85 geographically distributed areas around the country•The CPI is compiled monthly by Bureau of Labor Statistics•They look at a market basket (a fixed list of commonly used items used to track inflation)

Calculating CPI•The gov’t looks at a market basket (a fixed list of commonly used items used to track inflation). We are going to use Thanksgiving Dinner as an example.

Market Basket for current yr Market Basket for base year

CPI= x 100

Market Basket item

1998

16 lb turkey14 oz package of stuffing

$13.71$2.36

1 gallon of milk3lb of sweet potatoes

$2.63$2.10

12 oz package of rolls8 oz carton whipping cream

$1.42$1.10

1 lb of celery/carrots30oz pumpkin pie mix

$0.74$1.58

12 oz package cranberriesPackage of 2 nine inch pie shells

$2.00$1.37

16 oz package of frozen green peasMisc items (coffee, other ingred.)

$1.05$3.04

TOTAL cost of market basket

$33.09

Base year = $28.74 for 12 Thanksgiving Dinner items in 1986

Figure these out! Market Basket for current yr

Market Basket for base year

1. What is the CPI for 1998? ___________2. Did inflation or deflation occur for the price of Thanksgiving meal

between 1986 and 1998?3. What is the CPI for 2000 if the market basket is $32.37?4. Did inflation or deflation occur between 1998 and 2000? 5. What is the CPI for 2002 if the market basket is $34.56?6. What is the CPI for 2004 if the market basket is $35.68?7. What is the CPI for 2006 if the market basket is $38.10?8. Did inflation or deflation occur between 2000 and 2006?

CPI= x 100

Current vs. Real GDP1.Current/Nominal GDP

not adjusted for inflation….it is measure in current dollars

2.Real GDPafter adjustments for inflation. You will see this on the final…….Real

income is measured in terms of constant dollars (at a fixed rate)

Ch 16 INFLATION•Definition: rise in general price level…negative effects on economy…tends to rise near end of EXPANSION

•Three Degrees of Inflation:1.Creeping – range of 1-3%/yr2.Galloping – range of 100-300%/yr (form Soviet bloc countries…early 1990’s)

3.Hyperinflation- 500%/yr (former Soviet Union)

5 possible explanations for Inflation1.Demand Pull – as demand continues to increase, price of goods is “pulled” even higher2.Gov deficit – inflation is blamed on federal deficit3.Cost-push – increased production costs “push” producers to raise prices even if demand hasn’t increased4.Wage price spiral – no one is to blame…it is a self perpetuating spiral that is tough to stop5.Excessive monetary growth – money supply grows faster than real GDP