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Economics for Managers by y Paul Farnham Chapter 11: Measuring Macroeconomic Activity © 2005 Prentice Hall, Inc. 11.1 Measuring Gross D Domestic ti Product P d t (GDP) GDP: the market value of all currently yp produced final g goods and services within a country in a given period by all resources Circular flow: derived from market transactions of g goods and services between demanders and suppliers © 2005 Prentice Hall, Inc. 11.2 Circular Flow in an O Open Mi Mixed d Economy E Mixed economy: both private sectors ((firms and households)) and public sector (government) Open economy: both domestic and foreign sector Closed economy: only a domestic sector © 2005 Prentice Hall, Inc. 11.3 Circular Flow in an O Open Mi Mixed d Economy E Expenditure or output approach: sum of consumption, investment, government, and net expenditure, with export spending minus import spending (E = C+I+G+M-X) C+I+G+M X) Aggregate expenditure: sum of C, I, G, and X on total amo G amount nt of real output produced in an economy in a given time period © 2005 Prentice Hall, Inc. 11.4 Circular Flow in an O Open Mi Mixed d Economy E Earnings or income approach: measures overall economic activity by adding earnings or income generated by selling the output t t produced d d in i the th economy The terms aggregate gg g expenditure, p , output, and income are interchangeable © 2005 Prentice Hall, Inc. 11.5 Managerial Rule of Thumb: Spending di Patterns Aggregate spending decisions influence overall macroeconomic environment of all firms Changes in spending patterns affect firm's competitive strategies g because they y alter the economic environment in which firms do business © 2005 Prentice Hall, Inc. 11.6 National Income A Accounting ti Systems S t Measure economic activity in real- world economies Produced by the Bureau of Economic Analysis in the U.S. Department of Commerce © 2005 Prentice Hall, Inc. 11.7 Characteristics of GDP Monetary measure of economic activity y Includes only final goods and services Calculated in dollar/CZK terms © 2005 Prentice Hall, Inc. 11.8 Characteristics of GDP Includes final, but not intermediate,, goods g and services The value added approach is used (only value added to each stage of production is counted) Includes only those goods and services currently produced in that period © 2005 Prentice Hall, Inc. 11.9 Characteristics of GDP Does D nott iinclude l d underground d d economic activities or transfer payments, p y , or health status,, environmental conditions GDP can increase because of • Price of goods and services while quantities are held constant • Quantities of goods and services increase while the prices are held constant • Both prices and quantities increase © 2005 Prentice Hall, Inc. 11.10 Characteristics of GDP GDP deflator: measure of price changes in the economy that compares the th price i off each h year’s ’ output of goods and services to the price of that same output in a base year Business cycle: periodic ups and downs in overall economic activity reflected in production, emplo ment profits, employment, profits and prices © 2005 Prentice Hall, Inc. 11.11 Characteristics of GDP Expansion: rising phase of business cycle in which direction of economic indicators turn upward Recession: falling phase of business cycle in which economic indicators turn downward Indicators include business sales sales, industrial production, unemployment rate, nonfarm employment and personal income employment, © 2005 Prentice Hall, Inc. 11.12 Personal Consumption E Expenditures dit Durable goods: commodities that can be stored for at least three years Nondurable goods: last less than th three years and d are consumed d very quickly Services: S i non-commodity dit items it such as utilities, private education, medical care, etc. © 2005 Prentice Hall, Inc. 11.13 Personal Consumption E Expenditures dit Figure 11.5 Durable Goods, Goods Nondurable Goods, Goods and Services Share 1959 1996 12% 13% 40% 47% Durables Nondurables Services © 2005 Prentice Hall, Inc. 30% 58% Durables Nondurables Services 11.14 Investment Expenditures Gross private domestic investment spending p g includes: • Business or nonresidential fixed investment • Residential fixed investment • Changes Ch in i business b i inventories i t i produced but not sold in a given year © 2005 Prentice Hall, Inc. 11.15 Investment Expenditures Business fixed investment: structures, equipment, and software that provide capacity to produce goods and services Residential fixed investment: new construction of privately owned family y dwellings g Changes in business inventories: goods produced g p in a given g time but not sold © 2005 Prentice Hall, Inc. 11.16 Government Consumption E Expenditures dit Includes federal, state, and local g government purchases p of finished products plus all direct purchases of resources Divided into two categories: consumption p and investment © 2005 Prentice Hall, Inc. 11.17 Net Export Spending Difference between spending by other countries on domestically produced d d goods d and d services i and d spending by domestic residents on goods and services produced in the rest of the world © 2005 Prentice Hall, Inc. 11.18 Real GDP Growth Figure 11.6 5 1996 2000 1996-2000 4% avg. 4 2001-2003 2% avg. 3 2 © 2005 Prentice Hall, Inc. '03 '02 '01 '00 '99 '98 '97 0 '96 1 11.19 Income or E Earnings i Approach A h National income consists of: • Compensation of employees • Proprietors’ income • Rental income • Co Corporate po ate profits p o ts • Net interest © 2005 Prentice Hall, Inc. 11.20 Personal Income or E Earnings i Approach A h Di Disposable bl income i Yd = Y - Tp where Yd = disposable income Y = personal income Tp= personal taxes Savings Yd = C + S where Yd = disposable income C = personal consumption expenditure S = saving © 2005 Prentice Hall, Inc. 11.21 Price Level Measures Relative prices: price of one good in relation to price of another good Absolute price level: measure of overall level of prices using indices to measure all ll prices i Inflation: sustained increase in price l level l Deflation: sustained decrease in price level © 2005 Prentice Hall, Inc. 11.22 Annual Percent Change i the in th GDP Deflator D fl t Figure 11.8 3 1996-2000 1.7% avg. 2001-2003 1.8% avg. 2 1 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 0 © 2005 Prentice Hall, Inc. 11.23 Consumer Price Index Measures combined price consumers p pay y for goods g in a given period relative to combined price of identical goods in a base period i d Uses fixed market basket of goods reflecting a “typical” consumer © 2005 Prentice Hall, Inc. 11.24 Producer Price Index Shows rate of price increases at an earlier stage than the CPI Measures prices firms pay for intermediate goods and services Three indices: • Crude materials • Intermediate materials • Finished goods © 2005 Prentice Hall, Inc. 11.25 Employment and U Unemployment l t Current Population Survey: monthly survey of a sample of approximately 60 000 households 60,000 Labor force: people over 15 years old who o are a e working o g or o actively act e y see seeking g employment Employed: people who did any work for pay Unemployed: people who are not working © 2005 Prentice Hall, Inc. 11.26 Employment and U Unemployment l t Discouraged workers: not considered because they y are not actively seeking employment as they believe work is not available Natural rate of employment: minimum level of unemployment p y achieved with full usage of production factors © 2005 Prentice Hall, Inc. 11.27 Major Macroeconomic P li Policy Issues I What factors influence the spending behavior of different sectors in the economy? How do behavior changes in these sectors influence the level of output and income in the economy? Can policy makers maintain stable prices, full employment, and adequate growth over time? © 2005 Prentice Hall, Inc. 11.28 Major Macroeconomic P li Policy Issues I How H d do fiscal, fi l monetary, t and d balance b l of payment policies influence the economy? • Fiscal policy • Monetary policy • Balance of payments What Wh t iimpactt do d these th macro changes have on different firms and industries? © 2005 Prentice Hall, Inc. 11.29 Summary of Key Terms Absolute price level Aggregate expenditure B l Balance off payments iissues Business cycles B i Business fixed fi d investment i t t Capital flows Changes in business inventories Circular flow Compensation of employees © 2005 Prentice Hall, Inc. 11.30 Summary of Key Terms Consumer Price Index Core rate of inflation C Corporate profits fi Currency exchange rate D fl ti Deflation Discouraged workers Disposable income Durable goods Earnings or income approach © 2005 Prentice Hall, Inc. 11.31 Summary of Key Terms Equilibrium level of output and income Expenditure or output approach Export spending Final goods and services Fiscal policy GDP deflator Government consumption and expenditures dit © 2005 Prentice Hall, Inc. 11.32 Summary of Key Terms Gross investment Gross domestic product Gross private domestic investment spending I Import t spending di Imputed value Inflation and recession Intermediate goods and services Labor force © 2005 Prentice Hall, Inc. 11.33 Summary of Key Terms Macroeconomics Mixed economy M Monetary policy li National income N t Natural l rate t off unemployment l t Net export spending Net interest Nominal GDP and real GDP Nondurable goods © 2005 Prentice Hall, Inc. 11.34 Summary of Key Terms Open economy Personal consumption expenditures P Personal l income i Producer Price Index R id ti l fixed Residential fi d investment i t t Saving Trade balance Transfer payments Underground economy © 2005 Prentice Hall, Inc. 11.35