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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)
ƒ GDP: the market value of all
currently
yp
produced final g
goods
and services within a country in a
given period by all resources
ƒ Circular flow: derived from market
transactions of g
goods and
services between demanders and
suppliers
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11.2
Circular Flow in an
O
Open
Mi
Mixed
d Economy
E
ƒ Mixed economy: both private
sectors ((firms and households))
and public sector (government)
ƒ Open economy: both domestic
and foreign sector
ƒ Closed economy: only a domestic
sector
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11.3
Circular Flow in an
O
Open
Mi
Mixed
d Economy
E
ƒ 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)
ƒ 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
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11.4
Circular Flow in an
O
Open
Mi
Mixed
d Economy
E
ƒ 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
ƒ The terms aggregate
gg g
expenditure,
p
,
output, and income are
interchangeable
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11.5
Managerial Rule of Thumb:
Spending
di
Patterns
ƒ Aggregate spending decisions
influence overall macroeconomic
environment of all firms
ƒ Changes in spending patterns
affect firm's competitive
strategies
g
because they
y alter the
economic environment in which
firms do business
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11.6
National Income
A
Accounting
ti
Systems
S t
ƒ Measure economic activity in real-
world economies
ƒ Produced by the Bureau of
Economic Analysis in the U.S.
Department of Commerce
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11.7
Characteristics of GDP
ƒ Monetary measure of economic
activity
y
ƒ Includes only final goods and
services
ƒ Calculated in dollar/CZK terms
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11.8
Characteristics of GDP
ƒ Includes final, but not
intermediate,, goods
g
and services
ƒ The value added approach is used
(only value added to each stage of
production is counted)
ƒ Includes only those goods and
services currently produced in
that period
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11.9
Characteristics of GDP
ƒ Does
D
nott iinclude
l d underground
d
d
economic activities or transfer
payments,
p
y
, or health status,,
environmental conditions
ƒ 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
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11.10
Characteristics of GDP
ƒ 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
ƒ Business cycle: periodic ups and
downs in overall economic
activity reflected in production,
emplo ment profits,
employment,
profits and prices
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11.11
Characteristics of GDP
ƒ Expansion: rising phase of business
cycle in which direction of economic
indicators turn upward
ƒ Recession: falling phase of
business cycle in which economic
indicators turn downward
ƒ Indicators include business sales
sales,
industrial production,
unemployment rate, nonfarm
employment and personal income
employment,
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11.12
Personal Consumption
E
Expenditures
dit
ƒ Durable goods: commodities that
can be stored for at least three
years
ƒ Nondurable goods: last less than
th
three
years and
d are consumed
d
very quickly
ƒ Services:
S
i
non-commodity
dit items
it
such as utilities, private
education, medical care, etc.
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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
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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
ƒ Business fixed investment:
structures, equipment, and
software that provide capacity to
produce goods and services
ƒ Residential fixed investment: new
construction of privately owned
family
y dwellings
g
ƒ Changes in business inventories:
goods produced
g
p
in a given
g
time but
not sold
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11.16
Government Consumption
E
Expenditures
dit
ƒ Includes federal, state, and local
g
government
purchases
p
of finished
products plus all direct purchases
of resources
ƒ Divided into two categories:
consumption
p
and investment
© 2005 Prentice Hall, Inc.
11.17
Net Export Spending
ƒ 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
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11.18
Real GDP Growth
Figure 11.6
5
1996 2000
1996-2000
4% avg.
4
2001-2003
2% avg.
3
2
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'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
ƒ Relative prices: price of one good in
relation to price of another good
ƒ Absolute price level: measure of
overall level of prices using indices to
measure all
ll prices
i
ƒ Inflation: sustained increase in price
l
level
l
ƒ 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
ƒ 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
ƒ Uses fixed market basket of
goods reflecting a “typical”
consumer
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11.24
Producer Price Index
ƒ Shows rate of price increases at
an earlier stage than the CPI
ƒ Measures prices firms pay for
intermediate goods and services
ƒ Three indices:
• Crude materials
• Intermediate materials
• Finished goods
© 2005 Prentice Hall, Inc.
11.25
Employment and
U
Unemployment
l
t
ƒ Current Population Survey: monthly
survey of a sample of approximately
60 000 households
60,000
ƒ 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
ƒ Employed: people who did any work
for pay
ƒ Unemployed: people who are not
working
© 2005 Prentice Hall, Inc.
11.26
Employment and
U
Unemployment
l
t
ƒ Discouraged workers: not
considered because they
y are not
actively seeking employment as
they believe work is not available
ƒ Natural rate of employment:
minimum level of unemployment
p y
achieved with full usage of
production factors
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11.27
Major Macroeconomic
P li
Policy
Issues
I
ƒ What factors influence the spending
behavior of different sectors in the
economy?
ƒ How do behavior changes in these
sectors influence the level of output
and income in the economy?
ƒ Can policy makers maintain stable
prices, full employment, and adequate
growth over time?
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11.28
Major Macroeconomic
P li
Policy
Issues
I
ƒ 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
ƒ What
Wh t iimpactt do
d these
th
macro
changes have on different firms and
industries?
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11.29
Summary of Key Terms
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
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
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
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
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11.31
Summary of Key Terms
ƒ Equilibrium level of output and
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
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
ƒ Gross investment
ƒ Gross domestic product
ƒ Gross private domestic investment
ƒ
ƒ
ƒ
ƒ
ƒ
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
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
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
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
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
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11.35