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Download UNIT 6 NOTES Economic Performance Aggregate Income • Gross
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UNIT 6 NOTES Economic Performance • • • Aggregate Income Gross Domestic Product (GDP)—the total amount of goods produced and the total amount of payments to land, labor, capital and entrepreneurship, including the production of foreign owned goods within the US but NOT income from US-‐owned resources outside the US. This is the best tool to use to analyze price changes in the market. GDP can be used to determine five different income measures: Gross National Product (GNP), net national product, national income, personal income and disposable personal income. Employee wages + net interest + rental income + corporate profits -‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ National Income + indirect business taxes and miscellaneous items -‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ Net National Product - income received from other countries + income paid to other countries + depreciation --‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ Gross Domestic Product • • • • • Gross National Product (GNP)—the total dollar value of all goods and services produced by American labor and property regardless of where it’s produced within a given year. o This does NOT include output from foreigners working within the US. Net National Product—is the GNP minus depreciation and capital deterioration. National income—the net national product minus all but corporate profit taxes. Personal income—the amount of money consumers take in before taxes. Disposable personal income—personal income left over after taxes. Gross National Product -‐ depreciation and capital deterioration -‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ Net National Product -‐ all but corporate profit taxes -‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ National Income Personal Income - taxes -‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ Disposable Personal Income • • • • • • • • • • • Constructing a Price Index GDP figures can be distorted by inflation. To reduce these distortions, economics use a price index. Price Index—a statistical measure of how prices have changed over time. To construct a price index, a base year is selected that will be used to compare other years by. Then a market basket is determined. Base Year—the year selected to be used in comparison with other years. Market Basket—a collection of goods and services that will be compared year-‐to-‐year. 2011 2012 2013 2014 Eggs Eggs Eggs Eggs Coffee Coffee Coffee Coffee Oil Change Oil Change Oil Change Oil Change Carpet Carpet Carpet Carpet Light Bulbs Light Bulbs Light Bulbs Light Bulbs -‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ -‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ -‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ -‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ 450.00 468.50 489.10 515.48 100% 104.1% 108.7% 114.6% +4.1% +8.7% +14.6% Prices Indices Consumer Price Index (CPI)—a monthly report from the Bureau of Labor Statistics of the price changes for roughly 90,000 items in 364 categories sampled from 85 geographic areas around the country. Producer Price Index (PPI)—reports of the prices on products that producers receive at various stages of production. o This used to be called the wholesale price index. o This index is also compiled monthly by the Bureau of Labor Statistics. o The three main categories are crude materials, intermediate materials and finished goods. o Because of the PPI can determine price increases early on during production, these changes can indicate a change in consumer prices later on. Implicit GDP Price Deflator—a quarterly index that measures price changes in the GDP by using 1987 as its base year and removing the effects of inflation. Because the GDP encompasses many more items than the other indicators, economics still think it is the best tool to analyze price changes in the market. Unemployment Unemployment Rate—the number of those individuals currently unemployed divided by the number of workers in the labor force. o The Bureau of Census surveys 55,800 households in roughly 2000 counties across the United States. Total # of workers unemployed Unemployment rate = -‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ Total # of workers in the workplace The unemployment rate is not entirely an accurate reflection of unemployment. o It does not count people who have given up looking for a job, which can include nearly one million people during a recession. o It addition, it counts part-‐timers who are working as little as one hour per week at minimum wage as employed. • • Full employment does not mean 0% unemployment. It means that there exists the lowest possible unemployment rate while all factors of production are being optimized and the economy is growing. Most economists believe that full employment occurs when the unemployment rate is below 5%. • • Inflation The relative magnitude of prices at any given time is called the price level. o This is used for comparisons (are prices higher now than last month or last year?). Price level is measured by selecting a market basket and determining a price index. o One of the most widely used is the consumer price index, comparing the base index year with other years to show if inflation has occurred. • • • • • • • • • Inflation—an increase in the price level, usually reported as an annual rate of change. (Ending price level -‐ Beginning price level) Inflation rate = -‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ Beginning price level Creeping Inflation—entails a 1-‐3% increase per year. People still have faith in the country’s economy. Galloping Inflation—entails a 100-‐300% increase per year. For example, during 1980-‐1991 the following nations saw galloping inflation: Argentina 417%, Brazil 328%, Peru 287% and Yugoslavia 123%. Hyperinflation—entails a 500% or better increase per year. For example, prices doubled every two days at one point in Germany from 1922 to 1923, inflation hit 4.19 quintillion per cent in Hungary in July 1946, and 5 quadrillion percent in Yugoslavia between October 1993 and January 1995. Causes of Inflation Demand-Pull Theory—consumers, business and government attempt to buy more than what is produced, causing shortages and a price increase. Government-Deficit Theory—inflation is caused by the Federal Reserve keeping interest rates low by expanding the money supply o If insufficient money is created to offset federal borrowing so interest rates stay the same, borrowers are left out and it impacts employment and production costs. Cost-Push Theory—inflation is caused by labor groups who win pay increases for their members but cause business to raise their prices to compensate. o An unexpected increase in the cost of some non-‐labor products, such as oil, can also spur inflation. Wage-Price Spiral Theory—there is a direct relationship between wages and the price of goods and services. o As one goes up, the other invariably goes up to compensate for it. Excessive Monetary Growth Theory—extra money will increase one group’s buying power; once they make their purchases, more is demanded than what is produced (the demand-pull theory). • • • • • • • • • • • • Consequences of Inflation The purchasing power of the dollar decreases as prices increase. o People still in the workplace can accommodate for this inflation through continued employment and pay increases. o Individuals on fixed incomes (like those in retirement) have their purchasing power greatly diminished over time. Consumers and investors change their spending habits during inflation. o As interest rates rise, consumers are less willing to purchased goods and services that require financing. o Businesses also start cutting production so they don’t have to borrow as much; consequently workers are laid off because of slowed production. Investors move their money from speculative investments (such as the stock market) to lower-‐risk investment (such as houses or works of art) that will usually guarantee a return. Inflation alters the distribution of income by hurting lenders more than borrowers. o When someone borrows money, even though they may be paying a certain interest rate, the money that is paid back by the end of the loan is worth less than at the beginning of the loan. Real Gross Domestic Product Real Gross Domestic Product (Real GDP or GDP in Constant Dollars)—GDP adjusted for inflation. GDP Real GDP = -‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ x 100 Implicit GDP price deflator The implicit GDP price deflator is determined by the Department of Commerce. To determine the real GDP, the current GDP is divided by the price index and multiplied by one hundred. The price index that measures changes in the GDP is called the implicit GDP price deflator. For example, if the GDP for 2012 was $4,708,000,000 and the implicit GDP price deflator was 54.75, the real GDP would be roughly $8, 599,000,000. To compare two years to see if there was an increase in real GDP, determine the statistic for both years. Say the GDP for 2013 was $4,739,000,000 and the implicit GDP price deflator was 57.55. The real GDP for 2012 was $8, 599,000,000 while the real GDP for 2013 was approximately $8,235,000,000. Real GDP actually declined the following year once inflation is factored in. Real GDP allows for comparisons of prices over time. o If current GDP was used it would simply appear that GDP gradually increased over time. o Discounting inflation, though, the real GDP gives economists a clearer picture of the real performance of GDP.
