Download Economic Performance Ch 13

Economic Performance
Chapter 13
Measuring National Output
• Gross Domestic Product (GDP)
– Dollar amount of all final goods & services
produced in country’s borders in a year
– Single most important measure of overall
economic performance
• National income accounting
– System of statistics and accounts that tracks
overall economic performance
• Production, consumption, saving, & investment
Computing GDP
• Multiply all final goods and services
produced in a 12-month period by their
prices and add them up
• Exclude:
– Intermediate products
– Secondhand sales
– Nonmarket transactions
– Underground economy
Limitations of GDP
• Tells nothing of the composition of output
– Controversial goods may be produced
• Tells little about the impact on the quality
of life for the country’s people
• Despite limitations, GDP remains best
measure of a country’s economic health
– Used to influence voting
Gross National Product
• Gross National Product (GNP)
– Measures national income
– Dollar value on all final goods, services, &
structures produced in one year by a country
• Regardless of location; depends on ownership of
labor and capital
• GDP vs GNP
– Output vs income; GNP is based on GDP
– GDP is used to rank economies
National Income & Product
Accounts (NIPA)
• GNP is first income measure
• Net National Product (NNP)
– GNP minus depreciation
• National Income (NI)
– Income after taxes are subtracted from NNP
• Personal Income (PI)
– Amount going to consumers before individual income
taxes are subtracted
• Disposable Personal Income (DI)
– What consumers can actually spend (after taxes)
Economic Sectors
• Consumer Sector (C)
– Households, families, & unrelated individuals
• Investment Sector (I)
– Proprietorships, partnerships, & corporations
• Government Sector (G)
– Federal, State, & Local
• Foreign Sector (F)
– All consumers & producers outside of the U.S.
– (X – M): difference between dollar value of goods sent
abroad and purchased from abroad
Circular Flow of Economic Activity
• Output-expenditure model
• GDP = C + I + G + (X - M)
• Expenditures spent by C, I, and G
becomes part of the GDP/GNP which
becomes income for C, I, and G
• Foreign sector expenditures are called net
exports of goods and services
GDP and Changes in the
Price Level
Section 2
GDP and Price Level Changes
• A rise in the general level of prices is inflation
• Changes in prices over time are measured in a
price index
– Select a base year to serve as a comparison for
other years
– Select a market basket (representative selection of
commonly purchased goods & services)
– Total the prices for each good to get the base-year
market basket price—assign a value of 100%
Major Price Indices
• Consumer Price Index (CPI)
– price changes on 80,000 items in 364 categories
(1982-1984 are base-year prices)
• Producer Price Index
– price changes on 100,000 items paid by domestic
producers for their inputs—(1982 base-year)
• Implicit GDP Price Deflator
– average levels of prices for all goods and services
– Base-year of 1996
Real vs. Current GDP
• Current GDP (or just plain GDP)
– Not adjusted for inflation
• Real GDP
– What GDP would be if prices had not changed from
the base-year
Convert current GDP by the deflator then multiply by
100 to get the Real GDP
This allows us to compare GDP in different years
GDP and Population
Section 3
GDP and Population
• GDP is often expressed on a per capita basis
– Population growth affects GDP through the factors of
production (primarily labor) and quality of life issues
– Per capita is determined through the census
– Urban population: >2,500 in an incorporated town
– Rural population: everyone else in the country
• Census tracks growth and shifts in population
– Center of population: where the country would
balance based on people (Missouri)
• Businesses use the data to make decisions
– New plants, sales territories, market for products
Factors Affecting Population
Growth
• Demographers study 3 important factors:
• Fertility Rate
– Births per 1,000 women
• Life Expectancy
– Average life span (about 76 years)
• Net Immigration
– Overall change in population caused by
people moving in and out
Projections
• Age and gender projections are important
because demands on Social Security,
Medicare benefits, pensions, etc., will
burden younger and smaller generations
– This also impacts the dependency ratio
• Number of children and elderly per 100 people of
working age (18-64)
• Race and ethnic origin projections are
tracked as well
Economic Growth
Section 4
Economic Growth
• Measured in the short-term (1-5 years) by
real GDP
• Long-term is measured by real GDP per
capita
– Adjusts for changes in inflation and population
• A growth triangle is used to show
compound rates of growth between
selected periods of time (see page 365)
Importance of Economic Growth
• Raises standard of living
– Quality of life improves
• Eases burden of government
– Finance public services and social programs
• Helps solve domestic problems
– Reduces poverty, unemployment, welfare #’s
– Increases wages, health care, security
• Boosts foreign trade partners’ economies
– Creates jobs/generates income which results in
greater demand for American goods and services
Factors Influencing Growth
• Land
– Natural resources need to be conserved
– Renewable resources need time to replenish
• Capital
– High capital-to-labor ratio is most efficient
• Depends on high-quality capital
• Labor
• Skilled and growing workforce required-affected by education
• Labor productivity: amount of output produced per unit of labor
input--when the ratio is high, productivity is high and vice versa
• Entrepreneurs
– The key to economic growth
– Favor minimal government regulation and a system that lets
them keep a maximum of their profits