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Measuring the Economy’s Performance
GDP – Gross Domestic Product
 Definition: total dollar value of all final goods and
services produced in a nation in a single year.
 Must be:
 Produced within the country’s borders
 Made available for purchase in this year
 Expressed in dollar terms
 In 2009, the US GDP totaled more than $14.2 trillion.
GDP continued…
 What does final mean?
 Must avoid double counting
 Example: you don’t count the memory chips and
motherboards if they are installed in computers for sale.
 You count the computer.
 If sold separately (not in a comp.) then it’s also counted
 Only new items are counted
What’s counted in GDP?
 C + I + G + X = GDP
 C=Consumer sector  I=Investment sector
 G=Government sector
 X=Net exports
Consumer Sector - Details
 Durable goods are items such as cars, furniture, and
appliances, which are used for several years (9%).
 Non-durable goods are items such as food, clothing,
and disposable products, which are used for only a
short time period (21%).
 Services include rent paid on apartments (or estimated
values for owner-occupied housing), airplane tickets,
legal and medical advice or treatment, electricity and
other utilities. Services are the fastest growing part of
consumption spending (41%).
Investment - Details
 Non-residential fixed investment is the creation of
tools and equipment to use in the production of other
goods and services. Examples are the building of
factories, the production of new machines, and the
manufacturing of computers for business use (10%).
 Residential investment is the building of a new homes
or apartments (5%).
 Inventory changes consist of changes in the level of
stocks of goods necessary for production and finished
goods ready to be sold (0%).
Government - Details
 Consists of federal, state, and local government spending
on goods and services such as research, roads, defense,
schools, and police and fire departments. (19%)
 Does not include transfer payments such as Social Security,
unemployment compensation, and welfare payments,
which do not represent production of goods and services.
 Federal defense spending now accounts for approximately
(5%).
 State and local spending on goods and services accounts for
(12%).
US GDP – Yearly changes
Measurements of Income
National Income
Personal Income
Disposable Personal Income
Elements of National Income
Disposable Personal Income
 Income people have left after taxes are
paid
 Important because it actually measures
the amount of money people have to
spend and save
Inflation
 Definition: prolonged rise in the general price level of
final goods and services
 Purchasing power of the dollar decreases
 In other words, a dollar can not buy the same amount
as it did before the inflation occurred.
Learn economic indicators &
business cycle
Get out yesterday’s notes too
Measure of Inflation…
 Consumer Price Index – statistical
measure of the average of prices of a
specified set of goods and services
purchased by typical consumers in city
areas.
Bell Ringer #7
Deflation
 Prolonged decline in the general price level of goods
and services.
 Rarely happens during modern times
Example – If a food item was $1 in the
base year what was the average price
of the item in 2005.
Producer Price Index (PPI)
 Measures the changes in prices that producers charge
for their goods and services
 PPI usually increases before CPI since most of time the
time the increased cost is passed to consumers from
the producer.
GDP Price Deflator
 Economists use this to remove the effects of inflation
so the overall economy of one year can be compared to
the overall economy of another year.
 When the price deflator is applied to GDP the new
figure is referred to real GDP.
Nominal & Real GDP
 Nominal GDP – Also called current GDP
 Real GDP – has been adjusted for inflation using the
GDP deflator.
Aggregate Supply & Demand
 Aggregate Demand – is the quantity of goods
demanded by an entire economy
 Aggregate Supply – is the quantity of goods supplied
by an entire economy
Aggregate Demand - Graphed
Aggregate Supply - Graphed
Business Cycle – Changes in the level of total
output measured by real GDP
 Parts
 Peak/boom – level of economic activity is at it highest
 Contraction – occurs when economic activity is slowing
down
 Trough – Point where downward spiral of economy
levels off
 Expansion/recovery – occurs when economic activity
slowly rises
 Recession – point in which the real GDP declines for at
least 6 months
 Depression - major slowdown in economic activity
Business Cycle
Business Cycle – Historical view
At what point was U.S. Business activity contracting most severely?
At what point did U.S. Business activity reach its highest peak?
On average about how much time passes between large drops? Large
peaks?
Unemployment Rate
 Definition – The percentage of the population that is
without jobs but actively seeking employment
 When high is a a sign of a poor economy.
 Maintaining a low unemployment rate is a major goal
in stabilizing the economy.
 FULL Employment – occurs when the unemployment
rate is around 4 – 6%.
4 types of Unemployment
 Cyclical – unemployment caused by fluctuations in
the business cycle
 Example: People all over the country are losing their jobs
in many types of industries
 Structural – Caused by changes in the economic
system
 Example: replaced by machines, new industries &
technologies
4 types con’t
 Seasonal – caused by changes in weather or seasons
 Example: Life guards, farm workers and snow removal
 Frictional – temporary unemployment; between jobs
caused by layoffs, firings, search for new job or
retraining
 Example: Always exists due to people changing jobs,
moving and relocating.