Download Measuring Economic Performance

Measuring Economic
Performance
GDP, Unemployment
and Inflation
I. Importance of
Macroeconomic Measurement:



Measures level of economic
performance at a point in time and
explains the immediate cause of that
level of performance
Compares economic conditions over
time
Provides a basis for formulating public
policies to improve economic
performance
II. Macroeconomic Goals

Full Employment

Price Stability

Economic Growth
III. GDP vs. GNP

Originally GNP – Gross National Product

Was changed to GDP in 1992

Both measure the total market value of
all final goods and services produced in
the economy in one year
III. GDP vs. GNP continued….

The difference is in how they define the
economy.
III. GDP vs. GNP continued….

GNP consists of total output produced by
Americans – whether here or abroad
• Ex: Income by an American living and working
•
in France is included
Ex: Income by a French person living and
working in the U.S. is excluded
III. GDP vs. GNP continued….

GDP consists of the total output
produced within the U.S., whether it uses
domestic or foreign owned resources.
• Ex: Full value of cars produced by Honda in
•
U.S. is included, including profits
Ex: Profits earned by an American-owned
plant in Japan are excluded
IV. Gross Domestic Product

GDP is a monetary value – 2012 GDP
was $15,684,800,000,000.00


Sale of final goods is included
Sale of intermediate goods excluded

Avoids double counting
• The “value-added” approach
V. Final and Intermediate Goods

Final Goods and Services
• Are not used as inputs into the production of
•
another good or service
Are bought by their final users
V. Final and Intermediate Goods

Intermediate goods
• Are used as inputs into the production of
•
another good or service
Examples
• Intermediate goods – windshields, gearboxes,
batteries
• Intermediate services – banking and insurance
services bought by a car producer
V. Final and Intermediate Goods

How to tell
• Look at who buys it and for what purpose
• Example: electric power
• Intermediate when bought by car producer
• Final when bought for your home
VI. What GDP excludes

Purely financial transactions
• Public transfer payments (Social Security)
• Private transfer payments (money and gifts)
• Securities transactions
• Stocks (dividends and brokerage fees are counted)
• Private bonds (interest payments are counted)
• Public bonds (interest payments are transfer
payments)
VI. What GDP excludes

Secondhand sales
• Do not represent current output
VII. Measuring GDP

Two approaches that must equal
VII. Measuring GDP

The Expenditure (Spending) Approach
C + Ig + G + Xn
VII. Measuring GDP




C – Personal consumption expenditures
on durables, non-durables and
services
Ig – Gross private domestic investment
in capital goods
G – Government purchases (exhaustive
government outlays)
Xn – Net Exports (exports-imports)
VII. Measuring GDP

The Income Approach:
Add the following #1-7 and subtract net
American income earned abroad.
VII. Measuring GDP
1.
2.
3.
4.
5.
6.
7.
Compensation of Employees – wages, salaries and benefits
Rental Income
Interest
Proprietors income (sole-proprietors and partnerships)
Corporate profits (corporate income taxes + corporate
dividends + retained earnings)
Consumption of fixed capital (depreciation)
Indirect business taxes (unrelated to income – excise, sales,
property, license fees, customs duties)
VIII. What GDP does not include





Non-market production (housewives,etc.)
Changes in product quality, disproducts
Unreported tip or sales
Barter activity
Illegal Activites
“Underground Activities may be
as much as 15% of GDP!