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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!