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Chapter 13
Measuring the Economy’s Performance

Section 1
National Income Accounting

Section 2
Correcting Statistics for
Inflation

Section 3
Aggregate Demand & Supply

Section 4
Business Fluctuations
National Income Accounting
 national
income accounting –
measurement of the national
economy’s performance, dealing with
the overall economy’s output and
income
National Income Accounting
5
major statistics that measure the
national economy
– 1.
– 2.
– 3.
– 4.
– 5.
gross domestic product (GDP)
net domestic product (NDP)
national income (NI)
personal income (PI)
disposable personal income (DI)
Gross Domestic Product (GDP)
 gross
domestic product – total value
of all final goods and services
produced in a nation in one year
 Value is measured in dollars ($9
trillion in 1999)
 Counts only final items and new
items to avoid double counting and
transfer of products
Gross Domestic Product (GDP)

4 categories for calculating GDP
– 1.
consumer sector (C) – goods & services bought
by the consumer for their direct use
– 2.
investment sector (I) – business purchases to
produce other goods & keep an inventory
– 3.
government sector (G) – goods & services
bought by federal, state & local governments
– 4.
net exports (X) – difference between exports
and imports
GDP is only an estimate and omits areas such as unpaid
work
Net Domestic Product (NDP)
 net
domestic product – value of the
nation’s total output (GDP) minus the
total value lost through depreciation
on equipment
 depreciation – loss of value because
of wear and tear to durable and
capital goods
National Income (NI)
 national
income – total income
earned by everyone in the economy
 Includes
– wages & salaries
– self-employed income
– rental income
– corporate profits
– interest on savings & investments
Personal Income (PI)
 personal
income – total income that
individuals receive before personal
taxes are paid
 transfer
payments – welfare & other
supplementary payments that govt.
makes to individuals
Disposable Personal Income (DI)
 disposable
personal income – income
people have after taxes and Social
Security payments
 Measures
the actual amount of
money people have available to save
and spend.
Section 2 – Correcting Statistics for Inflation
 Unpaid
work, depreciation & inflation
make GDP inaccurate
 inflation
– a prolonged rise in the
general price level of goods and
services
Purchasing Power of Money
 purchasing
power – real goods &
services that money can buy
 Dollar cannot buy the same amount
as it did before inflation
 Price may rise but output doesn’t
change
 deflation – prolonged decline in
general price level – rarely occurs
Measures of Inflation
3
Measures of Inflation
– 1.
– 2.
– 3.
consumer price index (CPI)
producer price index (PPI)
implicit GDP price deflator
Consumer Price Index (CPI)
CPI – measure of the change in price over
time of a specific group of goods and
services used by the average household
 market basket – representative group of
goods & services used to compile the CPI
 90,000 items including- food, clothing,
housing, medical, transportation,
education & recreation
 Compiled by Bureau of Labor Statistics
(BLS)
 Work from a base year where index is set
at 100

Producer Price Index (PPI)
 PPI
– measure of the change in price
over time that US producers charge
for their goods & services
 Ex. – mining, manufacturing &
agriculture
 Index that usually rises before CPIex. apples, crude oil, steel & plywood
GDP Price Deflator
 GDP
price deflator – price index that
removes the effect of inflation from
GDP so that the overall economy in
one year can be compared to
another
 Real GDP is found when price
deflator is applied
Section 3 – Aggregate Demand & Supply
 Economists
are interested in the
demand by all consumers for all
goods and services as well as the
supply by all producers for goods and
services
 aggregates
– summation of all
individual parts of the economy
Aggregate Demand




aggregate demand – total quantity of goods and
services in the entire economy that all citizens
will demand at any single time
Aggregate demand is related to a price level
instead of individual prices due to the millions of
different prices for products.
Aggregate demand curve – graphed line showing
the relationship between the aggregate quantity
demanded and the average of all prices.
Inverse relationship as average price level goes
down, more is demanded
Aggregate Supply
aggregate supply – real domestic output
of producers based on the rise and fall of
the price level
 If the average price level goes up,
producers will be willing to produce more
to make more profit
 The reverse is true if the price falls.
 aggregate supply curve – a graphed line
showing the relationship between the
aggregate quantity supplied and the
average of all prices adjusted for inflation

Section 4 – Business Fluctutations
business fluctuations – ups and downs in
an economy
 business cycle – irregular changes in the
level of total output measured by real GDP
 See Figure 13.11 on page 361
 peak/boom – a period of prosperity where
economic activity is at its highest point
 contraction – part of the business cycle
during which economic activity is slowing
down

Business Fluctuations
contraction – part of the business cycle
during which economic activity is slowing
down
 recession – part of the business cycle in
which the nation’s output (real GDP) does
not grow for at least six months
 recession – factories cut production,
layoffs, consumers cut back purchases,
fewer businesses start, & businesses fail
 depression – major slowdown of economic
activity

Business Fluctuations
 trough
– lowest part of the business
cycle in which the downward spiral of
the economy levels off
 expansion/recovery – part of the
business cycle in which economic
activity slowly increases