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CHAPTER 11
Measuring Economic Activity


Business Cycle
Alternating periods of economic
expansion and contraction
Peak
Recession
Inflation
Recovery
Depression
GDP

GDP measures the market value of final
goods and services produced within a
country’s border during a given time
period
Three approaches to
measurement



Value added
Expenditure method
Income method
What is not included in GDP?
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Used goods
Financial transactions
Underground transactions
Transfer payments
Barter transactions
Some non-market production
Expenditure Method

GDP = C + I + G + (x - m)
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C =Personal consumption expenditure
I =Gross private domestic investment
G =Government consumption expenditures
and investment
(x-m)= net exports
Components of GDP

Personal consumption expenditures

Durable goods


Non-durable goods
Services
Spending on durable goods tends to be highly
volatile during business cycles
Components of GDP

Gross private domestic investment
 Fixed investment
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Non-residential (structures equipment &
software)
Residential (new houses by HH and landlords)
Changes in private inventories

Goods produced but not sold during a given
year
Components of GDP
Govt. consumption Exp. & Gross
investment
 Federal

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
National defense
Non-defense
State and local
Components of GDP

Exports

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
Goods
Services
Imports


Goods
Services
Income Method
Gross domestic product
Less:
Depreciation
Plus:
Statistical discrepancy
Equals:
National income
Compensation of employees
Proprietor’s income
Rental income
Corporate profits
Net interest
Income Method cont…
Less:
Plus:
Equal:
Less:
Equals:
Income earned but not received
Income received but not earned
Personal income
personal taxes
disposable income
personal consumption
personal savings
Measurement of Price level

Inflation


Deflation


A sustained increase in price level
A sustained decrease in price level
Main Indices
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
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Consumer price index (CPI)
Producer price index (PPI)
GDP deflator
Measurement of Employment

Population 16 years of age or older
Less: members of armed forces
Less: Institutionalized persons
(in jails or nursing homes)
Equals: Civilian Non-institutional
population
Cont….
Measurement of Employment
Less:
Persons who are not actively
seeking jobs (housewives,
retirees, students, discouraged
workers)
Equals: Civilian labor force
Unemployment
Unemployment
rate

# of persons unemployed
=
Labor force
X 100
Natural rate of unemployment

Minimum level of unemployment that can be
achieved with current institutions without
causing inflation to accelerate
Relevance for the manager
inflation
recession
In contraction phase, generally, GDP, P,
employment, profits & production show a
downward trend
Relevance for the manager
In Expansion phase, generally, GDP, P,
employment, profits and production show an
upward trend
Demand for firm’s product is influenced by the
business cycle.
Policy changes also take place