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Unit 3: Measuring Economic Performance

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Title: Unit 3: Measuring Economic Performance


1
Unit 3 Measuring Economic Performance
  • Chapters 6-7

2
Revisit the Circular Flow Diagram
  • On board
  • What is Income?
  • Rent, profits to the entrepreneur, interest,
    wages
  • Leakage in Circular Flow Model
  • Imports

3
Measuring Economic Activity
  • Three primary ways to measure
  • Gross Domestic Product
  • Unemployment
  • Inflation

4
National Income Accounting
  • Measures the economys overall performance
  • Why measure?
  • Assess the health of the economy by comparing
    production to previous dates
  • Track long-run course of the economy
  • Formulate policies that will improve economy

5
Gross Domestic Product
  • Gross Domestic Product (GDP)
  • Measure of aggregate output
  • Total market value of all final goods and
    services produced by either citizen or foreign
    supplied resources within the country
  • Includes everything made in the US for final use
  • It is a monetary measure ( value)

6
GDP cont.
  • What is included?
  • All final goods produced within the country
  • Goods purchased for final use by consumers, not
    for resale or further processing

7
GDP cont.
  • What is not included?
  • Intermediate goods
  • Goods purchased for resale or further processing
    or manufacturing
  • Why exclude these?
  • Nonproduction transactions
  • Financial transactions
  • Public transfer payments
  • Welfare, unemployment, social security, subsidies
  • Private transfer payments
  • Birthday money from family
  • Stock market transactions
  • Secondhand sales

8
GDP cont.
  • What else is not included?
  • Stuff made by American companies in other
    countries
  • Illegal activities
  • Non-market activities
  • Doing things yourself

9
GDP cont.
  • How do you find the GDP value?
  • 2 ways
  • Expenditure VS Income Approach
  • Expenditure Approach (Super Easy)
  • C Ig G Xn
  • C Personal Consumption Expenditures
  • Ig Gross Private Domestic Investment
  • G Government Purchases
  • Xn Net Exports

10
GDP cont.
  • C Personal consumption expenditure
  • All households expenditures
  • Largest portion
  • Ig Gross Private Domestic Investment
  • All final purchases of machinery, equipment, and
    tools by business enterprises
  • All construction (houses, factories, warehouses,
    and stores)
  • Changes in business inventories
  • Negative and Positive

11
GDP cont.
  • G Government Purchases
  • Includes all government expenditures on final
    goods and services and purchases of resources,
    including labor
  • G/S the government consumes to provide public
    services
  • Social Capital like schools and roads
  • Xn Net Exports
  • Exports (X) Imports (M)

12
GDP cont.
  • Income Approach (Super Complicated)
  • Add the following to get National Income (All
    income earned through the use of American-owned
    resources)
  • Compensation of Employees
  • Wages and salaries (largest portion)
  • Rents
  • Income received by those who rent property
  • Gross Rent Depreciation
  • Interest
  • Loans paid lenders
  • Interest paid to savers (bond, CDs, savings
    deposits)
  • Proprietors Income
  • Profits from partnerships, sole proprietorships,
    unincorporated businesses
  • Corporate Profits
  • Corporate income taxes, dividends to
    stockholders, undistributed corporate profits
    (retained earnings)
  • Taxes on Production and Imports
  • Sales taxes, excise taxes, business property
    taxes, license fees, customs duties

13
GDP cont.
  • Income Approach cont.
  • Add or subtract to get final GDP value
  • Net Foreign Factor Income
  • Money earned by American companies in other
    countries (subtracted from total national income)
  • Statistical Discrepancy
  • Added to make the income approach the
    expenditure approach
  • Consumption of Fixed Capital
  • Depreciation of capital over time
  • Added to get the true value cost of capital over
    time

14
Real VS Nominal
  • Real GDP is adjusted for inflation, while nominal
    is not.
  • Why would this be an important difference?
  • Price index and application
  • On board

15
GDP cont.
  • Shortcomings
  • Nonmarket activities
  • Leads to understated number
  • Leisure time or job satisfaction
  • Adds to well-being but cannot be measured
  • Product quality
  • Underground economy
  • Also includes cash-only jobs not reported on
    taxes
  • Environment
  • Distribution of income
  • Noneconomic sources of well-being
  • Reductions in crime, civility, drug or alcohol
    abuse

16
(a) Real GDP
Billions of
1996 Dollars
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1965
1970
1975
1980
1985
1990
1995
2000
17
GDP and the Business Cycle
18
Economic Growth
  • Growth occurs when
  • Increase in real GDP
  • Increase in real GDP per Capita
  • GDP/population
  • Tells more about living standards
  • Growth leads to
  • Rise in real wages
  • Decreases of the burden of scarcity

19
Growth cont.
  • Rule of 70
  • 70 divided by annual growth rate tells us how
    long it will take to double GDP
  • Sources of growth
  • What shifts PPC?
  • Increases in resources
  • Increasing productivity
  • Real output per input
  • 2/3 of US growth comes from this

20
Growth cont.
  • Again, what are the limitations of growth
    information?
  • What are the limitations of GDP?
  • Improved products
  • Added leisure
  • Environment
  • Gains in well-being

21
Business Cycle and Growth
  • What causes the business cycle?
  • Really controversial
  • Innovations
  • Changes in productivity
  • Monetary phenomenon
  • Changes in spending
  • Government interference
  • Who is affected most/least?
  • Least
  • Non-durable good producers
  • Most
  • Durable good producers and capital good producers

22
Enemies of the Economy
  • Inflation and unemployment
  • Usually dont occur at the same time
  • High rates are either have negative effects on
    the economy
  • Therefore, societies want to avoid both

23
Unemployment
  • Civilian Labor Force (CLF)
  • Men and women 16 and up not in the military,
    prison, or otherwise institutionalized who are
    working or actively looking for a job.
  • Who does this not include? (IMPORTANT!!!)
  • The number of people in the CLF is determined by
    the Bureau of Labor Statistics (BLS)

24
Unemployment cont.
  • Unemployment rate
  • of Civilian Labor Force without a job
  • Calculation?
  • On board
  • They also determine the unemployment rate
  • Current Rate?
  • http//www.bls.gov/cps/
  • Limitations
  • Part-time employment
  • Underemployed
  • Discouraged workers

25
Unemployment cont.
  • 4 types of unemployment
  • Frictional
  • Not necessarily bad
  • Labor market is not perfect and it takes time to
    match jobs to workers
  • Usually short term
  • Structural
  • Replaced by machines, changes in demand for
    products, movement of businesses
  • Longer term
  • Cyclical
  • Downturn in economy
  • Seasonal
  • Seasonal demand for employees

26
Unemployment cont.
  • Is zero unemployment desirable?
  • Why or why not?
  • Full Employment rate of unemployment or natural
    rate of unemployment (NRU)
  • Economy is at potential output
  • Job seekersjob vacancies
  • Economy can be above potential output temporarily
  • NRU can change over time
  • In the 1980s it was around 6
  • Today between 4-5
  • Changes in population
  • Welfare laws
  • Internet job sites

27
Unemployment cont.
  • GDP gap
  • Gap between PPC and point inside the curve due to
    unemployment
  • GDP Gap actual GDP potential GDP
  • Okuns Law
  • For every 1 actual unemployment exceeds NRU, a
    negative GDP gap of about 2 occurs
  • We can use this to find how much loss of wealth
    unemployment causes

28
Unemployment cont.
  • Unequal burdens
  • Low skilled or less educated
  • Teenagers
  • AA and Hispanics
  • Costs of unemployment
  • Loss of wealth (GDP)
  • Social costs
  • Poverty, racial and ethnic tensions, loss of hope
    and morale, sociopolitical unrest, family
    disintegration, loss of skills
  • Long term unemployed

29
Inflation
  • What is inflation?
  • Rise in the general level of prices
  • Real income is declining
  • Does NOT mean all prices are rising
  • Inflation is monetary phenomenon!!!
  • Hyperinflation
  • Deflation

30
Inflation cont.
  • How is it measured?
  • Consumer Price Index (CPI)
  • market basket of 300 consumer goods and
    services
  • Compiled by the BLS
  • CPI (Price of most recent basket) / (Price
    estimate of same basket in 1982-1984) X 100
  • Inflation Rate (year 2 year 1) / (year 1) X
    100
  • GDP Deflator
  • Uses GDP instead of market basket
  • (Nominal / Real) X 100

31
Inflation cont.
  • Types
  • Demand Pull
  • Too much money chasing too few goods
  • Loans increasing at a rapid rate
  • Cost Push
  • Increasing in factor of production costs
  • Per-unit production costs rise
  • Per-unit cost (total input cost) / unit of
    output
  • Supply shocks
  • Leads to increases in unemployment and inflation
    at the same time (stagflation)
  • Hard to know which is causing inflation

32
Effects of Inflation
  • Nominal and real income changes
  • Real income (nominal income) / (price index in
    hundredths)
  • Doesnt necessarily change real income for
    everyone
  • Anticipated VS Unanticipated Inflation
  • If we expect it we can plan for it

33
Effects cont.
  • Who is hurt?
  • Almost everyone, but in particular
  • People on fixed incomes
  • Savers
  • Creditors
  • Who is helped or unaffected?
  • Flexible-income receivers
  • People who receive Cost-of-Living Adjustments
  • Debtors
  • Governments

34
Effects cont.
  • Planning for inflation
  • Real VS Nominal Interest rates
  • Real is true cost to borrow the money
  • Nominal is real plus the extra cost of due to
    inflation
  • Nominal Real Expected Rate of Inflation
  • Effects on output
  • Cost-push reduces output
  • Demand-pull
  • Harder to know. Some say
  • Costs associated with changing prices
  • Distinguishing between real and nominal interest
    rates
  • Costs of getting cash
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