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Economic Performance: Key Q


Economic Performance: Key Q s What is gross domestic product (GDP)? How is GDP calculated? (2 methods) What is the difference between nominal and real GDP? – PowerPoint PPT presentation

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Title: Economic Performance: Key Q

Economic Performance Key Qs
  • What is gross domestic product (GDP)?
  • How is GDP calculated? (2 methods)
  • What is the difference between nominal and real
  • What are the limitations of GDP measurements?
  • What are other measures of income and output?
  • What factors influence GDP?
  • Key Concept National income accounting provides
    a conceptual framework. Categories and vocab
    from natl income is used by economists in
    assessing the macroeconomy.

  • The United States has the highest Gross Domestic
    Product in the World. In 2009, it reached 14.1
    TRILLION, up from 5.7 Trillion in 1990.
  • Economists monitor the macroeconomy using
    national income accounting, a system that
    collects statistics on production, income,
    investment, and savings. The United States looks
    very good on paper, as you will find out.

Gross Domestic Product The Measure of Domestic
  • Gross domestic product (GDP) is the dollar value
    of all FINAL goods and services produced within a
    countrys borders in a given year. Invented in
    1930s to measure depression.
  • GDP does not include the value of intermediate
    goods. Intermediate goods are goods used in the
    production of final goods and services. EX
    Wood thats cut into a baseball bat, but before
    its sanded, stamped, or the lacquer is put on is
    an intermediate good.
  • Secondhand sales are excluded. Garage sales
    dont count as GDP!
  • Increase in GDP Economic Growth
  • National Income and Product Accounts (NIPA) are
    maintained by the Department of Commerces Bureau
    of Economic Analysis (BEA)

Top-10 World GDP Nations
2 Methods of Calculating GDP
  • The Income Approach
  • The income approach calculates GDP by adding
    up all the incomes in the economy.
  • The Expenditure Approach
  • The expenditure approach totals annual
    expenditures on four categories of final goods or
    services. CIGF
  • 1. consumer goods and services
  • 2. business goods and services
  • 3. government goods and services
  • 4. net exports or imports of goods or services.
  • Consumer goods include durable goods, goods that
    last for a relatively long time like
    refrigerators, and nondurable goods, or goods
    that last a short period of time, like food and
    light bulbs

The Income Approach Add the following to get GDP
  • Wages and Salaries
  • Proprietors income
  • Rental income
  • Interest income
  • Corporate Profits
  • Indirect Business Taxes
  • Depreciation

Real and Nominal GDP
  • Nominal GDP is GDP measured in current prices.
    It does not account for price level increases
    from year to year.
  • Real GDP is GDP expressed in constant, or
    unchanging, dollars.

Calculating Nominal GDP
  • Suppose the following
  • GDP 1990 5.7 Trillion
  • GDP 2001 8.1 Trillion
  • If inflation averaged 4/year, had REAL GDP
  • Real GDP grows if GDP increase gt inflation rate
  • (8.1 trillion/ 5.7 trillion) 42.1 growth in
  • Inflation rate 3/year 11 years 33 increase
  • Real GDP increased during the 1990s. Got reasons?

Other Income and Output Measures
  • Gross National Product (GNP)--GNP is a measure of
    the market value of all goods and services
    produced by Americans in one year.
  • Net National Product (NNP)--NNP is a measure of
    the output made by Americans in one year minus
    adjustments for depreciation. Depreciation is
    the loss of value of capital equipment that
    results from normal wear and tear. NNP is always
    lower than GNP.
  • National Income (NI)--NI is equal to NNP minus
    sales and excise taxes. NI is lower than NNP.
  • Personal Income (PI)--PI is the total pre-tax
    income paid to U.S. households.
  • Disposable Personal Income (DPI)--DPI is equal to
    personal income minus individual income taxes.
    Its what you have left after taxes that you can

Key Macroeconomic Measurements
The Output-Expenditure Model A 2nd Way of
Figuring GDP! Oh boy!
  • GDP C I G F where
  • C Consumer Expenditures (rent, groceries, cars,
    clothes, etc.) -- accounts for two-thirds of all
    economic activity in the United States
  • I Business Investment in plants, offices,
    equipment, inventories, and other capital goods
  • G Government Spending on national defense,
    income security, national debt interest, health
    care, roads, education, etc. Transfer payments
    DO NOT count. Why?????????
  • F NET Foreign Trade (Foreign purchases minus
    foreign importsusually a negative number)

Limitations of GDP (What GDP fails to take into
  • Nonmarket Activities--GDP does not measure goods
    and services that people make or do themselves,
    such as caring for children, mowing lawns, or
    cooking dinner. Doesnt measure psychic
  • Negative Externalities--Unintended economic side
    effects, such as pollution, have a monetary value
    that is often not reflected in GDP. Externalities
    inflate GDP. WHY?
  • The Underground Economy--There is much economic
    activity which, although income is generated,
    never reported to the government. Examples
    include black market transactions and "under the
    table" wages. GDP is undercounted here.
  • Quality of Life--Although GDP is often used as a
    quality of life measurement, there are factors
    not covered by it. These include leisure time,
    pleasant surroundings, and personal safety. GDP
    tells us nothing about product quality.

Section ReviewNatl Income Accounting
  • 1. Real GDP takes which of the following into
  • (a) changes in supply
  • (b) changes in prices
  • (c) changes in demand
  • (d) changes in aggregate demand
  • 2. Which of the following is an example of a
    durable good?
  • (a) a refrigerator
  • (b) a hair cut
  • (c) a pair of jeans
  • (d) a pizza

  • InflationA rise in the GENERAL PRICE LEVEL. Not
    a rise in the price of 1 good or a group of
  • Purchasing power, the ability to purchase goods
    and services, is decreased by rising prices.
  • Price level is the relative cost of goods and
    services in the entire economy at a given point
    in time.
  • Example Cars, clothing, and most other consumer
    goods have increased in price since you were
  • Some prices increase faster than others (milk
    prices per gallon have blown away gasoline prices
    when it comes to inflationboth were 79 cents in

Price Indexes
  • A price index is a measurement that shows how the
    average price of a standard group of goods
    changes over time.
  • The consumer price index (CPI) is computed each
    month by the Bureau of Labor Statistics. May 2002
    was 0.5--6 annual inflation. Yikes!
  • The CPI is determined by measuring the price of a
    standard group of goods meant to represent the
    typical market basket of an urban consumer.
    1982-84 base.
  • Changes in the CPI from month to month help
    economists measure the economys inflation
    rate--the percentage change in price level over
  • The Producer Price Index (PPI) has a base year of
    1982 and samples 100,000 commodities used as
  • You may also hear of the GDP Deflator. It
    measures the same thinginflationso you can
    calculate real GDP. Base year 1996, compiled

Calculating Inflation
  • To determine the inflation rate from one year to
    the next, use the following steps
  • (CPI for Year A CPI for Year B) /( CPI for Year
    B) 100
  • For example
  • If the CPI for 1998 (Year A) 163 and the CPI
    for 1997 (Year B) 160.5.then
  • (163 160.5) 2.5 160.5 0.156 100 1.6
  • The inflation rate for 1998 was 1.6.

Economic Growth Focus Questions
  • How do economists measure economic growth?
  • What is capital deepening?
  • How are saving and investing related to economic
  • How does technological progress affect economic
  • What other factors can affect economic growth?

Measuring Economic Growth
  • The basic measure of a nations economic growth
    rate is the percentage change of real GDP over a
    given period of time.
  • GDP and Population Growth
  • In order to account for population increases in
    an economy, economists use a measurement of real
    GDP per capita. It is a measure of real GDP
    divided by the total population.
  • Real GDP per capita is considered the best
    measure of a nations standard of living.
  • GDP and Quality of Life
  • Like measurements of GDP itself, the measurement
    of real GDP per capita excludes many factors that
    affect the quality of life.

Capital Deepening
  • The process of increasing the amount of capital
    per worker is called capital deepening. Capital
    deepening is one of the most important sources of
    growth in modern economies.
  • Firms increase physical capital by purchasing
    more equipment. Firms and employees increase
    human capital through additional training and

The Effects of Savings Investing
  • The proportion of disposable income spent to
    income saved is the savings rate.
  • When consumers save or invest money in banks,
    their money becomes available for firms to borrow
    or use. This allows firms to deepen capital. In
    the long run, more savings will lead to higher
    output and income for the population, raising GDP
    and living standards.

The Effects of Technology
  • Besides capital deepening, the other key source
    of economic growth is technological progress.
  • Technological progress is an increase in
    efficiency gained by producing more output
    without using more inputs.
  • A variety of factors contribute to technological
  • Innovation When new products and ideas are
    successfully brought to market, output goes up,
    boosting GDP and business profits.
  • Scale of the Market Larger markets provide more
    incentives for innovation since the potential
    profits are greater.
  • Education and Experience Increased human capital
    makes workers more productive. Educated workers
    may also have the necessary skills needed to use
    new technology.

Other Factors Affecting Economic Growth
  • Population Growth--If population grows while the
    supply of capital remains constant, the amount of
    capital per worker will actually shrink.
  • Government--Government can affect the process of
    economic growth by raising or lowering taxes.
    Government use of tax revenues also affects
    growth funds spent on public goods increase
    investment, while funds spent on consumption
    decrease net investment.
  • Foreign Trade--Trade deficits, the result of
    importing more goods than exporting goods, can
    sometimes increase investment and capital
    deepening if the imports consist of investment
    goods rather than consumer goods.

Section 3 Review
  • 1. Capital deepening is the process of
  • (a) increasing consumer spending.
  • (b) selling off obsolete equipment.
  • (c) decreasing the amount of capital per worker.
  • (d) increasing the amount of capital per worker.
  • 2. Taxes and trade deficits can contribute to
    economic growth if the money involved is spent on
  • (a) consumer goods.
  • (b) investment goods.
  • (c) additional services.
  • (d) farming.

Population in the United States
  • Remember our buddy Malthus?
  • Census Bureau performs constitutionally-mandated
    Census every 10 years since 1790. It also
    conducts monthly surveys.
  • The Bureau tabulates data in 2 classifications
    urban and rural.
  • Population continues to grow in the U.S., but the
    rate of growth has fallen since 1860. 2000 rate
    0.9. Smaller households, especially among white
  • Population center has also shiftedto the south
  • Debate in 2000sampling or count? Politically
  • Democrats say sampling is more scientific, would
    count more minorities and homeless in inner
  • Republicans want count, win in court

Factors Affecting Population Growth
  • Fertility rate Number of births per 1000 women
    during their lifetime. Currently about 2,119
    (2.12/woman). Vastly different for whites,
    blacks, and hispanics. Why so low nowadays?
  • Life expectancy average remaining life span of
    people who reach a certain age. Currently 75.9,
    will rise to 82.1 by 2050.
  • Net immigration (About 880,000 people/year)
  • Who cares? Well, businesses and government need
    to plan.
  • What might be some demographic trends that need
    to be noticed? Need for more medical supplies and
    drugs, less need for police protection if
    majority of pop is older?

Population Projections/Demographics
  • The aging baby boomer population will drive
    most characteristics (baby boom was 1946-64).
  • Trouble is coming as baby boomers retire starting
    in 2011. In 2012, Social Security will be paying
    out more money than it takes in.
  • The Dependency ratio will increasefrom 63.9 in
    1998 to 80.0 by 2040. DR of children and
    elderly per 100 persons 18-64.
  • More widows as people life longer, but women live
    way longer. If anyone mentions Tadpole, I will
    hit you.
  • By 2050, whites will be a bare majority (52.7).
    Asian population will grow 5X, Hispanic will

Immigration in the U.S.
  • Old immigrantsfrom N. and W. Europe. Blended
    easily. Came before 1880. Most were Protestant.
  • New Immigrantsfrom S. and E. Europe, came
    1880-1924. Spoke different languages, darker, had
    different religions, took longer to blend but
    were successful
  • It is true immigrants helped build this country.
    EX Chinese laborers and Transcontinental RR
  • Significant immigrants include Albert Einstein,
    Bob Hope, Joseph Pulitzer, Felix Frankfurter,
    Enrico Fermi, Samuel Gompers, Madeleine Albright,
    John Audubon, Cary Grant, Sonja Henie, Werner von
    Braun, and Alexander Hamilton. Immigration has
    been good.
  • BUT, We must look at this academically and
    realize there is a downside. Diversity in other
    countries has posed severe problemsYugoslavia,
    even Quebecois in Canada. As the US changes,
    ethnic conflict will result

Section Review--Population
  • 1. What will likely happen to the percentage of
    the population of the United States that lives in
    Michigan over the next 20-50 years?
  • 2. Why is knowing population demographics
    important to the average businessman or

More on Economic Growth
  • Now, we know that not every country has the
    U.S.s standard of living, or quality of life
  • Compare U.S. and India Nominal GDP
  • U.S. 8.1 Trillion. India 500 Billion. (Its
    that big? 500 Billion is nothing to shake a
    stick at)
  • Real GDP stats are still not perfect. To get the
    true picture, you need to determine
  • Real GDP per capita
  • In other words, divide Real GDP by the of
  • U.S.29,000 per capita
  • India 500 per capita

Why Economic Growth is Not Only Important, But
Actually A Cure-All
  • Economic growth in the U.S. helps everyone in the
    worldnot just Americans.
  • Tax revenues increase with more earnings.
    Healthier tax bases mean government can provide
    more services or tax cuts. During the 1980s,
    revenue doubled in 8 years with tax cuts. You
    need investment for growthwhy do you think we
    love British and Japanese capital? The British
    know they get a good return on their investments!
    And then we tax the growth and play the game all
    over again IF WE DONT TAX TOO MUCH.
  • Economic growth solves domestic problems (poverty
    is the source of so many social problemsdrugs,
    unsupervised kids, wages rise because demand for
    labor increases)
  • We can help other nations more if we are
  • A healthy U.S. capitalistic system is an
    excellent role model for the world, especially
    for China, a definite threat

Factors Influencing Growth What do we do to get
that growth??
  • LandConserve our own natural resources, make use
    of renewable resources, and use everyone elses
  • CapitalKeep capital-to-labor ratio high.
    Capital investments are a better choice than
    immediate consumption
  • LaborEducate labor force and keep population
    growing. Much 1900s economic growth is due to
    women working outside the home, although society
    has paid for that
  • Entrepreneurscreate incentives for entrepreneurs
    (low government regulation, low taxes) Best
    example of why this works The Internet
  • Improve productivity so we can shift resources to
    other areas. EX Mazda plant in Japan makes cars
    robotically, allows release of labor to make
    whatever else.

Section ReviewPeculiarities of Economic Growth
  • Which U.S. President was hurt by going along with
    a tax increase, and a recession that actually
    cleared up by election day?
  • In laymans terms, define standard of living