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MEASURING ECONOMIC
PERFORMANCEUnit 6 Notes
Unit 6, Lesson 1Notes
NATIONAL INCOME AND PRODUCT ACCOUNTS Economists monitor economic data of
the country using national income accounting – collects statistics on production, income, investments, and savings
This data is collected and presented to the government and maintained by the Department of Commerce
GROSS DOMESTIC PRODUCT The MOST IMPORTANT measure that is
collected is GDP – the dollar value of all final goods and services produced within a country’s borders in a given year.
The definition itself is worded that each piece must be looked at individually
GROSS DOMESTIC PRODUCT Dollar value is the total selling prices of
all goods and services produced in a country in a given year
Final goods and services are the products sold to consumers in a given year
Produced within a country’s borders means that anything produced in the U. S. is counted (Kia plant in Ohio)
GDP DOES NOT INCLUDE:
1. Intermediate goods – products/services used to make final products.
a. Ex: Car tires (intermediate good) aren’t counted if they are going onto a brand new car (final good).
b. Avoids multiple counting
2. Nonproduction Transactionsa. Transfer Payments (public or private) – money is given for
no service/product. Ex: $ as a gift, welfare, social security.b. Stocks & Bonds transactions
3. Sale of USED goods4. Non-market Transactions
Ex: Time & effort you spend fixing up your car.5. Underground Economy – no record exists of the
transaction.Ex: babysitting, lawn mowing, maid services, drug trade
GROSS DOMESTIC PRODUCTGDP Basics:
Always expressed in terms of $. Primary measure of economy’s
performance. Calculated using either the expenditure
approach or the income approach. Increases in GDP are desirable When the government looks at GDP, the
measurement must be as accurate as possible
EXPENDITURE APPROACH To calculate GDP, one way is the
Expenditure approach Economists estimate the annual
expenditures ($ spent) on four categories:ConsumerBusinessGovernmentNet imports/exports
This total equals GDP – practical approach
INCOME APPROACH Another way to measure GDP is the
income approach – provides better accuracy
This approach adds up all the incomes in the economy (ex. Income from selling a house for $115,000)
Unit 6, Lesson 2Notes
REAL VS. NOMINAL GDP Nominal GDP is GDP measured in
current prices - GDP unadjusted for inflation or deflation of prices. Uses current year’s prices
Real GDP is GDP expressed in constant, or unchanging, prices - GDP that has been adjusted for inflation/deflation. Reflects price changes so that you
may compare if production increased or if higher prices simply caused a higher nominal GDP. (Remember: GDP measures the goods/service produced in one year.)
OTHER INCOME AND OUTPUT MEASURES Even though GDP is the primary
economic measure, others are also taken
GDP is used to determine 5 other economic measures including:GNPDepreciation
GROSS NATIONAL PRODUCT (GNP) GNP is the annual income earned by U. S.-
owned firms and U. S. citizens It is calculated by: GDP + income earned
outside the U. S. – income earned by foreign firms and citizens inside the U. S. = GNP
GNP does not account for depreciation – the loss of the value of capital equipment that results from normal wear and tear So, GNP – Depreciation = Net National Product
(NNP) NNP is the output made after the adjustment for
depreciation
GROSS NATIONAL PRODUCT NNP does not account for another factor that
reflects the cost of doing business – taxes So NNP – taxes (sales and exercise) = National
Income (NI) We can then figure out how much individuals make
that they can then spend, called Personal Income (PI)
So PI = Other household income + Money business pays out (SS, Income taxes, etc.) – National Income
Then, we look at how much a person actually has to spend after taxes, called Disposable Personal Income (DPI) = Personal income – taxes Personal Taxes include income, property, estate, etc.
Unit 6, Lesson 3Notes
THE SHADOW ECONOMY…(Reading and Discussion)
BUSINESS CYCLE A business cycle is a period of economic
expansion followed by a period of economic contraction
These are not minor ups and downs – they are major changes to GDP
There are typically 4 phases of a business cycle:ExpansionPeakContractionTrough
EXPANSION Expansion is a period of economic
growth measured by a rise of in real GDP
In this phase the economy as a whole enjoys plentiful jobs and a falling unemployment rate
Economic growth is a steady, long-term increase in GDP
PEAK Peak occurs when GDP stops rising – it
has reached the pinnacle of economic expansion
CONTRACTION Contraction occurs after a peak, when the
economy enters a period of economic decline marked by falling GDP
Other conditions may like unemployment and price may vary
Economists have different terms to describe the severity of a contraction: Recession – exists if real GDP falls for 2
consecutive quarters (6 months) – unemployment normally 6 to 10 months
Depression – exists if a recession is esp. long and severe – high unemployment and low output
Stagflation – exists if real GDP declines (output) and prices rise (inflation)
TROUGH When the economy has “bottomed-out”
it has reached the trough. This is the lowest point of economic
contraction GDP stops falling
FACTORS THAT AFFECT THE BUSINESS CYCLE Business investment: When the
economy is good, businesses invest in new capital. When economy isn’t so good, businesses stop investing and this creates a drop in the output of other sectors of the economy – can also begin firing workers
Interest rates and credit: When interest rates are low, consumers and business are inclined to make purchases. When interest rates are high, they are less likely to spend money, lowering GDP
FACTORS THAT AFFECT THE BUSINESS CYCLE Consumer Expectations: When expectations
are that we are in a “good” economy, they expect higher wages and available jobs – increase in spending. When expectations are poor, consumers don’t spend money because they expect lay-off and lower incomes – can start a contraction
External Shocks: Negative shocks (drought, hurricane, oil supply) can cause increase in prices and a decline in GDP. Positive shocks (good growing season, finding of new oil supply) can increase GDP and decrease prices
Unit 6, Lesson 4Notes
ECONOMIC GROWTH The basic measure of a nation’s
economic growth rate is the percentage of change of GDP over a given period time
GDP must also keep up with population growth in order for it to keep being positive
Taking into account population, most economist prefer to rely on real GDP per capita into accountThis is the GDP per person in the country
ECONOMIC GROWTH Real GDP per capita is considered the
best measure of a nation’s standard of living
If GDP rises faster than population, the standard of living will go up
Factors such as population, government and foreign trade are taken under consideration.
Population Growth If the population grows while the supply of
capital remains constant, the amount of capital per worker will shrink.
Leads to lower living standards
Government If a government raises tax rates to pay for a
war, households will have less money and people will reduce savings. This reduces the money available for businesses.
Foreign Trade Trade Deficit- situation where the value of
goods a country imports is higher than the value of goods it exports.
TECHNOLOGICAL PROGRESS An increase in efficiency gained by
producing more output without using more inputs. New inventions New ways of performing a task New scientific knowledge New methods for organizing production
Increased productivity means producing more output with the same amounts of land, labor and capital.
This equals higher rates of GDP per capita, and thus higher standards of living!
Unit 6, Lesson 5Notes
ECONOMIC CHALLENGES - UNEMPLOYMENT Economists can measure the strength of
the economy at any given time by counting the number of unemployed people
There are 4 kinds of unemployment: FrictionalSeasonalStructuralCyclical
FRICTIONAL UNEMPLOYMENT Unemployment always exists, even in a
good economy Frictional unemployment occurs when
people take time to find a job For example: changing jobs, time to
find job after finishing school, etc. In an economy as large as the U. S.,
economists expect to find a large number of unemployed falling into this category
SEASONAL UNEMPLOYMENT Seasonal unemployment occurs when
industries slow or shut down for a season or make a seasonal shift in production schedules
For example, summer jobs, harvests, etc.
Economists expect to see people in this category as well
STRUCTURAL UNEMPLOYMENT When the type of economy shifts from one
sector to another, the skills workers need to have a job also changes
Workers who lack the necessary skills will lose their jobs – this is structural unemployment
There are 5 causes of structural unemployment: New technology New resources Changes in consumer demand Globalization Lack of education
CYCLICAL UNEMPLOYMENT Unemployment that rises when the
economy is down and falls when the economy is good is called cyclical unemployment
For example – Great Depression (1 out of 4 unemployed) and today’s recession (10% unemployment)
MEASURING UNEMPLOYMENT The amount of unemployment in the
nation is an important clue to the nation’s health
Each month, the Bureau of Labor and Statistics polls a portion of the population that tracks unemployment
They compute the unemployment rate: percentage of nation’s labor force that is unemployed
The unemployment rate is a national average and doesn’t take into account regional or local differences
FULL EMPLOYMENT 0% unemployment rate is not possible
in a market economy – 4-6% is normal Full employment can occur if there is no
cyclical unemployment