Economic Performance

1. EconomicPerformance Chapter 13

2. Measuring National Output • Gross Domestic Product (GDP) • Dollar amount of all final goods & services produced in country’s borders in a year • Single most important measure of overall economic performance • National income accounting • System of statistics and accounts that tracks overall economic performance • Production, consumption, saving, & investment

3. Computing GDP • Multiply all final goods and services produced in a 12-month period by their prices and add them up • Exclude: • Intermediate products • Secondhand sales • Nonmarket transactions • Underground economy

4. Limitations of GDP • Tells nothing of the composition of output • Controversial goods may be produced • Tells little about the impact on the quality of life for the country’s people • Despite limitations, GDP remains best measure of a country’s economic health • Used to influence voting

5. Gross National Product • Gross National Product (GNP) • Measures national income • Dollar value on all final goods, services, & structures produced in one year by a country • Regardless of location; depends on ownership of labor and capital • GDP vs GNP • Output vs income; GNP is based on GDP • GDP is used to rank economies

6. National Income & Product Accounts (NIPA) • GNP is first income measure • Net National Product (NNP) • GNP minus depreciation • National Income (NI) • Income after taxes are subtracted from NNP • Personal Income (PI) • Amount going to consumers before individual income taxes are subtracted • Disposable Personal Income (DI) • What consumers can actually spend (after taxes)

7. Economic Sectors • Consumer Sector (C) • Households, families, & unrelated individuals • Investment Sector (I) • Proprietorships, partnerships, & corporations • Government Sector (G) • Federal, State, & Local • Foreign Sector (F) • All consumers & producers outside of the U.S. • (X – M): difference between dollar value of goods sent abroad and purchased from abroad

8. Circular Flow of Economic Activity • Output-expenditure model • GDP = C + I + G + (X - M) • Expenditures spent by C, I, and G becomes part of the GDP/GNP which becomes income for C, I, and G • Foreign sector expenditures are called net exports of goods and services

9. GDP and Changes in the Price Level Section 2

10. GDP and Price Level Changes • A rise in the general level of prices is inflation • Changes in prices over time are measured in a price index • Select a base year to serve as a comparison for other years • Select a market basket (representative selection of commonly purchased goods & services) • Total the prices for each good to get the base-year market basket price—assign a value of 100%

11. Major Price Indices • Consumer Price Index (CPI) • price changes on 80,000 items in 364 categories (1982-1984 are base-year prices) • Producer Price Index • price changes on 100,000 items paid by domestic producers for their inputs—(1982 base-year) • Implicit GDP Price Deflator • average levels of prices for all goods and services • Base-year of 1996

12. Real vs. Current GDP • Current GDP (or just plain GDP) • Not adjusted for inflation • Real GDP • What GDP would be if prices had not changed from the base-year Convert current GDP by the deflator then multiply by 100 to get the Real GDP This allows us to compare GDP in different years

13. GDP and Population Section 3

14. GDP and Population • GDP is often expressed on a per capita basis • Population growth affects GDP through the factors of production (primarily labor) and quality of life issues • Per capita is determined through the census • Urban population: >2,500 in an incorporated town • Rural population: everyone else in the country • Census tracks growth and shifts in population • Center of population: where the country would balance based on people (Missouri) • Businesses use the data to make decisions • New plants, sales territories, market for products

15. Factors Affecting Population Growth • Demographers study 3 important factors: • Fertility Rate • Births per 1,000 women • Life Expectancy • Average life span (about 76 years) • Net Immigration • Overall change in population caused by people moving in and out

16. Projections • Age and gender projections are important because demands on Social Security, Medicare benefits, pensions, etc., will burden younger and smaller generations • This also impacts the dependency ratio • Number of children and elderly per 100 people of working age (18-64) • Race and ethnic origin projections are tracked as well

17. Economic Growth Section 4

18. Economic Growth • Measured in the short-term (1-5 years) by real GDP • Long-term is measured by real GDP per capita • Adjusts forchanges in inflation and population • A growth triangle is used to show compound rates of growth between selected periods of time (see page 365)

19. Importance of Economic Growth • Raises standard of living • Quality of life improves • Eases burden of government • Finance public services and social programs • Helps solve domestic problems • Reduces poverty, unemployment, welfare #’s • Increases wages, health care, security • Boosts foreign trade partners’ economies • Creates jobs/generates income which results in greater demand for American goods and services

20. Factors Influencing Growth • Land • Natural resources need to be conserved • Renewable resources need time to replenish • Capital • High capital-to-labor ratio is most efficient • Depends on high-quality capital • Labor • Skilled and growing workforce required-affected by education • Labor productivity: amount of output produced per unit of labor input--when the ratio is high, productivity is high and vice versa • Entrepreneurs • The key to economic growth • Favor minimal government regulation and a system that lets them keep a maximum of their profits