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Economic Performance. Chapter 13. 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

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measuring national output
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
computing gdp
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
limitations of gdp
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
gross national product
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
national income product accounts nipa
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)
economic sectors
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
circular flow of economic activity
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
gdp and price level changes
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%
major price indices
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
real vs current gdp
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

gdp and population1
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
factors affecting population growth
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
projections
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
economic growth1
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)
importance of economic growth
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
factors influencing growth
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