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Unit Two: Measuring Economic Growth and Performance

Unit Two: Measuring Economic Growth and Performance. Topic: Measuring growth Chapter: 7. Learning Targets. I will be able to calculate a percentage change. I will know for what national income accounting is used. I will be able to calculate GDP, and know what it is used for.

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Unit Two: Measuring Economic Growth and Performance

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  1. Unit Two: Measuring Economic Growth and Performance Topic: Measuring growth Chapter: 7

  2. Learning Targets • I will be able to calculate a percentage change. • I will know for what national income accounting is used. • I will be able to calculate GDP, and know what it is used for. • I will be able to explain the difference between real GDP and nominal GDP. • I will be able to calculate the GDP deflator and know for what is it used. • I understand how real GDP has changed over time. • I will evaluate the concerns of GDP being used as a measurement of well-being. • I will be able to calculate NDP, NI, DI and PI. • I know the common price indices and for what they are used. • I will be able to calculate CPI and use it to determine the inflation rate. • I can compare the GDP deflator to the CPI.

  3. Prior knowledge… • How to find a percentage change (New – original) X 100 = % change from original to new original

  4. National Income Accounting • Measures economic performance by examining flows of income and expenditures over time. • One person’s expenditure is another person’s income; thus, the two must always equal. • Consistency is key to comparison; if something is always measured the same way, it is easier to compare. • Provides a basis for public (gov’t) policies to improve economic performance.

  5. Gross Domestic Product (GDP) • Monetary measure of the value of all final goods and services produced within a country in one year.

  6. Includes: All goods and services produced in one country Foreign producers within domestic borders Final goods only Does not include: Anything produced outside of the country Intermediate goods Public transfer payments Private transfer payments Stock market transactions Secondhand sales Illegal transactions Non-market activities GDP

  7. Expenditures (“stuff”) Divides economy into categories of buyers – consumers, businesses, government and foreign buyers. Income (money) Shows how expenditures on final goods and services are allocated to resource suppliers. GDP – Two Approaches

  8. Expenditures Approach • Personal consumption expenditures (C) • Gross private domestic investment (Ig) • Government purchases (G) • Net Exports (Xn) GDP = C + Ig + G +Xn

  9. C (personal consumption expenditures) • Includes FINAL durable goods, nondurable goods, and all services.

  10. Ig (gross private domestic investment) • Final purchases of machinery and equipment by businesses • Construction of buildings, houses, roads, etc. • Changes in business inventories • Net private domestic investment (In), a.k.a. depreciation or consumption of fixed capital

  11. G (government purchases) • Spending at all levels (local, state and federal) • Direct purchases of resources (particularly labor) • Excludes transfer payments (social security, welfare, unemployment compensation, etc.)

  12. Xn (net exports) • All spending on goods produced in the U.S. must be counted, regardless of who buys it (domestic or foreign). • Imports are excluded from GDP because they are not produced in the U.S. • Net exports, therefore, equal exports (X) minus imports (M). • This number can be either positive or negative.

  13. Income Approach • Wages and compensation – includes benefits • Rents – payments from businesses to suppliers of money capital. • Proprietors’ incomes – incorporated businesses, sole proprietorships, partnerships, and cooperatives. • Corporate profits – corporate income taxes, dividends, and undistributed corporate profits. • Indirect business taxes • Net foreign factor income – foreign nationals must be added and Americans abroad subtracted (can be a negative number).

  14. Nominal GDP vs. Real GDP • GDP must be deflated or inflated to reflect changes in the price level. • The unadjusted GDP is nominal GDP and the adjusted is real GDP. • Ex: Find nominal GDP for 2005 and for 2007. Find real GDP for 2007 using 2005 as base year.

  15. Nominal GDP vs. Real GDP GDPn 2005 = GDPn 2007 = GDPr 2005 = GDPr 2007 =

  16. GDP Deflator • Measure of price level (PL) • Used to adjust nominal GDP to real GDP GDPn X 100 GDP deflator = GDPr

  17. GDP Deflator From our info from before (below), calculate the GDP deflator for 2005 and for 2007. GDPn 2005 = ($1X100) + ($2X50) = $200 GDPn 2007 = ($3X200) + ($4X150) = $1200 GDPr 2005 = $200 GDPr 2007 = ($1X200) + ($2X50) = $500

  18. GDP Deflator 2005 2007 The price level increased by ______% between these two years. This is the rate of inflation.

  19. Real GDP over History • In general, real GDP has increased since 1965. • There have been periods of recession where real GDP has briefly decreased, but the overall trend has been growth.

  20. Concerns of GDP as a measure of economic well-being… • GDP does not account for health, leisure time, quality of education, quality of life, intelligence, wisdom, quality of environment, etc. • BUT – countries with larger GDPs tend to have better healthcare, education systems, environmental standards, work standards, etc.

  21. Net domestic product (NDP) = GDP – consumption of fixed capital (depreciation) National income (NI) = NDP – net foreign factor income – indirect business taxes Personal income (PI) = NI – social security contributions – corporate income taxes – undistributed corporate profits + transfer payments Disposable income (DI) = PI – personal taxes Other national accounts…

  22. Common Price Indices • Used to measure cost of living • Consumer price index (CPI) – measures the overall cost of goods and services purchased by the typical consumer in a year. • Producer price index (PPI) – measures the overall cost of resources purchased by a typical firm in a year. Because increased costs are generally thought to be passed onto the consumer in the form of higher prices, this can be used as an indicator for changes in the CPI.

  23. CPI • How it is calculated: • Basket is determined by what consumers buy (everything is weighted according to popularity). • Find the prices for the year(s) being examined. • Compute the cost of the basket. • Choose a base year and compute the index. • Compute the inflation rate.

  24. CPI and Inflation Rate Calculations Price of basket of goods and services X 100 CPI = Price of basket in base year To calculate the inflation rate, use the percentage change formula.

  25. CPI and Inflation Rate Calculate the CPI for each year with 2005 as the base year. Calculate the inflation rate between 2005 and 2006.

  26. CPI and Inflation Rate CPI 2005 = CPI 2006 = Inflation rate 2006 =

  27. GDP deflator Reflects the prices of all domestic goods and services. Compares the price of currently produced goods and services to the prices of goods that were produced a prior year. CPI Reflects the prices of all (domestic and foreign) goods and services bought by consumers. Compares the price of a fixed basket of goods and services to the price of the basket in the base year. GDP deflator vs. CPI

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