CHAPTER 5 “Measuring National Output”

1. MACROECONOMICS: EXPLORE & APPLYby Ayers and Collinge CHAPTER 5“Measuring National Output”

2. Learning Objectives • Present three widely accepted goals for the macro economy. • Delineate gross domestic product (GDP) and its components. • Distinguish real GDP from nominal GDP.

3. Learning Objectives • Track the stages of the business cycle. • (E&A) Identify the advantages and disadvantages of static and dynamic scoring.

4. 5.1 MACROECONOMIC GOALS • Economic Growth occurs when the economy’s total output of goods and services increase. • Full Employment occurs when jobs are available for those who are willing and able to work. • Low Inflation when prices are relatively low and stable.

5. Effects of Growth: Selected Changesin the U.S. Standard of Living

6. Effects of Growth: Selected Changesin the U.S. Standard of Living

7. 5.2 MEASURING NATIONAL OUTPUT Outputis usually measured by tallying the value of final goods and services - those which are sold to their final owners.

8. Gross Domestic Product (GDP) The most widely reported measure of the economy’s output is gross domestic product (GDP) which is the market value of the final goods and services produced in the economy within some time period (usually one year or one quarter).

9. Gross Domestic Product (GDP) Spending on final goods and services may be attributed to four sources: • Consumption • Investment • Government • Foreign Commerce Spending on intermediate goods is not included in GDP so as to avoid double counting.

10. Consumption (C) • Purchasing by households • The majority of spending in the U.S. economy - about 68% • Consumer durable goods, • Consumer nondurable goods • Services

11. Investment (I) Spending now in order to increase output or productivity later: • Purchases by firms of capital • Consumers’ purchases of new housing • Market value of changes in inventories

12. Gross Investment, Net Investment, and Net Domestic Product Gross Investment Total Amount of Investment = Gross Investment minus Depreciation Net Investment = GDP minus Depreciation = NDP

13. Government (G) • At federal, state, and local levels account for 18% of total purchasing in the U.S. economy. • Approximately 1/10 of government spending could be investment. • Government purchases of goods and services must be distinguished from transfer payments such as Social Security and unemployment benefits.

14. Foreign Commerce (NX) Because a portion of spending by consumers, businesses, and government is on imports, it is useful to subtract imports from exports. Net Exports Exports - Imports =

15. $7,064.5 +$1,633.9 +$1,839.5 + -$329.8 (69%) (16%) (18%) (-3%) 5.3Gross Domestic Product (GDP) GDP is the sum of purchases by the four sectors of the economy. GDP = C + I + G + NX $10,208.1 = 2001 Data

16. The Four Components of GDP

17. Potential GDP Potential GDPis the value of GDP that would exist if all resources in the economy were fully and efficiently employed. Actual GDP equals potential GDP only if there is no unemployment or underemployment of resources.

18. Per Capita GDP • Per capita GDP is GDP per person • In 2001, total GDP was $10.2 trillion • In 2001, the U.S. population was over 284 million people • Per capita GDP for 2001 was $35,843 - the amount of output produced and equally divided among every man, woman, and child in the U.S.

19. GDP and Value Added GDP may also be viewed as the sum of value added in the economy. Each firm takes inputs of materials and intermediate goods and increases their value through the firm’s production process. Value added equals the revenue from the sale of output minus the cost of purchased inputs.

20. Underground Economy The underground economy refers to the market transactions which go unreported. Some of these goods and services are illegal and thus not recorded in GDP. Others are legal, but not reported so that their producers may avoid paying taxes on the output.

21. Nominal versus Real GDP • Nominal GDP is the value of GDP expressed in current dollars terms. • Real GDP adjust for inflation the nominal value of GDP. • The chain-type price index is an index of prices that measure price changes over time.

22. Nominal versus Real GDP Real GDP = Nominal GDP divided by GDP chain price index x 100

23. Nominal and Real GDP

24. 5.4THE BUSINESS CYCLE The business cycle refers to the expansions and contractions in economic activity that take place over time.

25. Stages of the Business Cycle Peak Real GDP Recession Expansion Trend Line Trough Trough Time

26. Rising Trend of GDP

27. The Upward Trend of Real GDP

28. Economic Indicators • Leading Indicators:index of building permits, housing starts, and manufacturers’ new orders for durable goods. • Lagging indicators:unemployment rate and expenditures on new plant and equipment. • Coincident indicators:index of industrial production and the prime interest rate.

29. 5.5 EXPLORE & APPLYStatic vs. Dynamic Scoring • Static scoring: the traditional method of computing the effects of federal actions. Static scoring assumes no general change in behavior as a result of government policy changes. • Dynamic scoring: allows for the consideration of all behavioral changes caused by changes in government policy.

30. gross domestic product (GDP) consumption spending investment gross investment net investment net domestic product (NDP) value added potential GDP underground economy GDP chain price index nominal GDP real GDP potential GDP business cycle leading indicators static scoring dynamic scoring Terms along the Way

31. Test Yourself • The consumption spending portion of GDP includes • durables, nondurables, and services • goods, services, and new houses. • intermediate foods, but not final goods. • about 90% of all production that occurs in the economy.

32. Test Yourself 2. Gross Investment equals • net investment plus depreciation. • investment adjusted for the effects of inflation. • a negative component of GDP. • the change in business inventories.

33. Test Yourself 3. The value of a new house is included in • consumption. • investment. • government purchases. • net exports.

34. Test Yourself 4. Which of the following is an example of a transfer payment? • A school district pays the salary of a school teacher. • A senior citizen is issued a Social Security check by the government. • A farmer raises a field of corn from seed.. • A little boy and girl spend their allowances at Chuck E. Cheese’s pizza restaurant.

35. Test Yourself 5. Net exports are computed as • exports minus depreciation. • export minus imports. • export minus GDP. • imports minus exports.

36. Test Yourself 6. To compute real GDP when given nominal GDP we must also know • nothing else, since real GDP and nominal GDP are generally equal. • the value of consumption spending. • the value of gross investment. • the value of the GDP chain-type price index.

37. The End! Next Chapter 6 “Unemployment"