Economics 9/29/14 http://mrmilewski.com • OBJECTIVE: Measurement of Economic Performance AP Macro-II.A • Language objective: SWBAT define essential vocabulary on measurement of economic performance in regards to national income accounts. In addition, swbat write notes on performance and read and write answers to questions and problems regarding the objective. • I. Journal#15 -Do now: What can happen to the economy, in the short run, if demand drops in a market where they have “sticky prices”? • II. Homework -Questions #1-6 and Problems #1-3 on page 502-503.
National Income Accounting • It measures the economy’s overall performance and enables economists to : • Assess the health of the economy by comparing levels of production at regular intervals. • Track the long run course of the economy to see if it has grown, been steady or declined. • Formulate policies that will help improve the economy’s health.
Gross Domestic Product • The annual total output of goods and services or its aggregate output. • This aggregate output is measured as the dollar value of all goods and services produced within the borders of a country.
Question • If a Toyota factory in Ohio is producing and selling cars, should these cars be counted in the aggregate GDP for Japan, or should they be counted in the aggregate GDP for the United States? • Since they are made within the borders of the U.S., they would count as aggregate GDP for the U.S.
Aggregate GDP is a Monetary Measure • To measure aggregate GDP, we measure it in a monetary measure. This means that we calculate GDP in dollars. • A price tag has to be attached to products to indicate how society evaluates their relative worth.
Example • Without evaluating in dollars, we have no way of comparing the vast number of goods and services produced in different years. • If in year 1, the price of sofas is $500 and the price of computers is $2000 and 3 sofas and 2 computers are produced, what is the value? • Then in year 2, the prices remain the same but production is 2 sofas and 3 computers, what is the value? • Year 1 would be $5,500 • Year 2 would be $7,000
Avoiding Multiple Counting • To measure aggregate GDP accurately, all goods and services must be counted once, and only once. • Because most products go through a series of production levels before they reach the market, GDP includes final goods and not intermediate goods.
Intermediate Goods Goods that are produced that are purchased for resale or further processing.
Final Goods Products that are purchased by their end users.
What does GDP Exclude • The aggregate GDP excludes nonproduction transactions that have nothing to do with the generation of final goods. These include: • Financial Transactions- Social Security, welfare and veterans’ payments. • Private Transfer Payments- Cash gifts from parents to children. • Stock Market Transactions- The buying and selling of stocks and bonds except for commissions to brokers. • Secondhand Sales- The sale of a used car for example.
Homework Tonight • Questions #1-6 and Problems #1-3 on page 502-503.
Two Ways of Looking at GDP: Spending and Income • Expenditure Approach- This looks at the aggregate GDP through the sum of all money spent in buying goods and services. • Income Approach- This looks at the aggregate GDP in terms of income derived or created from producing goods and services.
The Expenditure Approach • Business cycle - the rise and fall of GDP over time. • GDP – Gross Domestic Product • GDP= C+Ig+G+Xn(X-M) • C – consumer spending • I – business investment • G – government purchases • X – exports • M - imports
Personal Consumption Expenditures (c) • This includes all spending by households. • About 10% of this spending is on durable goods or goods that have an expected life of three or more years. • About 30% are on non-durable goods thathave a life expectancy of less than three years. • About 60% are on services provided by doctors, lawyers, etc.
Gross Private Domestic Investment (Ig)or Business Investment • This includes: • All final purchases of machinery, equipment and tools by businesses. • All construction. • All changes in inventory.
Government Purchases (G) • The government spends in two major ways: • Expenditures for goods and services that the government consumes providing public services. • Spending on publicly owned capital such as schools and highways, which have long lifetimes.
Net Exports (Xn) • Net Exports consist of all goods produced within our borders that are sold to other countries, less the goods made by other countries that we purchase. • Net Exports=Exports-Imports.
Homework Tonight • Questions #1-6 and Problems #1-3 on page 502-503.
AP Economics 9/30/14 http://mrmilewski.com • OBJECTIVE: Measurement of Economic Performance AP Macro-II.A • Language objective: SWBAT define essential vocabulary on measurement of economic performance in regards to national income accounts. In addition, swbat write notes on performance and read and write answers to questions and problems regarding the objective. • I. Journal#17 -Do now: What is the GDP for Wonderland if business investment is 22 billion, purchases of stocks is 31 billion, personal consumption is 123 billion, second hand sales are 18 billion, government spending is 109 billion, transfer payments are 25 billion and net exports are 72 billion? • II. Homework -Questions #7-9 and problems #4-5 on page 503-504.
The Income Approach • GDP – Gross Domestic Product • GDP= W + R + I + P + SA • W– wages • R – rents • I - interest • P– profits • SA - statistical adjustments
Compensation to Employees (W) • By far the largest share of national income. • Wages and salaries paid by business and government to their employees. • It also includes payments for pensions, health insurance and other benefits.
Rents (R) • Rents consist of the income received by the households and businesses that supply property resources. • It includes the monthly payments tenants make to landlords and the lease payments businesses make to lease office space. • This is a net rent payment: gross rental income less depreciation of the property.
Interest (I) • The money paid by businesses to the suppliers of loans used to purchase capital. • It also includes interest earned by households on savings deposits, CD’s and corporate bonds.
Profits (P) • Proprietor’s income is the net income of sole proprietors’, partnerships and unincorporated businesses. • Corporate profits are broken down into three categories: • Corporate Income Tax • Dividends • Undistributed Corporate Profits.
Taxes on Production and Imports • Income earned by the government in the form of sales taxes, excise taxes, business property taxes, license fees and customs duties.
From National Income to GDP • National Income is the total of all sources of private income (compensation, rents, interest, proprietors’ income and corporate profits) plus government revenues. • To arrive at GDP using the income approach: GDP=National Income - Net Foreign Income + Statistical Discrepancy + Consumption of Fixed Capital(Depreciation)
Other National Accounts • Net Domestic Product = GDP – Depreciation • Disposable Income = Consumption + Savings
Homework Tonight • Questions #7-9 and problems #4-5 on page 503-504.
Economics 10/1/14 http://mrmilewski.com • OBJECTIVE: Measurements of Economic Performance AP Macro-II.A • Language objective: SWBAT define essential vocabulary on measurement of economic performance in regards to Nominal GDP versus Real GDP. In addition, swbat write notes on performance and read and write answers to questions and problems regarding the objective. • I. Journal#18 -Do now: Using the following data, compute the GDP using the income approach: Wages 145 billion, Net Exports 34 billion, Government Spending 143 billion, Rents 63 billion, Interest 35 billion, Investment 47 billion, Proprietors’ Income 76 billion, Corporate Income 101 billion and Taxes on Production and Imports 39 billion. • II. Homework -Questions #10-12 and problems #6-8 on page 503-504.
Nominal GDP versus Real GDP • As discussed earlier, we have to associate GDP to dollar values to be able to calculate it. Unfortunately, the value of money changes from year to year. • Money’s value is can be affected by both inflation or deflation. • The way around this problem is to take Nominal GDP (unadjusted GDP) and inflate it when prices fall or deflate it when prices rise. This adjusted GDP is referred to as Real GDP.
Price Index • The Price Index is a measure of the price of a collection of goods and services called a “market basket”. • It compares the prices of a given year and a specific year.
How to Compute the Price Index • In this example of a one good economy, pizza, we can compute a price index to apply to the nominal GDP. • This is done by dividing the specific year price by the base year price. If it is 2/1, or 2, we change it to 200. If it is 1/2, or .50 we change it to 50.
Calculating Real GDP • To calculate Real GDP, we have to first compute the nominal GDP (C+I+G+Xn) and divide it by the price index. • Let’s go back to the previous example.
Alternative Method • If we know nominal GDP and we know real GDP, we can use a little algebra and calculate the Price Index.
Shortcomings of GDP • Although GDP is reasonably accurate and a very good measure of how the economy is doing, it does have its shortcomings. • Some major productive activities that it does not account for, or are not included in GDP: • Nonmarket Activities like stay at home parents or carpenters that do repair work on their own home • The underground economy which includes gamblers, smugglers, prostitutes, drug growers and drug dealers. • Others in the underground economy include people who get paid under the table, servers who don’t claim all of their tips they earned in cash. (Look at the chart on page 500)
ACDC Films • AC DC Econ: Back to the Future Inflation • ACDC Econ: GDP & Growth • ACDC Econ: Cars • ACDC Econ: Nominal & Real
Homework Tonight Questions #10-12 and problems #6-8 on page 503-504.
Economics 10/3/14 http://mrmilewski.com • OBJECTIVE: Measurements of Economic Performance AP Macro-I.E • Language objective: SWBAT define essential vocabulary on the business cycle, unemployment and inflation . In addition, swbat write notes on performance and read and write answers to questions and problems regarding the objective. • I. Journal#18 -Do now: Go to next slide. • II. Homework -Questions #1 and 2, problems # 1 on page 544-545.
Do now • Compute real GDP for the following table:
The Business Cycle • The economy in the long-run is cyclical. It goes through up and down phases. • This is known as the Business Cycle. We have periods of expansion as well as periods of recession.
Phases of the Business Cycle • Peak- Here the economy is near or at full employment and output is close to capacity. Prices tend to rise during this phase. • Recession- Here the economy is in decline which lasts 6 months or more. Output, income and employment are all down. • Trough- The recession bottoms out and everything is at their lowest levels. This can be short lived or last quite long. • Expansion- The economy begins to recover. GDP, income and employment begin to rise.
Causes of Fluctuations in the Cycle • As we discussed in a previous chapter, changes in the short run of the economy are the results of shocks. • When there are “sticky prices”, they cannot change quick enough to adjust to the shock.
What Causes Shocks? • Irregular Innovation- Technology advances such as the railroads in the 19th century or the computer in modern times can cause a shock. • Productivity Changes- A shock can be caused if productivity were to increase or decrease unexpectedly. This can happen if the availability of a resource suddenly changes, like oil or agricultural goods.
Causes of shocks continued • Monetary Factors- Changes in the money supply can affect the economy. Printing more money can cause inflation and printing less can lower output and prices fall. • Political Events- Unexpected events, like 9/11, can create a shock. • Financial instability- Unexpected financial bubbles (rapid asset price increases or decreases) can cause a shock. This can cause a change in consumer confidence.
Shock Impact on Goods and Services • During a recession, firms that produce capital goods and durable goods suffer greater output and employment declines. • Firms that provide services or that produce nondurable goods tend to be less effected by a recession.
Homework Tonight Questions #1 and 2, problems # 1 on page 544-545.