Transcript ECON ch 10.1

Chapter 10
Economic Performance
10.1 What is gross
domestic product?
How do economists predict
economic performance?
• Macroeconomists use measures called national
income & product accounts (NIPA’s) to track
economies:
– Production
– Income
– Consumptions
• Tracking process called national income
accounting
– National income accounting provides
information about nation’s economic activities
How do economists
calculate gross domestic
product?
• Gross domestic product (GDP) is the
most commonly used NIPA—it calculates
the total dollar value of all final goods &
services produced within a country in a
year
– Calculates total production, or output
How do economists
calculate gross domestic
product?
• Final output
– To avoid counting products more than once,
economists include on the value of final goods
& services when calculating GDP
• Example: Table is final product of
– Woodcutter (cuts down tree)
– Sawmill (processes tree into lumber)
– Furniture manufacturer (makes table)
• Tree & lumber are intermediate products—goods &
services used to make other products
– Intermediate product value is built into cost of table
How do economists
calculate gross domestic
product?
• Current year
– Does not include products such as used cars or
secondhand clothing
– GDP is a gauge of production—not sales
• Output produced within national borders
– Does not include products produced by U.S.
companies in factories outside the U.S.
– Does include output of foreign workers & firms within
the U.S.
• Example: Japanese-owned Nissan factory in Tennessee
How do economists
calculate gross domestic
product?
• How is GDP determined?
– Economists add the output produced by
•
•
•
•
Personal consumption expenditures (C)
Gross investment (I)
Government purchases of goods & services (G)
Net exports of goods & services, or exports minus
imports (X - M)
by using the output-expenditure model
• C + I + G + (X – M) = GDP
How do economists
calculate gross domestic
product?
• Personal consumption
expenditures
– Consumer purchases
• Durable goods
– Have a useful lifetime of more than a year, such as cars &
computers
• Nondurable goods
– Have a short useful lifetime, such as goods & cosmetics
• Services
– Such as medical care, entertainment & public education
– Fastest growing area of consumer expenditures
How do economists
calculate gross domestic
product?
• Gross Investment
– True investment is the use of money to
produce new capital goods
– Gross investment is the total value of all
capital goods produced in a given nation
during one year
• Includes changes in the dollar value of business
inventories
• Does not include the purchase of financial assets—
such as stocks, bonds, and land that do not result
in the production of new goods or services
How do economists
calculate gross domestic
product?
• Gross Investment
– 2 subcategories
• Fixed investment
– Spending on residential structures, nonresidential
structures such as office space & factories, & capital
goods such as new machinery & office equipment
• Inventory investment
– Refers to the increase or decrease in the total dollar
amount of the stock of raw materials, intermediate goods,
and final goods of domestic businesses during a given
period
How do economists
calculate gross domestic
product?
• Government purchases
– Total dollar value that federal, state, & local
governments spend on goods & services such
as
• Highways
• Public education
• National defense
– Transfer payments, such as Social Security
payments & government aid, expenditures for
which the government receives no goods or
services in exchange, are not included
How do economists
calculate gross domestic
product?
• Net exports
– Total U.S. exports minus total U.S. imports
• Includes the value of goods & services produced
domestically but sold in other countries (exports) &
does not include goods & services produced in
other countries but purchased locally (imports)
• As some goods & services included in GDP are
produced in other countries, and some items
produced in U.S. are sold in other countries & fail to
get included in the other components of GDP,
economists subtract total imports from total exports
How do economists
calculate gross domestic
product?
• What if a products price increases during
the year?
– Nominal GDP, or current GDP, is GDP
expressed in the current prices of the period
being measured
– Real GDP is GDP adjusted for price changes
• Calculating Real GDP helps economists to
determine if production increased or decreased
– A price index is a set of statistics that allows
economists to compare prices over time
What are some of the
limitations of gross
domestic product?
• Accuracy & timeliness of data
– Economists use sampling techniques to determine
prices & quantities
– Gathering data is slow & time-consuming
– GDP & NIPAs are only approximations of total output
& income
• Nonmarket activities
– GDP does not measure exchanges of goods &
services that are not market transactions (some output
does not get paid for, or may begin payment for
additional goods/services midway through year)
What are some of the
limitations of gross
domestic product?
• Underground activity
– Underground activity is illegal activities &
unreported legal activities (although it is illegal not to
report it)
• “Goods” & “Bads”
– The value of many things that make for a better
society are often not accounted for, while things that
make a society worse, are
– GDP is an imperfect reporter of economic well-being
• Example: Car emissions standards & regulations that prohibit
development in ecologically sensitive areas reduce GDP but
improve the nation’s well-being
• Some economists propose assigning positive values to
“goods” such as leisure & urban renewal, and negative dollar
values to “bads” such as pollution & traffic congestion
What other statistics do
economists use to measure
the economy?
• Gross national product
– Stopped being used in 1991
– GNP measures the total dollar value of all final output
products with factors of production owned by residents
of a country during one year
• Example: If production in Russia involves any capital owned
by U.S. residents, it would be counted as part of the U.S.
GNP
• GDP more accurately represents short-term resource use
changes in the economy
– GDP used by the United Nations & most other
countries—so the Commerce Department switched to
GDP
What other statistics do
economists use to measure
the economy?
• Net national product
– As GNP includes money invested in capital
goods, it also includes money spent on
replacing outdated or defective equipment
– When this depreciation is subtracted from
GNP, the result is a nation’s net national
product
What other statistics do
economists use to measure
the economy?
• National income
– The sum of employees’ & proprietors’ income, real &
estimated rental income, corporate profits, & net interest
– Economists subtract subsidies & indirect taxes from net
national product
• Personal income
– To determine the amount of income people in a nation
earn, economists will subtract income not given to
people, such as profits that firms keep & reinvest &
money spent on corporate income taxes & employee’s
Social Security
– Economists then add money given from government
transfer funds such as Social Security to determine
income paid to individuals in a nation
What other statistics do
economists use to measure
the economy?
• Disposable personal income
– Disposable income is the amount of money an
individual has after deductions such as Social
Security & income tax are taken out.
– Economists subtract personal taxes & nontax
payments from personal income
• Personal taxes include:
– Income, estate, gift, property, and motor vehicle taxes
• Nontax payments include:
– Fines & passport fees