Transcript Economics: Principles, Applications, and Tools, 5th ed

O’Sullivan • Sheffrin • Perez
Measuring a Nation’s
Production and Income
© 2007 Pearson/Prentice Hall, Survey of Economics: Principles, Applications & Tools, 3e, O’Sullivan • Sheffrin • Perez
chapter
MEASURING A NATION’S PRODUCT AND INCOME
• macroeconomics
The study of the nation’s
economy as a whole;
focuses on the issues of
inflation, unemployment,
and economic growth.
• inflation
Sustained increases in the
average prices of all
goods and services.
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chapter
11.1
THE “FLIP” SIDES OF MACROECONOMIC
ACTIVITY: PRODUCTION AND INCOME
The Circular Flow of Production and Income
 FIGURE 11.1
The Circular Flow of Production and Income
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chapter
11.2
THE PRODUCTION APPROACH: MEASURING A
NATION’S MACROECONOMIC ACTIVITY USING
GROSS DOMESTIC PRODUCT
• gross domestic product (GDP)
The total market value of final
goods and services produced
within an economy in a given
year.
• intermediate goods
Goods used in the production
process that are not final goods
and services.
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chapter
11.2
THE PRODUCTION APPROACH: MEASURING A
NATION’S MACROECONOMIC ACTIVITY USING
GROSS DOMESTIC PRODUCT
• real GDP
A measure of GDP that controls for
changes in prices.
• nominal GDP
The value of GDP in current dollars.
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Extra Application 4
THE ECONOMY HEATS UP
Reports indicate the economy is still going strong. Manufacturing and services are both
showing growth as is personal income. Retail sales growth is up 0.6 %for April and chain
store receipts grew by 3% for the month. In spite of the positive indicators some
economists are worried about the ultimate impact of higher gasoline prices on consumer
spending.
• One widely awaited economic indicator is the consumer sentiment index from the
University of Michigan which provides a useful forecasting tool about future growth.
• Optimistic consumers spend money and pessimistic consumers reduce spending.
• Analysts are also waiting for the Fed’s press release later this week.
• Strong economic numbers may spell
more rate increases in the near term.
Optimistic consumers fuel economic growth. As consumers
feel better about the economy they will open their wallets
and demand more goods and services. This increased
optimism pushes the aggregate demand curve out and
results in higher output as shown in the graph.
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chapter
11.2
THE PRODUCTION APPROACH: MEASURING A
NATION’S MACROECONOMIC ACTIVITY USING
GROSS DOMESTIC PRODUCT
 FIGURE 11.2
U.S. Real GDP, 1930–2005
• economic growth
Sustained increases in
the real GDP of an
economy over a long
period of time.
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chapter
11.2
THE PRODUCTION APPROACH: MEASURING A
NATION’S MACROECONOMIC ACTIVITY USING
GROSS DOMESTIC PRODUCT
The Components of GDP
Economists divide GDP into four broad categories, each corresponding to different
types of purchases represented in GDP:
1 Consumption expenditures: purchases by consumers
2 Private investment expenditures: purchases by firms
3 Government purchases: purchases by federal, state, and local governments
4 Net exports: net purchases by the foreign sector (domestic exports minus domestic
imports)
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chapter
11.2
THE PRODUCTION APPROACH: MEASURING A
NATION’S MACROECONOMIC ACTIVITY USING
GROSS DOMESTIC PRODUCT
The Components of GDP
CONSUMPTION EXPENDITURES
• consumption expenditures
Purchases of newly produced goods
and services by households.
PRIVATE INVESTMENT EXPENDITURES
• private investment expenditures
Purchases of newly produced goods
and services by firms.
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chapter
11.2
THE PRODUCTION APPROACH: MEASURING A
NATION’S MACROECONOMIC ACTIVITY USING
GROSS DOMESTIC PRODUCT
The Components of GDP
PRIVATE INVESTMENT EXPENDITURES
Private investment expenditures in GDP consist of three components:
1 First, there is spending on new plants and equipment during the year.
2 Second, newly produced housing is included in investment spending.
3 Finally, if firms add to their stock of inventories the increase in inventories during
the current year is included in GDP.
• gross investment
Total new investment expenditures.
• depreciation
Reduction in the value of capital goods over a one-year period
due to physical wear and tear and also to obsolescence; also
called capital consumption allowance.
• net investment
Gross investment minus depreciation.
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chapter
11.2
THE PRODUCTION APPROACH: MEASURING A
NATION’S MACROECONOMIC ACTIVITY USING
GROSS DOMESTIC PRODUCT
The Components of GDP
GOVERNMENT PURCHASES
• government purchases
Purchases of newly produced goods and
services by local, state, and federal
governments.
• transfer payments
Payments from governments to individuals
that do not correspond to the production of
goods and services.
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chapter
11.2
THE PRODUCTION APPROACH: MEASURING A
NATION’S MACROECONOMIC ACTIVITY USING
GROSS DOMESTIC PRODUCT
The Components of GDP
NET EXPORTS
• import
A good produced in a foreign country
and purchased by residents of the
home country (for example, the United
States).
• export
A good produced in the home country
(for example, the United States) and
sold in another country.
• net exports
Exports minus imports.
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chapter
11.2
THE PRODUCTION APPROACH: MEASURING A
NATION’S MACROECONOMIC ACTIVITY USING
GROSS DOMESTIC PRODUCT
The Components of GDP
NET EXPORTS
• trade deficit
The excess of imports
over exports.
• trade surplus
The excess of exports
over imports.
FIGURE 11.3
U.S. Trade Balance as a
Share of GDP,
1960–2005
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chapter
11.2
THE PRODUCTION APPROACH: MEASURING A
NATION’S MACROECONOMIC ACTIVITY USING
GROSS DOMESTIC PRODUCT
Putting It All Together: The GDP Equation
Y = C + I + G + NX
Y = GDP
C = Consumption
I = Investment
G = Government purchases
NX = net exports
GDP = consumption + investment + government purchases + net exports
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chapter
11.3
THE INCOME APPROACH: MEASURING A
NATION’S MACROECONOMIC ACTIVITY
USING NATIONAL INCOME
• national income
The total income earned by a nation’s
residents both domestically and abroad in
the production of goods and services.
Measuring National Income
• gross national product
GDP plus net income earned abroad.
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chapter
11.3
THE INCOME APPROACH: MEASURING A
NATION’S MACROECONOMIC ACTIVITY
USING NATIONAL INCOME
Measuring National Income
• personal income
Income, including transfer
payments, received by
households.
• personal disposable income
Personal income that households
retain after paying taxes.
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11.3
THE INCOME APPROACH: MEASURING A
NATION’S MACROECONOMIC ACTIVITY
USING NATIONAL INCOME
Measuring National Income Through Value Added
• value added
The sum of all the income—wages, interest, profits,
and rent—generated by an organization. For a firm,
we can measure value added by the dollar value of
the firm’s sales minus the dollar value of the goods
and services purchased from other firms.
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chapter
11.3
THE INCOME APPROACH: MEASURING A
NATION’S MACROECONOMIC ACTIVITY
USING NATIONAL INCOME
An Expanded Circular Flow
FIGURE 11.4
The Circular Flow with Government
and the Foreign Sector
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chapter
USING VALUE ADDED TO MEASURE THE TRUE SIZE
OF WAL-MART
APPLYING THE CONCEPTS #1: How can we use economic
analysis to compare the size of a major corporation
to a country?
During 2004, Wal-Mart’s sales were approximately $285 billion, nearly
2.4 percent of U.S. GDP. Some social commentators might want to measure
the impact of Wal-Mart just through its sales. But to produce those
sales, Wal-Mart had to buy goods from many other companies.
• Based on Wal-Mart’s annual reports, its cost of sales was $219 billion,
leaving approximately $66 billion in value added.
• If we used Wal-Mart’s sales to compare it to a country, it would have a
GDP similar to Indonesia, which is ranked 23rd in the world.
• However, using the more appropriate measure of value added, WalMart’s size is closer to the Ukraine, which is ranked 53rd in the world.
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chapter
11.4
A CLOSER EXAMINATION OF NOMINAL
AND REAL GDP
Measuring Real Versus Nominal GDP
FIGURE 11.5
U.S. Nominal and Real GDP,
1950–2005
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chapter
11.4
A CLOSER EXAMINATION OF NOMINAL
AND REAL GDP
How to Use the GDP Deflator
• GDP deflator
An index that measures how the prices of
goods and services included in GDP change
over time.
• chain-weighted index
A method for calculating changes in prices
that uses an average of base years from
neighboring years.
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chapter
11.5 FLUCTUATIONS IN GDP
FIGURE 11.6
The 1990 Recession
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chapter
11.5 FLUCTUATIONS IN GDP
• recession
Commonly defined as six consecutive
months of declining real GDP.
• peak
The date at which a recession starts.
• trough
The date at which output stops falling
in a recession.
• expansion
The period after a trough in the
business cycle during which the
economy recovers.
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chapter
Extra Application 6
THE U.S. ECONOMY SLOWS BUT DOESN'T SHRINK
The primary components of GDP are consumption, government spending, business
investment, and net exports. Consumer spending is critical to continued growth hence
the reason that consumer confidence is such a closely watched statistic.
• The most recent numbers indicate that the U.S. economy has slowed to an annual
growth rate of 1.6%.
• While that rate is the slowest rate in the past three years it still does not spell
economic doom.
• Slowing growth is not all bad since it tends to dampen upward price movements
or inflation.
• While slowing growth as measured by the change in gross domestic product (GDP)
can be good, it also positions the economy to be susceptive to negative shocks such
as additional weakness in consumer spending.
• Consumer spending typically accounts for about 70% of the total economy so
slowing growth could make consumers more cautious and cause them to slow
down on spending.
• The reduction in consumer spending could make negative growth (a recession) a
self-fulfilling prophecy.
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chapter
11.5 FLUCTUATIONS IN GDP
• depression
The common name for a severe recession.
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chapter
THE NBER AND THE 2001 RECESSION
APPLYING THE CONCEPTS #2: How do we
determine when a recession has occurred in the
United States?
Although the level of GDP is an extremely important indicator,
the NBER committee also examines a full range of other data.
This examination takes time, which is why the NBER often
announces the beginning and end of a recession many
months later.
• Example: On November 26, 2001, the NBER announced
that the peak of the 2001 recession occurred in March
2001.
• Nearly two years later, on July 17, 2003, they dated the
trough as occurring in November 2001.
• Although the common definition of a recession is a six-month consecutive period of
negative economic growth, the NBER defines a recession as a “significant decline in
activity spread across the economy, lasting more than a few months, visible in industrial
production, employment, real income, and wholesale-retail trade.”
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11.6 GDP AS A MEASURE OF WELFARE
Shortcomings of GDP as a Measure of Welfare
HOUSEWORK AND CHILDCARE
LEISURE
UNDERGROUND ECONOMY
POLLUTION
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