Chapter 13
Economic
Performance
Economics and You
A growing economy means an expanding
economy, one that continues to provide
more people with what they want or need.
In Chapter 13, you will learn how the
nation’s economic growth is the key to a
better future for everyone.
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Economics and You.
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Chapter Objectives
Section 1: Measuring the Nation’s
Output
• Explain how Gross Domestic Product
(GDP) is measured. 
• Describe the limitations of GDP. 
• Understand the importance of GDP.
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Chapter Objectives
Section 2: GDP and Changes in the
Price Level
• Explain how a price index is constructed. 
• Describe three price indices. 
• Understand the difference between real
and current GDP.
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Study Guide (cont.)
Key Terms
– Gross Domestic
Product 
– national income
accounting 
– intermediate
products 
– secondhand sales 
– nonmarket
transactions 
– underground
economy 
– Gross National
Product 
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–
–
–
–
–
–
–
–
–
net national product 
national income 
personal income 
disposable personal
income 
household 
unrelated individual 
family 
output-expenditure
model 
net exports of goods
and services
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Study Guide (cont.)
Objectives
After studying this section, you will be able to: 
– Explain how Gross Domestic Product (GDP)
is measured 
– Describe the limitations of GDP. 
– Understand the importance of GDP. 
Applying Economic Concepts
Gross Domestic Product Why is the GDP the
most important measure of overall economic
performance?
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Introduction
• The Gross Domestic Product (GDP)–the
dollar amount of all final goods and
services produced within a country’s
national borders in a year–is the single
most important measure of the economy’s
overall economic performance. 
• When GDP does not do well, neither does
the rest of the economy. 
• Economists devised national income
accounting–a system of statistics and
accounts that keeps track of production,
consumption, saving, and investment–to
track overall economic performance.
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Introduction (cont.)
• This data becomes part of the National
Income and Product Accounts (NIPA) kept
by the U.S. Department of Commerce. 
• The NIPA is like a statistical road map that
tells Americans where they are and how
they got there.
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GDP–The Measure of
National Output
• Gross Domestic Product (GDP), a measure
of national output is computed by
multiplying all final goods and services
produced in a 12-month period by their
prices. 
• Intermediate goods, secondhand sales,
and nonmarket transactions are excluded
from GDP.
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GDP–The Measure of
National Output (cont.)
Figure 13.1
Estimating Gross Domestic Product
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GDP–The Measure of
National Output (cont.)
• GDP tells nothing about the composition of
output or the impact of production on
quality of life. 
• Despite its limitations, GDP is still the best
measure of overall economic health.
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Discussion Question
What does an increase in GDP
indicate?
That the country experienced
economic growth.
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GNP–The Measure of
National Income
• Gross National Product (GNP) is equal to
GDP plus all payments that Americans
receive from outside the United States
minus all payments made to foreign-owned
resources inside the United States. 
• Net National Product (NNP) is equal to
GDP minus depreciation. 
• National Income (NI) is equal to NNP minus
all taxes paid by businesses other than the
corporate profits tax.
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GNP–The Measure of
National Income (cont.)
• Personal Income (PI) is the total amount of
income received by individuals before
taxes. 
• Disposable Personal Income (DI) is PI less
taxes.
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Discussion Question
Which measure of national income
would you be interested in if you were
trying to forecast sales of consumer
goods?
Disposable personal income, which
reflects the amount of money
individuals have to spend.
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Economic Sectors and
Circular Flows
• The consumer sector includes
individuals/households. 
• The investment sector includes businesses.

• The government sector includes local,
state, and federal levels of government. 
• The foreign sector includes all consumers
and producers outside the United States.
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Economic Sectors and
Circular Flows (cont.)
Figure 13.3
Circular Flow of Economic Activity
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The Output-Expenditure Model
• The output-expenditure model is a
macroeconomic model used to show
aggregate demand by all the economic
sectors. 
• The equation for the output-expenditure
model is GDP = C + I + G + F . 
• Each sector spends its income on different
types of goods and services.
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The Output-Expenditure Model (cont.)
Figure 13.3
Circular Flow of Economic Activity
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Introduction
• Most people are surprised to discover how
hard the government works to collect and
process data. 
• Inflation is a rise in the general price
level. 
• It is important to track inflation because it
distorts the economic statistics that we
keep.
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Introduction (cont.)
Figure 13.4
Estimating Gross Domestic Product
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Constructing a Price Index
• A price index is used to measure changes
in prices over time. 
• A price index is created by selecting a base
year and a representative market basket of
goods. 
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Constructing a Price Index (cont.)
Figure 13.5
Constructing the Consumer Price Index
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Discussion Question
What do price indices show?
The change in price relative to a base
year.
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Major Price Indices
• The consumer price index (CPI) reports
changes in the prices of 80,000 consumer
goods and services. 
• The producer price index (PPI) reports
changes in prices received by domestic
producers for 3,000 commodities. 
• The GDP price deflator is an index of
average prices for all goods and services.
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Real vs. Current GDP
• Real GDP is calculated by dividing current
GDP by the implicit GDP price deflator and
multiplying by 100. 
• Converting current GDP into real GDP is
useful for comparing over time.
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Section Close
What is the importance of inflation
when discussing economic
statistics. Name any familiar
products that you believe have been
affected by a rise in inflation.
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