Brief Response
• When you invest, it is best to diversify your
portfolio. Why? (2)
• The most effective portfolio has risky stocks
for fast money growth (but possibly greater
losses) and safer stocks for steady, but slower
money growth.
Unit IV: Macroeconomics
Policies
pp. 338-456
2
Chapter 13 Economic Performance
Section 1 p. 340
• Gross Domestic Product
• 341 aka: GDP
• The dollar amount of all final goods and
services produced in a single year
• Within a nation’s borders.
• A major indicator for economists and
governments of how their economies are
doing.
3
National income accounting
• 341 a system of statistics and accounts that keeps
track of
–
–
–
–
Production
Saving
Consumption
Investment
• US: the National Income and Products Accounts
(NIPA) are kept by the US Bureau of Economic
Analysis (BEA)
• Part of the US Department of Commerce
4
Intermediate products
• 343 products used to make other products
already counted in GDP
• Not counted in GDP
– Tires purchased with a new car
• Only value of car is counted
– Flour used by a bakery to make bread
• Only value of bread is counted
5
What’s the difference?
• Picture one
• shows intermediary products, parts used when
the new car is first built.
– They would be counted GDP when they were
purchased by the car manufacturer to build the car.
• Picture two
• shows an auto parts store when replacement
parts or parts to augment the original car would
be purchased.
– They would be counted as part of GDP when
purchased in the store.
6
Secondhand sales
• 343 merchandising used goods
• Not counted in GDP
–
–
–
–
–
–
Personal sales at home/yard sales
Flea markets
Used car
Any sale of a house after initial purchase
Used clothes
Thrift shops
• Etc.
7
Nonmarket transactions
• 343 do not happen in a market.
–Not counted in GDP
• Neighbor baby sitter
• Lawn mowing
• Homemaking
• Home garage
8
Underground economy
• 343 aka: “black market”
• Not reported in GDP
– Illegal drugs
– Smuggling
– Illegal gambling
– Prostitution
– Selling stolen goods
– Counterfieting
9
Gross National Product
• 344 the dollar amount of all final goods and
services and structures produced in one year
• Labor and property supplied by the country’s
residents.
– Includes GDP
– Also includes imports
• Another important measure of economic
productivity.
10
Net National Product
• 344 GNP minus depreciation
• subtracts capital equipment that is over 1 year
old
• Another economic measure
11
National income
• 345 income that is left after all taxes are
subtracted from NNP
– Excise tax
– Property tax
– Licensing fees
– Customs duties
– General sales tax
• Except corporate profit tax
• Another economic measure
12
Personal income
•
•
•
•
345 Another economic measure.
total amount of income going to consumers
Before individual income taxes are subtracted.
Adjustments include:
–
–
–
–
Income that does not go to the consumer
Corporate income taxes
SSI (FICA) contributions
Transfer payments are added in—
•
•
•
•
Unemployment insurance
SSI
Medicaid
Other public assistance
13
Disposable personal income
• 346 aka “DI”
• Total income the consumer sector has at its
disposal AFTER income taxes
• “amount people have available to spend”
14
Household
• 346 all the persons who occupy (reside) in a
living quarters:
• House
• Apartment
• Etc.
– Head
– Family
– Lodgers
– Live-in employees
15
Unrelated individual
• 346 a person who lives alone even though
he/she may have family living elsewhere.
16
Family
• 346 a group of two or more persons living
together
• related by
– blood,
– marriage,
– adoption
17
C
• 346 formula symbol for the consumer sector
of the economy
• Income of
– Households
– Family
– Unrelated individuals
18
Output-expenditure model
• 348 Shows the aggregate demand by the
– Consumer sector
– Investment/business sector
– Government sector
– Foreign sector
• The formula:
GDP = C + I + G + (X-M)
19
Net export of goods and services
• 348 refers to the difference between the US’
exports and imports.
• Note: This also helps determine balance of
trade
20
Section 2 p. 350 Terms:
• Inflation
• 350 a rise in the general price level
• Note: a weakening of the buying power of a
currency.
• Inflation must be considered when measuring
the economy because it distorts the results
(does not give an accurate measure)
21
Inflation 5/21
22
What is behind rising global inflation?
The Economist, 1/25/2011
•
•
•
•
•
•
•
•
•
•
•
hand-out
There are 5 very informative phrases explaining inflation in 2011….. Write on
your “other” paper.
AS THE world economy has recovered, fast-growing emerging economies such
as China and India have struggled to keep a lid on consumer prices,
while stagnating developed countries have faced low inflation rates.
Recently, however, rich-country inflation has also started creeping up:
in December Britain’s consumer-price index hit 3.7%,
while euro-zone inflation also rose above the ECB's target.
Much of the blame has been put on the increase in commodity prices.
But the impact on consumers differs widely between countries.
A larger share of income is spent on food in poorer countries such as China
(33%) and India (46%), so the rise in global food prices is the main driver of
inflation there.
By contrast, pricier energy is a bigger factor in the rich world, although it forms a
relatively small component of consumer spending.
For more detail, see article.
23
Comparing Food/Energy
Spending Ratios
• Do on your Cornell Notes.
• What two countries spend the most on food?
• Why don’t they spend so much on energy?
• What three countries are about even on food and
energy spending?
• Why do you think that is?
• EC: How will the ratios for India and China
change in the next few decades?
24
What is behind rising inflation?
The Economist, 1/25/2011
•
•
•
•
•
•
•
•
•
•
•
•
AS THE world economy has recovered, fast-growing emerging economies such
as China and India have struggled to keep a lid on consumer prices,
while stagnating developed countries have faced low inflation rates.
Recently, however, rich-country inflation has also started creeping up:
in December Britain’s consumer-price index hit 3.7%,
while euro-zone inflation also rose above the ECB's target.
Much of the blame has been put on the increase in commodity prices.
But the impact on consumers differs widely between countries.
A larger share of income is spent on food in poorer countries such as China
(33%) and India (46%), so the rise in global food prices is the main driver of
inflation there.
By contrast, pricier energy is a bigger factor in the rich world, although it forms a
relatively small component of consumer spending.
For more detail, see article.
EC: Since 2014, which fact has actually change (it currently does not contribute to
global inflation). Explain how that has affected the world….. (2)
The price of petroleum has dropped significantly,
–
actually making energy cheaper to consumers and producers.
25
Comparing Food/Energy
Spending Ratios
• Do on your Cornell Notes.
• What two countries spend the most on food?
– India and China
• Why don’t they spend so much on energy?
– They are developing economies, few people have cars or use much electricity.
• What three countries are about even on food and energy spending?
– Britain, Germany, The United States
• Why do you think that is?
– They are modern countries, consumers and producers use much technology
that needs energy.
• EC: How will the ratio’s for India and China change in the next few
decades?
– Indians and Chinese consumers and producers will make more money and use
more modern technology that needs energy.
26
Price index
• 351 statistical series that can be used to
measure changes in prices over time.
• Helps exclude inflation
27
Base year
• 351 the year that all other years will be
compared to
• Price index will use a base year to measure
progress or decline in later years.
28
Market basket
• 351 representative selection of commonly purchased goods and services
• Note:
–
–
–
–
–
–
–
–
–
–
–
–
Automobile
Tires
Shoes
Haircuts
Legal advice
Movie tickets
Meat
Milk
Bread
Carrots
Lettuce
Etc.
29
Consumer Price Index
• 352 reports on price changes for about 80,000
items in 364 categories
• 85 geographically distributed areas of the US
• Compared to base year of 1982-84
• Bureau of Labor Statistics
– CPI
30
Producer Price Index
• 352 price changes paid by domestic
businesses/industries for their inputs.
• PPI
31
Implicit GDP price deflator
• 353 An index of average levels of prices for all
goods and services in the economy
– Computed quarterly
– Base year of 1996
– Covers thousands of items
• Good long-run indicator
32
Current GDP
•
•
•
•
353 this year’s GDP
Real GDP (GDP in constant dollars)
Current GDP minus inflation
Formula:
Real GDP = GDP in current dollars
Implicit GDP price deflator x 100
33
Hwk Assessments, Class Work,
to Know
34
Assessments: Section 1, Checking for
Understanding; CH 13, S1
• 1
• GDP
– the dollar amount of all final goods and services produced
within a country’s national borders
– In a year
• GNP
– is the dollar value of all final goods, services, and
structures produced within national boundaries, produced
with labor and property supplied by a country’s residents.
– In a year
35
Assessments: Section 2, Checking for
Understanding CH 13, S2
• 1
• No, if adjustments are made for population
growth, the rates would be the same.
36
CH 13, S2
• 3
• Representative of purchases
37
CH 13, S2
•
•
•
•
4
Consumer price index
Producer price index
Implicit GDP price deflator
38
CH 13, S2
• 5
• Current GDP is the GDP not adjusted for
inflation
• When the distortions of inflation are removed,
it is called “real GDP”
39
6 Image, p. 342
• Question
• Quantity multiplied by price per unit
40
6 Image, p. 343
• Question
• Illegal activities
– Gambling
– Smuggling
– Prostitution
• Some legal activities not reported to avoid
taxes.
41
6 Image, p. 345
• Question
• GDP does not count
– Payments US citizens receive from outside the
country
• GDP does count
– Payments made to a foreign-owned resource
employed in the US
42
I
• 346 formula symbol for the
investment/business sector of the economy
– Proprietorships
– Partnerships
– Corporations
• They are the producers
43
G
• 347 formula symbol for government sector of
the economy
– All levels
• Federal
• State
• Local
• Collected tax revenues are counted as its
income
44
X-M
• 348 formula symbol for the foreign sector of
the economy
45
6 Image, p. 347 5/22
•
•
•
•
Question
Personal consumption expenditures
Government purchases of goods and services
Investment expenditures
46
12 Image, p. 351
• Question
• 351 inflation has changed the price per unit of
each item
47
12 Image, p. 352
• Question
• Subtract the price of the market basket for the
base year from the price of the new market
basket.
• Divide the difference by the market basket
price for the base period
• The percentage is the change of the new
market basket in relation to the base-period
market basket.
48
12 Image, p. 353
•
•
•
•
•
Questions
1
From 1975 to 1976
2
The 1990s
– Because from 1995 and on, growth consistently
increased
49
12 Image, p. 354
• Question
• Convert current dollar amounts to real dollars
by
• Dividing the current dollar amount by the
implicit GDP price deflator for that period
• Multiply that number by 100
50
Brief Response
• Inflation is a necessary “evil” (meaning that it
will always be around in a capitalist system).
Explain why that is so? (3)
51