Chevalier
Fall 2015
ECONOMIC PERFORMANCE
GDP (GROSS DOMESTIC PRODUCT)

The dollar amount of all final goods and
services produced within a country’s national
borders in a year
 Toyotas
made in Kentucky
 Fords made in Mexico

The single most important measure of the
economy’s overall economic performance
GDP

How is this all figured out:
 National
 System
income accounting
of statistics and accounts that keep track of
production, consumption, saving and investment
 All done to TRACK ECONOMIC PERFORMANCE
 Department of Commerce
COMPUTING GDP

Not conceptually difficult

Look at figure 13.1 on page 342

Certain things not counted in GDP
 Secondhand
sales
 Intermediate products (tires on new car)
 Underground economy (Black Market)
LIMITATIONS

Composition of output (we’re not sure what is
being produced, could be good, could be bad)

Quality of life not measured with increase in
GDP
STILL THE MAJOR MEASURE OF ECON. HEALTH

Political implications

Voluntary transactions- happens when both
parties feel they will be better off
GNP (GROSS NATIONAL PRODUCT)- THE
MEASUREMENT OF NATIONAL INCOME

Derived from GDP

Measures income of Americans instead of output,
whether goods and services are produced in the US or
other countries
 By
definition: the dollar value of all final goods, services, and
structures produced in one year with labor and property
supplied by a country’s residents

GDP to GNP: add all payments that Americans receive
from outside US, then subtract all payments made to
foreign-owned resources in the US
GNP

In a closed economy, GDP would = GNP

US- GNP is smaller than GDP
 US
paid out more income to factors of production
from the rest of the world than it received.
NATIONAL INCOME (PAGE 345)

Net National product


GNP minus depreciation (capital equipment that becomes worn
out over time)
National income

Income left after taxes have been paid



Business, excise, property, sales
Excludes the corporate profit tax
Personal Income


PI
Total amount of income going to consumers before indiv. Income
taxes are subtracted
NATIONAL INCOME

Disposable personal income
 What
 DI
is left after all taxes
GDP AND CHANGES IN THE PRICE LEVEL

Inflation-must keep track of it

So how do we figure out what GDP 15 years ago would
translate into in today’s dollar?
 Index-measures
 Base

price over time
year
The use of indexes
 Consumer
price index-reports price changes for 80K items in
364 categories
 Producer price indices- measures price changes paid my
domestic producers for their inputs (100k commodities; 1982)

Fuel, farm products, chemicals, rubber, paper,food
CHANGES IN THE PRICE LEVEL

Implicit GDP price deflator
 Index
of avg. levels of prices for all goods and
services in the economy (computed quarterly,
1996)
 Good
long run indicator of the price changes that
consumers face
REAL VS CURRENT GDP

Have to remove the effects of inflation
 Current
or nominal GDP (not adjusted)
 Real GDP or GDP in constant dollars (adjusted)
 Real
GDP=GDP in current dollars/implicit GDP price
deflator X 100

1st quarter of 2003 10,688.4
billion
 GDP deflator was 111.90
 In other words, prices in 2003 were 111.90 percent
higher than in 1996
 Calculation=9,551.7
billion
 Dollar value of all goods and services produced
measured in 1996 prices
 Acts as a benchmark
GDP AND POPULATION (FACTORS AFFECTING
POPULATION GROWTH
Population, growth, regional change
 Demographics, fertility rate
 Life expectancy, net immigration, census

ECONOMIC GROWTH

The best way to measure is GDP per capita

Importance of economic growth
 Standard
of living
 Enlarges the tax base
 Lowers domestic problems
 Increases demand for foreign products (helps other
nations)
FACTORS THAT INFLUENCE ECONOMIC GROWTH

Land, labor, capital, entrepreneur

Graph page 367