Chapter 13
Economic Performance
13/1 Measuring the Nation’s Output
• Gross Domestic Product (GDP)
• The dollar amount of all final goods
services and structures produced within a
country’s borders in a year.
• This is the single most important measure
of the economy’s overall economic
performance.
• National income accounting- system of
accounting
• NIPA (National Income and Product
accounts) kept by the Dept of Commerce.
• GAAP- “Generally Accepted Accounting
Practices”
GDP- The Measure of National
Output
• Only things produced in the US- even if
foreign owned
• Does not include products made by US
companies abroad
Computing GDP
• Multiply the final goods and services in a
given 12 month period by their prices to
get the total value of their production.
(GDP)
Some things are excluded
• Intermediate products
– Tires on new car
• Second hand sales
– Used car
• Nonmarket transactions
– Paying neighbor’s kid to cut your grass
• Underground economy
– Black market, illegal gambling, prostitution
Limitation of GDP
• Generally an increase in GDP is good, but
• GDP tells us nothing about the composition of
output
• GDP tells us little about the impact of production
on quality of life
• Still, GDP is our best measure of economic
health. (impact on presidential elections)
GNP- Measure of National Income
• GNP- the dollar value of all final goods,
services and structures produced in one
year with labor and property supplied by a
country’s residents.
• GNP is based on GDP, but
– Measures goods produced outside of US by
US firms.
– Must subtract money made here by foreign
firms.
– Therefore: in a closed economy, one with no
foreign business, GDP =GNP
Net National Product (NNP)
• GNP minus depreciation
• Depreciation represents the capital
equipment that has worn out or become
obsolete over the year.
National Income (NI)
• NI is the income that is left after all taxes
except corporate profits tax are subtracted
from the NNP.
• Examples
• Indirect taxes
– Excise taxes, business taxes, licensing fees,
customs duties and general sales taxes
Personal Income (PI)
• Total amount of income going to
consumers before individual income taxes
are subtracted.
Disposable Income (DI)
• Total income the consumer sector has
after personal taxes.
Economic Sectors and Circular
Flows
• Consumer Sector• Households- persons who occupy
separate residences, ie apartment, house,
condo etc.
• May be family or unrelated
• Useful info because of durable goods
impact
• Investment Sector- Proprietorships,
partnerships and corporations
Government Sector
• Public Sector- all local, state and federal
levels of government
Foreign Sector
• Includes all producers and consumers
outside of the United States.
The Output-Expenditure Model
• Note: with GDP we are measuring output,
you should be able give examples of the
output of each.
• GDP= C + I + G + ( X – M )
13/2 GDP and Changes in price
levels
• Inflation
• Price index- a statistical series that
• can be used to measure changes in prices
over time.
• Can be for a specific item or list of items.
– ie. CPI
– Base year:
– Market basket- selection of commonly
purchased goods
Major Price Indices
• Consumer Price index
• Producer Price index
• Implicit GDP Price deflator
Real vs Current GDP
• Current GDP- GDP that is not adjusted to
remove the effects of inflation
• Real GDP- is GDP that has been adjusted
for inflation (also called GDP in constant
dollars)
• We won’t concern ourselves with
converting Current GDP to Real GDP
13/3 GDP and Population
• Rate at which population grows or
decreases influences the GDP. Labor is
one of the factors of production.
• Changes in GDP and GNP can be
distorted if population changes. Per capita
is a much more accurate measure
• Population growth or decline can affect the
quality of life
Population in the US
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Census- required by the Constitution
Census Bureau
Monthly surveys
Ten year census
5 of 6 receive short form
1 of 6 receive long form
• Historical growth- Rate of population
growth is declining. 2000-.9 percent
• Why?
• Regional changes
• Center of population
– 1790- 25 miles east of Baltimore
– 2000 2.8 miles east of Edgar Springs, MO
Projected population trends
• Is it important?
• Factors affecting population growth
– Fertility rates- number of births per 1000
women
– Life expectancy• 1900 was 45 years
• 82.5 by 2050
• In US women have longer life expectancy than
men.
• Japan currently has the longest life expectancy
• Net immigration
• Immigrant v. emigrant
• Projections by age and gender
• Baby boomers 46-64
• Population pyramid• Bulge in the middle shows the baby
boomers.
• Dependency ratio- ratio based on the
number of children and elderly per 100
people in the ages 18-64
• This number is on the rise. Why?
Projections by Race and Ethnic
Origin
• By 2050
– Asian pop will increase 5x
– Hispanic population 2x
– Blacks- slight increase
– Whites- little change
• By 2050- Whites only 50.7 percent of the
population
13/4 Economic Growth
• Because of population changes, GDP and
GNP do not tell the whole story.
• Real GDP per capita- amount produced on
a per person basis is a better indicator of
growth/decline.
• Divide Real GDP by population gives us
the Real GDP per capita
• Growth triangle- table that shows annual
compound rates of growth between
selected periods of time.
Importance of Economic Growth
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Standard of living
Government spending
Domestic Problems
Helping other nations
Global role model
Factors influencing economic
growth
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Land
Capital
Labor
Entrepreneurs
• Labor productivity- the amount of output
produced per unit of labor input.
• As productivity grows, the entire economy
benefits.