GDP

Unemployment

Inflation

MEASURING ECONOMIC PERFORMANCE(THE BIG PICTURE)

I. IMPORTANCE OF ECONOMIC MEASUREMENT:

A. To identify the state of the economy at a specific point in time.

B. To compare economic conditions over periods of time

C. To provide a basis for establishing public policy in order to maintain stable economic performance

II. MACROECONOMIC GOALS

A. Economic Growth - measured by GDP

B. Price Stability - measured by inflation

C. Full Employment - measured by the level of unemployment

III. GDP & GNP

A. GDP - Gross Domestic Product is the total market value of all final goods and services produced in the economy in one year.

B. GNP – Gross National Product. This was the only method of analysis until 1992

C. Both are similar – the difference is how they define the economy

GDP VS. GNP CONTINUED….

D. GNP consists of total output produced by Americans – whether here or abroad

• Ex: Income by an American living and working in France is included

• Ex: Income by a French person living and working in the U.S. is excluded

GDP VS. GNP CONTINUED….

E. GDP consists of the total output produced within the U.S., whether it uses domestic or foreign owned resources.

• Ex: Full value of cars produced by Honda in U.S. is included, including profits

• Ex: Profits earned by an American-owned plant in Japan are excluded

GROSS DOMESTIC PRODUCT

• GDP is a monetary value – 2006 GDP was $13,130,300,000,000.00 (adjusted for inflation)

(yeah, that’s trillions!!!)

• Sale of final goods is included• Sale of intermediate goods excluded

• Avoids double counting

IV. FINAL AND INTERMEDIATE GOODS

A.A. FinalFinal Goods and Services• Are not used as inputs into the production of

another good or service

• Are bought by their final users

• $14.12 Trillion

• $46,400

• $8.79 Trillion (Purchasing Power Parity)

• $6,600 (PPP)

• How big was U.S. GDP in 2009?

• What was U.S. GDP per capita in 2009?

• How big was China’s GDP in 2009?

• What was China’s GDP per capita in 2009

A BRIEF QUIZ

Questions Answers

Source: CIA World Fact Book https://www.cia.gov/library/publications/the-world-factbook/index.html

U.S. Current and Constant Dollar GDPAnnual Rates

2000-2010

Year Current DollarGDP

Constant Dollar"Real" GDP

2000 9,951.5 11,226.0

2001 10,286.2 11,347.2

2002 10,642.3 11,553.0

2003 11,142.1 11,840.7

2004 11,867.8 12,263.8

2005 12,638.4 12,638.4

2006 13,398.9 12,976.2

2007 14,061.8 13,228.9

2008 14,369.1 13,228.8

2009 14,119.0 12,880.6

2010 14,657.8 13,245.6

Rank  Country                      GDP (current dollar)1         European Union      $14,890,000,000,0002         United States           $14,720,000,000,0003         China                           $9,872,000,000,0004         Japan                           $4,338,000,000,0005         India                             $4,046,000,000,0006         Germany                     $2,951,000,000,0007         Russia                         $2,229,000,000,0008         Brazil                            $2,194,000,000,0009         United Kingdom        $2,189,000,000,00010       France                         $2,160,000,000,000

Rank    Country                     Per Capita GDP                 Year1           Qatar                          $145,300                             2010 est.2           Liechtenstein           $122,100                             2007 est.3           Luxembourg               $81,800                             2010 est.4           Bermuda                     $69,900                             2004 est.5           Norway                        $59,100                             2010 est.6           Singapore                   $57,200                             2010 est.7           Jersey                          $57,000                             2005 est.8           Kuwait                          $57,100                             2010 est.9           Brunei                          $50,300                             2010 est.10         United States             $47,400                             2010 est.

FINAL AND INTERMEDIATE GOODS

B.B. IntermediateIntermediate goods• Are used as inputs into the production of

another good or service

• Examples• Intermediate goods – windshields, gearboxes,

batteries

• Intermediate services – banking and insurance services bought by a car producer

FINAL AND INTERMEDIATE GOODS

C. How to tell• Look at who buys it and for what purpose

• Example: electric power• Intermediate when bought by car producer

• Final when bought for your home

WHAT GDP EXCLUDES

D. Purely financial transactions• Public transfer payments (Social Security)

• Private transfer payments (money and gifts)

• Securities transactions

• Stocks (dividends and brokerage fees are counted)

E. Secondhand sales• Do not represent current output

MEASURING GDP

Two approaches that must equal

1. The Income Approach (complicated)

wages, salaries, benefits +

rental income +

profits +

interest = GDP

MEASURING GDP

2. The Expenditure (Spending) Approach

C + Ig + G + Xn

MEASURING GDP

• C – Consumer Spending

• Ig – Investment Spending.

• Gross private domestic investment in capital goods

• G – Government Spending

• Xn – Net Exports (exports-imports)

WHAT GDP DOES NOT INCLUDE

• Non-market production (housewives, etc.)

• Changes in product quality

• Unreported tips or sales• Illegal activities

“Underground Activities” may be

as much as 15% of GDP!