GDP—The Measure of National Output

1. GDP—The Measure of National Output • Macroeconomics uses a comprehensive set of measures in the National Income and Product Accounts (NIPA). • The most comprehensive measure of national output is gross domestic product (GDP). • To get current GDP, multiply all of the final goods and services produced in a 12-month period by their prices, and then add them up. • Real GDP is measured with a set of constant base year prices. • GDP per capita is determined by dividing the real GDP by the population. • GDP does not provide information about composition of output, quality of life impacts, nonmarket activities, or improved product quality. • GDP does not measure welfare, but appears to contribute to our well-being.

2. Measures of National Income • Gross national product (GNP) is a measure of the country’s total national income—the dollar value of all finals goods, services, and structures produced in one year with labor and property supplied by a country’s residents. • Net national product (NNP) is the GNP minus depreciation. • National income (NI) is the income that is left after all taxes except corporate profits tax are subtracted from the NNP. • Personal income (PI) equals the total amount of income that goes to consumers before income taxes are subtracted. • Disposable personal income (DPI) is the total income that goes to consumers after personal income taxes are subtracted.

3. Economic Sectors and Circular Flows • Economic sectors include the consumer, investment, government, and net foreign sectors. • The consumer sector consists of all the people who live in households and receives its income in the form of disposable personal income. • The investment sector consists of proprietorships, partnerships, and corporations that produce the nation’s output. • The government, or public, sector includes all local, state, and federal levels of government. • The net foreign sector includes all consumers and producers outside the United States. • The output-expenditure model says that the GDP is equal to the sum of aggregate demand for output by the consumer, investment, government, and net foreign sectors.

4. Stock Prices and Efficient Markets • Investors may buy and sell equities through a stockbroker or by opening an Internet account with a discount brokerage firm. • Changes in the supply and demand for individual stocks affect the value of the stocks on a daily basis. • Understanding stock listings requires that you understand the symbols used, including 52 Weeks, Stock (SYM), DIV, Yld%, PE, 100s, LAST, and NET CHG. • The Efficient Market Hypothesis states that stocks are usually priced correctly, so bargains are hard to find. • Portfolio diversification tends to even out gains and losses. • Mutual funds provide diversification and lower risk by purchasing stocks issued by hundreds or thousands of companies. • 401(k) plans are tax-deferred investment and savings plans that act as personal pension funds for employees.

5. Stock Markets and Their Performance • The two largest stock exchanges are now NYSE Euronext and AMEX-NASDAQ. • Measures of stock performance include the Dow Jones Industrial Average (DJIA) and the Standard & Poor’s 500 (S&P 500). • A bull market is one in which prices move up for several months or years in a row; a bear market is one in which prices fall sharply for several months or years in a row.

6. Trading in the Future • Most buying and selling takes place in the present (spot market). • A futures contract is an agreement to buy or sell at a specific future date at a predetermined price. • An option is a futures contract that gives the buyer the right to cancel the contract if the price drops. • A call option is the right to buy something at a specific future price, or cancel if the actual future price is not advantageous to the buyer. • A put option is the right to sell something at a specific future price, or cancel if the actual future price is not advantageous to the buyer.

7. Bonds as Financial Assets • The three main components of a bond are par value, maturity, and coupon rate. • Supply and demand among buyers and sellers establish the final price of a bond. • The interest received and the price paid for a bond determine its current yield, so bond yield is also determined by supply and demand. • Standard & Poor’s and Moody’s are corporations that publish bond ratings to help investors check the quality of bonds.

8. Financial Assets and Their Characteristics • Certificates of deposit (CDs) are loans of various amounts and maturities to financial institutions, and most are covered by the FDIC. • Corporate bonds can be long-term investments but can be sold quickly if needed. • Interest on corporate bonds is considered taxable income. • Municipal bonds are tax-exempt bonds issued by state and local governments. • Savings bonds are issued by the U.S. government and sell at face value, with interest added later. • Treasury notes have maturities of 2 to 10 years, and Treasury bonds have maturity dates of 20 to 30 years. • Treasury bills have short maturities of up to 52 weeks and are sold on a discount basis. • Individual Retirement Accounts (IRAs) are long-term, tax-sheltered deposits.

9. Markets for Financial Assets • Capital markets are markets in which money is loaned for more than one year. • Money markets are markets in which money is loaned for less than one year. • In the primary market, only the original issuer can sell or repurchase a financial asset. • In the secondary market, existing financial assets can be resold to new owners.

10. Stock Prices and Efficient Markets • Investors may buy and sell equities through a stockbroker or by opening an Internet account with a discount brokerage firm. • Changes in the supply and demand for individual stocks affect the value of the stocks on a daily basis. • Understanding stock listings requires that you understand the symbols used, including 52 Weeks, Stock (SYM), DIV, Yld%, PE, 100s, LAST, and NET CHG. • The Efficient Market Hypothesis states that stocks are usually priced correctly, so bargains are hard to find. • Portfolio diversification tends to even out gains and losses. • Mutual funds provide diversification and lower risk by purchasing stocks issued by hundreds or thousands of companies. • 401(k) plans are tax-deferred investment and savings plans that act as personal pension funds for employees.

11. Stock Markets and Their Performance • The two largest stock exchanges are now NYSE Euronext and AMEX-NASDAQ. • Measures of stock performance include the Dow Jones Industrial Average (DJIA) and the Standard & Poor’s 500 (S&P 500). • A bull market is one in which prices move up for several months or years in a row; a bear market is one in which prices fall sharply for several months or years in a row.

12. Trading in the Future • Most buying and selling takes place in the present (spot market). • A futures contract is an agreement to buy or sell at a specific future date at a predetermined price. • An option is a futures contract that gives the buyer the right to cancel the contract if the price drops. • A call option is the right to buy something at a specific future price, or cancel if the actual future price is not advantageous to the buyer. • A put option is the right to sell something at a specific future price, or cancel if the actual future price is not advantageous to the buyer.