Chapter 10 Economic Performance

1. Chapter 10Economic Performance 10.1 What is gross domestic product?

2. How do economists predict economic performance? • Macroeconomists use measures called national income & product accounts (NIPA’s) to track economies: • Production • Income • Consumptions • Tracking process called national income accounting • National income accounting provides information about nation’s economic activities

3. How do economists calculate gross domestic product? • Gross domestic product (GDP) is the most commonly used NIPA—it calculates the total dollar value of all final goods & services produced within a country in a year • Calculates total production, or output

4. How do economists calculate gross domestic product? • Final output • To avoid counting products more than once, economists include on the value of final goods & services when calculating GDP • Example: Table is final product of • Woodcutter (cuts down tree) • Sawmill (processes tree into lumber) • Furniture manufacturer (makes table) • Tree & lumber are intermediate products—goods & services used to make other products • Intermediate product value is built into cost of table

5. How do economists calculate gross domestic product? • Current year • Does not include products such as used cars or secondhand clothing • GDP is a gauge of production—not sales • Output produced within national borders • Does not include products produced by U.S. companies in factories outside the U.S. • Does include output of foreign workers & firms within the U.S. • Example: Japanese-owned Nissan factory in Tennessee

6. How do economists calculate gross domestic product? • How is GDP determined? • Economists add the output produced by • Personal consumption expenditures (C) • Gross investment (I) • Government purchases of goods & services (G) • Net exports of goods & services, or exports minus imports (X - M) by using the output-expenditure model • C + I + G + (X – M) = GDP

7. How do economists calculate gross domestic product? • Personal consumption expenditures • Consumer purchases • Durable goods • Have a useful lifetime of more than a year, such as cars & computers • Nondurable goods • Have a short useful lifetime, such as goods & cosmetics • Services • Such as medical care, entertainment & public education • Fastest growing area of consumer expenditures

8. How do economists calculate gross domestic product? • Gross Investment • True investment is the use of money to produce new capital goods • Gross investment is the total value of all capital goods produced in a given nation during one year • Includes changes in the dollar value of business inventories • Does not include the purchase of financial assets—such as stocks, bonds, and land that do not result in the production of new goods or services

9. How do economists calculate gross domestic product? • Gross Investment • 2 subcategories • Fixed investment • Spending on residential structures, nonresidential structures such as office space & factories, & capital goods such as new machinery & office equipment • Inventory investment • Refers to the increase or decrease in the total dollar amount of the stock of raw materials, intermediate goods, and final goods of domestic businesses during a given period

10. How do economists calculate gross domestic product? • Government purchases • Total dollar value that federal, state, & local governments spend on goods & services such as • Highways • Public education • National defense • Transfer payments, such as Social Security payments & government aid, expenditures for which the government receives no goods or services in exchange, are not included

11. How do economists calculate gross domestic product? • Net exports • Total U.S. exports minus total U.S. imports • Includes the value of goods & services produced domestically but sold in other countries (exports) & does not include goods & services produced in other countries but purchased locally (imports) • As some goods & services included in GDP are produced in other countries, and some items produced in U.S. are sold in other countries & fail to get included in the other components of GDP, economists subtract total imports from total exports

12. How do economists calculate gross domestic product? • What if a products price increases during the year? • Nominal GDP, or current GDP, is GDP expressed in the current prices of the period being measured • Real GDP is GDP adjusted for price changes • Calculating Real GDP helps economists to determine if production increased or decreased • A price index is a set of statistics that allows economists to compare prices over time

13. What are some of the limitations of gross domestic product? • Accuracy & timeliness of data • Economists use sampling techniques to determine prices & quantities • Gathering data is slow & time-consuming • GDP & NIPAs are only approximations of total output & income • Nonmarket activities • GDP does not measure exchanges of goods & services that are not market transactions (some output does not get paid for, or may begin payment for additional goods/services midway through year)

14. What are some of the limitations of gross domestic product? • Underground activity • Underground activity is illegal activities & unreported legal activities (although it is illegal not to report it) • “Goods” & “Bads” • The value of many things that make for a better society are often not accounted for, while things that make a society worse, are • GDP is an imperfect reporter of economic well-being • Example: Car emissions standards & regulations that prohibit development in ecologically sensitive areas reduce GDP but improve the nation’s well-being • Some economists propose assigning positive values to “goods” such as leisure & urban renewal, and negative dollar values to “bads” such as pollution & traffic congestion

15. What other statistics do economists use to measure the economy? • Gross national product • Stopped being used in 1991 • GNP measures the total dollar value of all final output products with factors of production owned by residents of a country during one year • Example: If production in Russia involves any capital owned by U.S. residents, it would be counted as part of the U.S. GNP • GDP more accurately represents short-term resource use changes in the economy • GDP used by the United Nations & most other countries—so the Commerce Department switched to GDP

16. What other statistics do economists use to measure the economy? • Net national product • As GNP includes money invested in capital goods, it also includes money spent on replacing outdated or defective equipment • When this depreciation is subtracted from GNP, the result is a nation’s net national product

17. What other statistics do economists use to measure the economy? • National income • The sum of employees’ & proprietors’ income, real & estimated rental income, corporate profits, & net interest • Economists subtract subsidies & indirect taxes from net national product • Personal income • To determine the amount of income people in a nation earn, economists will subtract income not given to people, such as profits that firms keep & reinvest & money spent on corporate income taxes & employee’s Social Security • Economists then add money given from government transfer funds such as Social Security to determine income paid to individuals in a nation

18. What other statistics do economists use to measure the economy? • Disposable personal income • Disposable income is the amount of money an individual has after deductions such as Social Security & income tax are taken out. • Economists subtract personal taxes & nontax payments from personal income • Personal taxes include: • Income, estate, gift, property, and motor vehicle taxes • Nontax payments include: • Fines & passport fees