Economists monitor economic data of the country using national income accounting – collects statistics on production, income, investments, and savings This data is collected and presented to the government and maintained by the Department of Commerce
The MOST IMPORTANT measure that is collected is GDP – the dollar value of all final goods and services produced within a country’s borders in a given year. The definition itself is worded that each piece must be looked at individually
Dollar value is the total selling prices of all goods and services produced in a country in a given year Final goods and services are the products sold to consumers in a given year Produced within a country’s borders means that anything produced in the U. S. is counted (Kia plant in Ohio)
1. Intermediate goods – products/services used to make final products. a. Ex: Car tires (intermediate good) aren’t counted if they are going onto a brand new car (final good). b. Avoids multiple counting2. Nonproduction Transactions a. Transfer Payments (public or private) – money is given for no service/product. Ex: $ as a gift, welfare, social security. b. Stocks & Bonds transactions3. Sale of USED goods4. Non-market Transactions Ex: Time & effort you spend fixing up your car.5. Underground Economy – no record exists of the transaction. Ex: babysitting, lawn mowing, maid services, drug trade
GDP Basics: Always expressed in terms of $. Primary measure of economy’s performance. Calculated using either the expenditure approach or the income approach. Increases in GDP are desirable When the government looks at GDP, the measurement must be as accurate as possible
To calculate GDP, one way is the Expenditure approach Economists estimate the annual expenditures ($ spent) on four categories: Consumer Business Government Net imports/exports This total equals GDP – practical approach
Another way to measure GDP is the income approach – provides better accuracy This approach adds up all the incomes in the economy (ex. Income from selling a house for $115,000)
Nominal GDP is GDP measured in current prices - GDP unadjusted for inflation or deflation of prices. Uses current year’s prices Real GDP is GDP expressed in constant, or unchanging, prices - GDP that has been adjusted for inflation/deflation. Reflects price changes so that you may compare if production increased or if higher prices simply caused a higher nominal GDP. (Remember: GDP measures the goods/service produced in one year.)
Even though GDP is the primary economic measure, others are also taken GDP is used to determine 5 other economic measures including: GNP Depreciation
GNP is the annual income earned by U. S.-owned firms and U. S. citizens It is calculated by: GDP + income earned outside the U. S. – income earned by foreign firms and citizens inside the U. S. = GNP GNP does not account for depreciation – the loss of the value of capital equipment that results from normal wear and tear So, GNP – Depreciation = Net National Product (NNP) NNP is the output made after the adjustment for depreciation
NNP does not account for another factor that reflects the cost of doing business – taxes So NNP – taxes (sales and exercise) = National Income (NI) We can then figure out how much individuals make that they can then spend, called Personal Income (PI) So PI = Other household income + Money business pays out (SS, Income taxes, etc.) – National Income Then, we look at how much a person actually has to spend after taxes, called Disposable Personal Income (DPI) = Personal income – taxes Personal Taxes include income, property, estate, etc.
A business cycle is a period of economic expansion followed by a period of economic contraction These are not minor ups and downs – they are major changes to GDP There are typically 4 phases of a business cycle: Expansion Peak Contraction Trough
Expansion is a period of economic growth measured by a rise of in real GDP In this phase the economy as a whole enjoys plentiful jobs and a falling unemployment rate Economic growth is a steady, long-term increase in GDP
Peakoccurs when GDP stops rising – it has reached the pinnacle of economic expansion
Contraction occurs after a peak, when the economy enters a period of economic decline marked by falling GDP Other conditions may like unemployment and price may vary Economists have different terms to describe the severity of a contraction: Recession – exists if real GDP falls for 2 consecutive quarters (6 months) – unemployment normally 6 to 10 months Depression – exists if a recession is esp. long and severe – high unemployment and low output Stagflation – exists if real GDP declines (output) and prices rise (inflation)
When the economy has “bottomed-out” it has reached the trough. This is the lowest point of economic contraction GDP stops falling
Business investment: When the economy is good, businesses invest in new capital. When economy isn’t so good, businesses stop investing and this creates a drop in the output of other sectors of the economy – can also begin firing workers Interest rates and credit: When interest rates are low, consumers and business are inclined to make purchases. When interest rates are high, they are less likely to spend money, lowering GDP
Consumer Expectations: When expectations are that we are in a “good” economy, they expect higher wages and available jobs – increase in spending. When expectations are poor, consumers don’t spend money because they expect lay-off and lower incomes – can start a contraction External Shocks: Negative shocks (drought, hurricane, oil supply) can cause increase in prices and a decline in GDP. Positive shocks (good growing season, finding of new oil supply) can increase GDP and decrease prices
The basic measure of a nation’s economic growth rate is the percentage of change of GDP over a given period time GDP must also keep up with population growth in order for it to keep being positive Taking into account population, most economist prefer to rely on real GDP per capita into account This is the GDP per person in the country
Real GDP per capita is considered the best measure of a nation’s standard of living If GDP rises faster than population, the standard of living will go up Factorssuch as population, government and foreign trade are taken under consideration.
Population Growth If the population grows while the supply of capital remains constant, the amount of capital per worker will shrink. Leads to lower living standards Government If a government raises tax rates to pay for a war, households will have less money and people will reduce savings. This reduces the money available for businesses. Foreign Trade Trade Deficit- situation where the value of goods a country imports is higher than the value of goods it exports.
An increase in efficiency gained by producing more output without using more inputs. New inventions New ways of performing a task New scientific knowledge New methods for organizing production Increased productivity means producing more output with the same amounts of land, labor and capital. This equals higher rates of GDP per capita, and thus higher standards of living!
Economists can measure the strength of the economy at any given time by counting the number of unemployed people There are 4 kinds of unemployment: Frictional Seasonal Structural Cyclical
Unemployment always exists, even in a good economy Frictional unemployment occurs when people take time to find a job For example: changing jobs, time to find job after finishing school, etc. In an economy as large as the U. S., economists expect to find a large number of unemployed falling into this category
Seasonal unemployment occurs when industries slow or shut down for a season or make a seasonal shift in production schedules For example, summer jobs, harvests, etc. Economists expect to see people in this category as well
When the type of economy shifts from one sector to another, the skills workers need to have a job also changes Workers who lack the necessary skills will lose their jobs – this is structural unemployment There are 5 causes of structural unemployment: New technology New resources Changes in consumer demand Globalization Lack of education
Unemployment that rises when the economy is down and falls when the economy is good is called cyclical unemployment For example – Great Depression (1 out of 4 unemployed) and today’s recession (10% unemployment)
The amount of unemployment in the nation is an important clue to the nation’s health Each month, the Bureau of Labor and Statistics polls a portion of the population that tracks unemployment They compute the unemployment rate: percentage of nation’s labor force that is unemployed The unemployment rate is a national average and doesn’t take into account regional or local differences
0% unemployment rate is not possible in a market economy – 4-6% is normal Full employment can occur if there is no cyclical unemployment