©2004 prentice hall publishing ayers/collinge, 1/e 1 chapter 5 “measuring national output”

1 ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e

ECONOMICS: ECONOMICS: EXPLORE & APPLYEXPLORE & APPLYby Ayers and Collingeby Ayers and Collinge

ECONOMICS: ECONOMICS: EXPLORE & APPLYEXPLORE & APPLYby Ayers and Collingeby Ayers and Collinge

CHAPTER 5CHAPTER 5“Measuring National Output”“Measuring National Output”

CHAPTER 5CHAPTER 5“Measuring National Output”“Measuring National Output”


Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

1.1. Present three widely accepted goals for Present three widely accepted goals for the macro economy.the macro economy.

2.2. Delineate gross domestic product Delineate gross domestic product (GDP) and its components.(GDP) and its components.

3.3. Distinguish real GDP from nominal Distinguish real GDP from nominal GDP.GDP.

1.1. Present three widely accepted goals for Present three widely accepted goals for the macro economy.the macro economy.

2.2. Delineate gross domestic product Delineate gross domestic product (GDP) and its components.(GDP) and its components.

3.3. Distinguish real GDP from nominal Distinguish real GDP from nominal GDP.GDP.


Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

4.4. Track the stages of the business cycle.Track the stages of the business cycle.

5.5. (E&A) Identify the advantages and (E&A) Identify the advantages and disadvantages of static and dynamic disadvantages of static and dynamic scoring.scoring.

4.4. Track the stages of the business cycle.Track the stages of the business cycle.

5.5. (E&A) Identify the advantages and (E&A) Identify the advantages and disadvantages of static and dynamic disadvantages of static and dynamic scoring.scoring.


5.1 5.1 MACROECONOMIC GOALSMACROECONOMIC GOALS5.1 5.1 MACROECONOMIC GOALSMACROECONOMIC GOALS

Economic GrowthEconomic Growth occurs when the occurs when the economy’s total output of goods and services economy’s total output of goods and services increase.increase.

Full Employment Full Employment occurs when jobs are occurs when jobs are available for those who are willing and able available for those who are willing and able to work.to work.

Low Inflation Low Inflation when prices are relatively low when prices are relatively low and stable.and stable.

Economic GrowthEconomic Growth occurs when the occurs when the economy’s total output of goods and services economy’s total output of goods and services increase.increase.

Full Employment Full Employment occurs when jobs are occurs when jobs are available for those who are willing and able available for those who are willing and able to work.to work.

Low Inflation Low Inflation when prices are relatively low when prices are relatively low and stable.and stable.


Effects of Growth: Selected ChangesEffects of Growth: Selected Changesin the U.S. Standard of Livingin the U.S. Standard of LivingEffects of Growth: Selected ChangesEffects of Growth: Selected Changesin the U.S. Standard of Livingin the U.S. Standard of Living

Indicator Years Compared Indicator Values

Computer Ownership

1994: 24%

2001: 57%

Internet Access 1998: 26%

2001: 50%

Consumer Credit 1997: $1272 billion

2001: $1701 billion

Infant Mortality Rate

1980: 12.6 per 1000

2001: 6.7 per 1000


Effects of Growth: Selected ChangesEffects of Growth: Selected Changesin the U.S. Standard of Livingin the U.S. Standard of LivingEffects of Growth: Selected ChangesEffects of Growth: Selected Changesin the U.S. Standard of Livingin the U.S. Standard of Living

Indicator Years Compared Indicator Values

Life expectancy at Birth

1970: 70.8 years

2000: 76.9 years

Work Fatalities 1992: 6,217

2000: 5,915

Homeownership Rates

1965: 62.9

2002: 67.8

College Graduate or More

1970: 11%

2000: 26%


5.2 5.2 MEASURING NATIONAL OUTPUTMEASURING NATIONAL OUTPUT5.2 5.2 MEASURING NATIONAL OUTPUTMEASURING NATIONAL OUTPUT

OutputOutput is usually measured by tallying is usually measured by tallying the value of final goods and services - the value of final goods and services - those which are sold to their final those which are sold to their final owners.owners.


Gross Domestic Product (GDP)Gross Domestic Product (GDP)

The most widely reported measure of The most widely reported measure of the economy’s output is the economy’s output is gross gross domestic product (GDP)domestic product (GDP) which is the which is the market value of the final goods and market value of the final goods and services produced in the economy services produced in the economy within some time period (usually within some time period (usually one year or one quarter).one year or one quarter).


Gross Domestic Product (GDP)Gross Domestic Product (GDP)

Spending on Spending on final goodsfinal goods and services may be and services may be attributed to four sources:attributed to four sources:

ConsumptionConsumption InvestmentInvestment GovernmentGovernment Foreign CommerceForeign CommerceSpending on Spending on intermediate goodsintermediate goods is not is not

included in GDP so as to avoid double included in GDP so as to avoid double counting.counting.

Spending on Spending on final goodsfinal goods and services may be and services may be attributed to four sources:attributed to four sources:

ConsumptionConsumption InvestmentInvestment GovernmentGovernment Foreign CommerceForeign CommerceSpending on Spending on intermediate goodsintermediate goods is not is not

included in GDP so as to avoid double included in GDP so as to avoid double counting.counting.


Consumption (C)Consumption (C)Consumption (C)Consumption (C)

Purchasing by householdsPurchasing by households The majority of spending in the U.S. The majority of spending in the U.S.

economy - about 68%economy - about 68% Consumer durable goods, Consumer durable goods, Consumer nondurable goods Consumer nondurable goods ServicesServices

Purchasing by householdsPurchasing by households The majority of spending in the U.S. The majority of spending in the U.S.

economy - about 68%economy - about 68% Consumer durable goods, Consumer durable goods, Consumer nondurable goods Consumer nondurable goods ServicesServices


Investment (I)Investment (I)Investment (I)Investment (I)

Spending now in order to increase Spending now in order to increase output or productivity later:output or productivity later:

Purchases by firms of capitalPurchases by firms of capitalConsumers’ purchases of new Consumers’ purchases of new

housinghousingMarket value of changes in Market value of changes in

inventoriesinventories

Spending now in order to increase Spending now in order to increase output or productivity later:output or productivity later:

Purchases by firms of capitalPurchases by firms of capitalConsumers’ purchases of new Consumers’ purchases of new

housinghousingMarket value of changes in Market value of changes in

inventoriesinventories


Gross Investment, Net Investment, and Net Domestic Product

Gross Investment, Net Investment, and Net Domestic Product

Gross Gross InvestmentInvestment == Total Amount of Total Amount of

InvestmentInvestment

Net Net InvestmentInvestment

== Gross Investment Gross Investment minus Depreciationminus Depreciation

NDPNDP ==GDP minus GDP minus

DepreciationDepreciation


Government (G)Government (G)Government (G)Government (G)

At federal, state, and local levels account At federal, state, and local levels account for 18% of total purchasing in the U.S. for 18% of total purchasing in the U.S. economy.economy.

Approximately 1/10 of government Approximately 1/10 of government spending could be investment.spending could be investment.

Government purchases of goods and Government purchases of goods and services must be distinguished from services must be distinguished from transfer paymentstransfer payments such as Social Security such as Social Security and unemployment benefits.and unemployment benefits.

At federal, state, and local levels account At federal, state, and local levels account for 18% of total purchasing in the U.S. for 18% of total purchasing in the U.S. economy.economy.

Approximately 1/10 of government Approximately 1/10 of government spending could be investment.spending could be investment.

Government purchases of goods and Government purchases of goods and services must be distinguished from services must be distinguished from transfer paymentstransfer payments such as Social Security such as Social Security and unemployment benefits.and unemployment benefits.


Foreign Commerce (NX)Foreign Commerce (NX)Foreign Commerce (NX)Foreign Commerce (NX)

Net Net ExportsExports == Exports - ImportsExports - Imports

Because a portion of spending by Because a portion of spending by consumers, businesses, and government is consumers, businesses, and government is on imports, it is useful to subtract imports on imports, it is useful to subtract imports from exports.from exports.

Because a portion of spending by Because a portion of spending by consumers, businesses, and government is consumers, businesses, and government is on imports, it is useful to subtract imports on imports, it is useful to subtract imports from exports.from exports.


5.35.3Gross Domestic Product (GDP)Gross Domestic Product (GDP)5.35.3Gross Domestic Product (GDP)Gross Domestic Product (GDP)

GDP is the sum of purchases by the four GDP is the sum of purchases by the four sectors of the economy.sectors of the economy.

GDP is the sum of purchases by the four GDP is the sum of purchases by the four sectors of the economy.sectors of the economy.

GDPGDP == CC + I+ I + G+ G + NX+ NX

(69%)(69%)

$7,064.5$7,064.5

(16%)(16%)

+$1,633.9+$1,633.9

(18%)(18%)

+$1,839.5+$1,839.5

(-3%)(-3%)

+ -$329.8+ -$329.8==$10,208.1$10,208.1

2001 Data2001 Data


The Four Components of GDPThe Four Components of GDPThe Four Components of GDPThe Four Components of GDP

-$2,000.0-$1,000.0

$0.0$1,000.0$2,000.0$3,000.0$4,000.0$5,000.0$6,000.0$7,000.0$8,000.0

Dol

lars

GDP

GDP Components

Gross Domestic Product (2001)

ConsumptionInvestmentGovernmentNet ExportsExportsImports

-$2,000.0-$1,000.0

$0.0$1,000.0$2,000.0$3,000.0$4,000.0$5,000.0$6,000.0$7,000.0$8,000.0

Dol

lars

GDP

GDP Components

Gross Domestic Product (2001)

ConsumptionInvestmentGovernmentNet ExportsExportsImports


Potential GDPPotential GDPPotential GDPPotential GDP

Potential GDPPotential GDP is the value of GDP that is the value of GDP that would exist if all resources in the economy would exist if all resources in the economy were fully and efficiently employed. were fully and efficiently employed. Actual GDP equals potential GDP only if Actual GDP equals potential GDP only if there is no unemployment or there is no unemployment or underemployment of resources. underemployment of resources.

Potential GDPPotential GDP is the value of GDP that is the value of GDP that would exist if all resources in the economy would exist if all resources in the economy were fully and efficiently employed. were fully and efficiently employed. Actual GDP equals potential GDP only if Actual GDP equals potential GDP only if there is no unemployment or there is no unemployment or underemployment of resources. underemployment of resources.


Per Capita GDPPer Capita GDPPer Capita GDPPer Capita GDP

Per capita GDPPer capita GDP is GDP per person is GDP per person In 2001, total GDP was $10.2 trillionIn 2001, total GDP was $10.2 trillion In 2001, the U.S. population was over In 2001, the U.S. population was over

284 million people284 million people Per capita GDP for 2001 was $35,843 - Per capita GDP for 2001 was $35,843 -

the amount of output produced and the amount of output produced and equally divided among every man, equally divided among every man, woman, and child in the U.S.woman, and child in the U.S.

Per capita GDPPer capita GDP is GDP per person is GDP per person In 2001, total GDP was $10.2 trillionIn 2001, total GDP was $10.2 trillion In 2001, the U.S. population was over In 2001, the U.S. population was over

284 million people284 million people Per capita GDP for 2001 was $35,843 - Per capita GDP for 2001 was $35,843 -

the amount of output produced and the amount of output produced and equally divided among every man, equally divided among every man, woman, and child in the U.S.woman, and child in the U.S.


GDP and Value AddedGDP and Value AddedGDP and Value AddedGDP and Value Added

GDP may also be viewed as the sum of value GDP may also be viewed as the sum of value added in the economy.added in the economy.Each firm takes inputs of materials and Each firm takes inputs of materials and intermediate goods and increases their value intermediate goods and increases their value through the firm’s production process.through the firm’s production process.Value addedValue added equals the revenue from the equals the revenue from the sale of output minus the cost of purchased sale of output minus the cost of purchased inputs.inputs.

GDP may also be viewed as the sum of value GDP may also be viewed as the sum of value added in the economy.added in the economy.Each firm takes inputs of materials and Each firm takes inputs of materials and intermediate goods and increases their value intermediate goods and increases their value through the firm’s production process.through the firm’s production process.Value addedValue added equals the revenue from the equals the revenue from the sale of output minus the cost of purchased sale of output minus the cost of purchased inputs.inputs.


Underground EconomyUnderground EconomyUnderground EconomyUnderground Economy

The underground economy refers to the The underground economy refers to the market transactions which go unreported.market transactions which go unreported. Some of these goods and services are illegal Some of these goods and services are illegal and thus not recorded in GDP.and thus not recorded in GDP. Others are legal, but not reported so that Others are legal, but not reported so that their producers may avoid paying taxes on the their producers may avoid paying taxes on the output.output.

The underground economy refers to the The underground economy refers to the market transactions which go unreported.market transactions which go unreported. Some of these goods and services are illegal Some of these goods and services are illegal and thus not recorded in GDP.and thus not recorded in GDP. Others are legal, but not reported so that Others are legal, but not reported so that their producers may avoid paying taxes on the their producers may avoid paying taxes on the output.output.


Nominal versus Real GDPNominal versus Real GDPNominal versus Real GDPNominal versus Real GDP

Nominal GDPNominal GDP is the value of GDP is the value of GDP expressed in current dollars terms.expressed in current dollars terms.

Real GDPReal GDP adjust for inflation the adjust for inflation the nominal value of GDP.nominal value of GDP.

The chain-type price indexThe chain-type price index is an index of is an index of prices that measure price changes over prices that measure price changes over time.time.

Nominal GDPNominal GDP is the value of GDP is the value of GDP expressed in current dollars terms.expressed in current dollars terms.

Real GDPReal GDP adjust for inflation the adjust for inflation the nominal value of GDP.nominal value of GDP.

The chain-type price indexThe chain-type price index is an index of is an index of prices that measure price changes over prices that measure price changes over time.time.


Nominal versus Real GDPNominal versus Real GDPNominal versus Real GDPNominal versus Real GDP

Real GDPReal GDP

==

Nominal GDP divided byNominal GDP divided byGDP chain price index x 100GDP chain price index x 100


Nominal and Real GDPNominal and Real GDPNominal and Real GDPNominal and Real GDP

Slected YearsNominal GDP(in trillions)

GDP Chain Type price index

(1996 $)Real GDP

in trillions of 1996 $'s

1961 0.546 22.43 2.4341971 1.129 30.52 3.699

1981 3.131 62.37 5.0201991 5.986 89.66 6.6761992 6.319 91.85 6.8801993 6.642 94.05 7.0621994 7.054 96.01 7.3471995 7.400 98.10 7.5431996 7.813 100.00 7.8131997 8.318 101.95 8.1631998 8.782 103.20 8.5101999 9.269 104.66 8.8562000 9.873 107.04 9.2242001 10.208 109.37 9.333

Slected YearsNominal GDP(in trillions)

GDP Chain Type price index

(1996 $)Real GDP

in trillions of 1996 $'s

1961 0.546 22.43 2.4341971 1.129 30.52 3.699

1981 3.131 62.37 5.0201991 5.986 89.66 6.6761992 6.319 91.85 6.8801993 6.642 94.05 7.0621994 7.054 96.01 7.3471995 7.400 98.10 7.5431996 7.813 100.00 7.8131997 8.318 101.95 8.1631998 8.782 103.20 8.5101999 9.269 104.66 8.8562000 9.873 107.04 9.2242001 10.208 109.37 9.333


The business cycleThe business cycle refers to the refers to the expansions and contractions in expansions and contractions in

economic activity that take place economic activity that take place over time.over time.

5.45.4THE BUSINESS CYCLETHE BUSINESS CYCLE5.45.4THE BUSINESS CYCLETHE BUSINESS CYCLE


Stages of the Business CycleStages of the Business CycleStages of the Business CycleStages of the Business Cycle

TimeTime

Rea

l GD

PR

eal G

DP

TroughTrough

ExpansionExpansion

PeakPeak

RecessionRecession

TroughTroughTrend LineTrend Line


Rising Trend of GDPRising Trend of GDPRising Trend of GDPRising Trend of GDP

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94


The Upward Trend of Real GDPThe Upward Trend of Real GDPThe Upward Trend of Real GDPThe Upward Trend of Real GDP

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

Dol

lars

Real GDP

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

Dol

lars

Real GDP


Economic IndicatorsEconomic IndicatorsEconomic IndicatorsEconomic Indicators

Leading Indicators:Leading Indicators: index of building index of building permits, housing starts, and manufacturers’ permits, housing starts, and manufacturers’ new orders for durable goods.new orders for durable goods.

Lagging indicators:Lagging indicators: unemployment rate and unemployment rate and expenditures on new plant and equipment.expenditures on new plant and equipment.

Coincident indicators:Coincident indicators: index of industrial index of industrial production and the prime interest rate.production and the prime interest rate.

Leading Indicators:Leading Indicators: index of building index of building permits, housing starts, and manufacturers’ permits, housing starts, and manufacturers’ new orders for durable goods.new orders for durable goods.

Lagging indicators:Lagging indicators: unemployment rate and unemployment rate and expenditures on new plant and equipment.expenditures on new plant and equipment.

Coincident indicators:Coincident indicators: index of industrial index of industrial production and the prime interest rate.production and the prime interest rate.


5.5 EXPLORE & APPLY5.5 EXPLORE & APPLYStatic vs. Dynamic ScoringStatic vs. Dynamic Scoring5.5 EXPLORE & APPLY5.5 EXPLORE & APPLYStatic vs. Dynamic ScoringStatic vs. Dynamic Scoring

Static scoring:Static scoring: the traditional method of the traditional method of computing the effects of federal actions. computing the effects of federal actions. Static scoring assumes no general change Static scoring assumes no general change in behavior as a result of government in behavior as a result of government policy changes.policy changes.

Dynamic scoring:Dynamic scoring: allows for the allows for the consideration of all behavioral changes consideration of all behavioral changes caused by changes in government policy.caused by changes in government policy.

Static scoring:Static scoring: the traditional method of the traditional method of computing the effects of federal actions. computing the effects of federal actions. Static scoring assumes no general change Static scoring assumes no general change in behavior as a result of government in behavior as a result of government policy changes.policy changes.

Dynamic scoring:Dynamic scoring: allows for the allows for the consideration of all behavioral changes consideration of all behavioral changes caused by changes in government policy.caused by changes in government policy.


Terms along the WayTerms along the WayTerms along the WayTerms along the Way

gross domestic product gross domestic product (GDP)(GDP)consumption spendingconsumption spendinginvestmentinvestmentgross investmentgross investmentnet investmentnet investmentnet domestic product net domestic product (NDP)(NDP)value addedvalue addedpotential GDPpotential GDP

gross domestic product gross domestic product (GDP)(GDP)consumption spendingconsumption spendinginvestmentinvestmentgross investmentgross investmentnet investmentnet investmentnet domestic product net domestic product (NDP)(NDP)value addedvalue addedpotential GDPpotential GDP

underground economyunderground economyGDP chain price indexGDP chain price indexnominal GDPnominal GDPreal GDPreal GDPpotential GDPpotential GDPbusiness cyclebusiness cycleleading indicatorsleading indicatorsstatic scoringstatic scoringdynamic scoringdynamic scoring

underground economyunderground economyGDP chain price indexGDP chain price indexnominal GDPnominal GDPreal GDPreal GDPpotential GDPpotential GDPbusiness cyclebusiness cycleleading indicatorsleading indicatorsstatic scoringstatic scoringdynamic scoringdynamic scoring


Test YourselfTest YourselfTest YourselfTest Yourself

1.1. The consumption spending portion of The consumption spending portion of GDP includesGDP includes

a.a. durables, nondurables, and servicesdurables, nondurables, and services

b.b. goods, services, and new houses.goods, services, and new houses.

c.c. intermediate foods, but not final goods.intermediate foods, but not final goods.

d.d. about 90% of all production that occurs about 90% of all production that occurs in the economy. in the economy.

1.1. The consumption spending portion of The consumption spending portion of GDP includesGDP includes

a.a. durables, nondurables, and servicesdurables, nondurables, and services

b.b. goods, services, and new houses.goods, services, and new houses.

c.c. intermediate foods, but not final goods.intermediate foods, but not final goods.

d.d. about 90% of all production that occurs about 90% of all production that occurs in the economy. in the economy.



2. 2. Gross Investment equalsGross Investment equals

a.a. net investment plus depreciation.net investment plus depreciation.

b.b. investment adjusted for the effects of investment adjusted for the effects of inflation.inflation.

c.c. a negative component of GDP.a negative component of GDP.

d.d. the change in business inventories. the change in business inventories.

2. 2. Gross Investment equalsGross Investment equals

a.a. net investment plus depreciation.net investment plus depreciation.

b.b. investment adjusted for the effects of investment adjusted for the effects of inflation.inflation.

c.c. a negative component of GDP.a negative component of GDP.

d.d. the change in business inventories. the change in business inventories.



3. 3. The value of a new house is included in The value of a new house is included in

a.a. consumption.consumption.

b.b. investment.investment.

c.c. government purchases.government purchases.

d.d. net exports. net exports.

3. 3. The value of a new house is included in The value of a new house is included in

a.a. consumption.consumption.

b.b. investment.investment.

c.c. government purchases.government purchases.

d.d. net exports. net exports.



4. 4. Which of the following is an example of a Which of the following is an example of a transfer payment? transfer payment?

a.a. A school district pays the salary of a school A school district pays the salary of a school teacher.teacher.

b.b. A senior citizen is issued a Social Security A senior citizen is issued a Social Security check by the government.check by the government.

c.c. A farmer raises a field of corn from seed..A farmer raises a field of corn from seed..d.d. A little boy and girl spend their allowances at A little boy and girl spend their allowances at

Chuck E. Cheese’s pizza restaurant. Chuck E. Cheese’s pizza restaurant.

4. 4. Which of the following is an example of a Which of the following is an example of a transfer payment? transfer payment?

a.a. A school district pays the salary of a school A school district pays the salary of a school teacher.teacher.

b.b. A senior citizen is issued a Social Security A senior citizen is issued a Social Security check by the government.check by the government.

c.c. A farmer raises a field of corn from seed..A farmer raises a field of corn from seed..d.d. A little boy and girl spend their allowances at A little boy and girl spend their allowances at

Chuck E. Cheese’s pizza restaurant. Chuck E. Cheese’s pizza restaurant.



5. 5. Net exports are computed as Net exports are computed as

a.a. exports minus depreciation.exports minus depreciation.

b.b. export minus imports.export minus imports.

c.c. export minus GDP.export minus GDP.

d.d. imports minus exports. imports minus exports.

5. 5. Net exports are computed as Net exports are computed as

a.a. exports minus depreciation.exports minus depreciation.

b.b. export minus imports.export minus imports.

c.c. export minus GDP.export minus GDP.

d.d. imports minus exports. imports minus exports.



6. 6. To compute real GDP when given To compute real GDP when given nominal GDP we must also know nominal GDP we must also know

a.a. nothing else, since real GDP and nothing else, since real GDP and nominal GDP are generally equal.nominal GDP are generally equal.

b.b. the value of consumption spending.the value of consumption spending.c.c. the value of gross investment.the value of gross investment.d.d. the value of the GDP chain-type price the value of the GDP chain-type price

index. index.

6. 6. To compute real GDP when given To compute real GDP when given nominal GDP we must also know nominal GDP we must also know

a.a. nothing else, since real GDP and nothing else, since real GDP and nominal GDP are generally equal.nominal GDP are generally equal.

b.b. the value of consumption spending.the value of consumption spending.c.c. the value of gross investment.the value of gross investment.d.d. the value of the GDP chain-type price the value of the GDP chain-type price

index. index.


The End!The End!Next Chapter 6Next Chapter 6

““Unemployment"Unemployment"

©2004 prentice hall publishing ayers/collinge, 1/e 1 chapter 5 “measuring national output”

Documents