ChapterChapter

Measuring Economic Measuring Economic

PerformancePerformance12

GDP

• GDP = Gross Domestic Product

• Total output or production in the nation in a single year.

• Dollar value of final goods & services produced.

• Includes foreign companies in U.S.

Defining GDP

• Final Product = total thing

• Intermediate Goods = parts

• Secondhand Sales = used goods

• Nonmarket Transaction = chores, volunteering, etc.

• Underground Economy = illegal

GDP is Geographical not National

US company in Mexico Mexican company in US

Other Measures

• GNP =gross national product

• NNP =Net national product

• NI =National Income

• PI =Personal Income

• DPI =Disposable Personal Income

Inflation

• A rise, over time, in the general level of prices.• Deflation = a drop, over time, in the general

level of prices. Year $1 $ 1,000

2 $ 1,040

3 $ 1,082

4 $ 1,125

5 $ 1,170

6 $ 1,217

7 $ 1,265

8 $ 1,316

9 $ 1,369

10 $ 1,423

Measures of Inflation

• CPI =Consumer Price Index

• Market Basket = common goods purchased by everyone, used for estimating CPI

• PPI =Producer Price Index

• Real GDP = GDP adjusted for inflation

Business Cycle

Business Fluctuations

“What causes the economy to move up and down?”

5 main forces1. Business Decisions

2. External Events

3. Innovation and Imitation

4. Government Policies

5. Psychological Factors

Leading Indicators: CHANGE?1. Average weekly hours for production workers in

manufacturing2. Weekly initial claims for unemployment3. New orders for consumer goods4. Speed with which companies make deliveries (the busier

a company, the longer it will take to fill orders)5. Number of contracts and orders for plants and equipment6. Number of building permits issued for private housing

units7. Stock prices8. Changes in money supply in circulation9. Changes in interest rates10. Changes in consumer expectations

Coincident Indicators: STARTED?

1. Number of nonagricultural workers who are employed

2. Personal income minus transfer payments

3. Rate of industrial production

4. Sales of manufacturers, wholesalers, and retailers

Lagging Indicators: LENGTH?

1. Average length of unemployment2. Size of manufacturing and trade inventories3. Labor cost per unit of output in manufacturing4. Average interest rate charged by banks to their

best business customers5. Number of commercial and industrial loans to

be repaid6. Ratio of consumer installment debt to personal

income7. Change in consumer price index for services

MAJOR ECONOMIC MAJOR ECONOMIC INDICATORSINDICATORS