Chapter 13 Measuring the Economy’s Performance  Section 1National Income Accounting  Section 2Correcting Statistics for Inflation  Section 3Aggregate Demand & Supply  Section 4Business Fluctuations

National Income Accounting  national income accounting – measurement of the national economy’s performance, dealing with the overall economy’s output and income

National Income Accounting  5 major statistics that measure the national economy –1.gross domestic product (GDP) –2.net domestic product (NDP) –3.national income (NI) –4.personal income (PI) –5.disposable personal income (DI)

Gross Domestic Product (GDP)  gross domestic product – total value of all final goods and services produced in a nation in one year  Value is measured in dollars ($9 trillion in 1999)  Counts only final items and new items to avoid double counting and transfer of products

Gross Domestic Product (GDP)  4 categories for calculating GDP –1.consumer sector (C) – goods & services bought by the consumer for their direct use –2.investment sector (I) – business purchases to produce other goods & keep an inventory –3.government sector (G) – goods & services bought by federal, state & local governments –4.net exports (X) – difference between exports and imports GDP is only an estimate and omits areas such as unpaid work

Net Domestic Product (NDP)  net domestic product – value of the nation’s total output (GDP) minus the total value lost through depreciation on equipment  depreciation – loss of value because of wear and tear to durable and capital goods

National Income (NI)  national income – total income earned by everyone in the economy  Includes –wages & salaries –self-employed income –rental income –corporate profits –interest on savings & investments

Personal Income (PI)  personal income – total income that individuals receive before personal taxes are paid  transfer payments – welfare & other supplementary payments that govt. makes to individuals

Disposable Personal Income (DI)  disposable personal income – income people have after taxes and Social Security payments  Measures the actual amount of money people have available to save and spend.

Section 2 – Correcting Statistics for Inflation  Unpaid work, depreciation & inflation make GDP inaccurate  inflation – a prolonged rise in the general price level of goods and services

Purchasing Power of Money  purchasing power – real goods & services that money can buy  Dollar cannot buy the same amount as it did before inflation  Price may rise but output doesn’t change  deflation – prolonged decline in general price level – rarely occurs

Measures of Inflation  3 Measures of Inflation –1.consumer price index (CPI) –2.producer price index (PPI) –3.implicit GDP price deflator

Consumer Price Index (CPI)  CPI – measure of the change in price over time of a specific group of goods and services used by the average household  market basket – representative group of goods & services used to compile the CPI  90,000 items including- food, clothing, housing, medical, transportation, education & recreation  Compiled by Bureau of Labor Statistics (BLS)  Work from a base year where index is set at 100

Producer Price Index (PPI)  PPI – measure of the change in price over time that US producers charge for their goods & services  Ex. – mining, manufacturing & agriculture  Index that usually rises before CPI- ex. apples, crude oil, steel & plywood

GDP Price Deflator  GDP price deflator – price index that removes the effect of inflation from GDP so that the overall economy in one year can be compared to another  Real GDP is found when price deflator is applied

Section 3 – Aggregate Demand & Supply  Economists are interested in the demand by all consumers for all goods and services as well as the supply by all producers for goods and services  aggregates – summation of all individual parts of the economy

Aggregate Demand  aggregate demand – total quantity of goods and services in the entire economy that all citizens will demand at any single time  Aggregate demand is related to a price level instead of individual prices due to the millions of different prices for products.  Aggregate demand curve – graphed line showing the relationship between the aggregate quantity demanded and the average of all prices.  Inverse relationship as average price level goes down, more is demanded

Aggregate Supply  aggregate supply – real domestic output of producers based on the rise and fall of the price level  If the average price level goes up, producers will be willing to produce more to make more profit  The reverse is true if the price falls.  aggregate supply curve – a graphed line showing the relationship between the aggregate quantity supplied and the average of all prices adjusted for inflation

Section 4 – Business Fluctutations  business fluctuations – ups and downs in an economy  business cycle – irregular changes in the level of total output measured by real GDP  See Figure on page 361  peak/boom – a period of prosperity where economic activity is at its highest point  contraction – part of the business cycle during which economic activity is slowing down

Business Fluctuations  contraction – part of the business cycle during which economic activity is slowing down  recession – part of the business cycle in which the nation’s output (real GDP) does not grow for at least six months  recession – factories cut production, layoffs, consumers cut back purchases, fewer businesses start, & businesses fail  depression – major slowdown of economic activity

Business Fluctuations  trough – lowest part of the business cycle in which the downward spiral of the economy levels off  expansion/recovery – part of the business cycle in which economic activity slowly increases