Section Preview In this section, you will learn how economists calculate the overall success of the nation’s economy.

National Income Accounting, GDP, and NDP Gross domestic product is an estimate of the total dollar value of all final goods and services produced annually within a country. National income accounting is used to measure the national economy’s performance.National income accounting Five major statistics measure the national economy: –Gross domestic product –Net domestic product –National income –Personal income –Disposable income

Gross domestic product (GDP) is the broadest measure of the economy’s size.Gross domestic product (GDP) –It is the total dollar value of all final goods and services produced in the nation during a single year. Note the word VALUE in the definition: Simply adding up the quantities of different items produced would not mean much. What needs to be totaled is the dollar value of these items. Note the word FINAL in the definition: This is to avoid double counting. Only new and final goods are counted.

To derive GDP, economists add the expenditures made in four economic categories: C + I + G + X = GDP –Consumer goods and services (C) —goods and services bought directly by consumers for their direct use. –Investment (business) goods and services (I) — business purchases of tools, machines, buildings, and so on, used to produce other goods; this figure also includes money spent on business inventories. –Government goods and services (G) —goods and services, ranging from paper clips to jet airplanes, bought by the federal, state and local governments. –Net exports (X) —difference between what the nation sells to other countries (exports) and what it buys from other countries (imports). This figure may be a plus or a minus depending on whether a nation sells more or less to other nations than it buys from them.Net exports

Net domestic product (NDP) takes GDP and subtracts the total loss in value of capital goods caused by depreciation.Net domestic product (NDP)depreciation

Measurements of Income Disposable personal income is the total income that people have left after taxes are paid. A way to measure the economy’s performance is to measure categories of National Income. National income (NI) or the total income earned by everyone in the economy.National income (NI) –NI is the sum of the income resulting from five different sources: Wages and salaries Income of self-employed individuals Rental income Corporate profits Interest on savings and other investments

Personal income (PI) is the total income that individuals receive before personal taxes are paid.Personal income (PI) –This number is derived from NI through a two-step process: Several items, including corporate income taxes and social security contributions employees make, are subtracted. Government transfer payments such as welfare and unemployment compensation are added to NI.transfer payments Disposable personal income (DPI) equals PI minus personal taxes. It represents the actual amount of money income people have available to spend.Disposable personal income (DPI)

Personal and Disposable Income $10,750 $8,250 $2,500 Personal Income Personal Taxes Disposable Personal Income Billions of Dollars

Personal and Disposable Income ? $7,750 $3,000 Personal Income Personal Taxes Disposable Personal Income Billions of Dollars

Personal and Disposable Income $10,000 $6,000 ? Personal Income Personal Taxes Disposable Personal Income Billions of Dollars

Section Preview In this section, you will learn what price inflation is and how it is measured.

The Purchasing Power of Money The nominal value of GDP must be adjusted for changes in the purchasing power of money to determine changes in real output. Economists need to take inflation into account when thinking about GDP.inflation –A prolonged rise in the general price level of goods and services. –Example: When I was 16 a 22 ounce slurpee cost $.90. Today is costs about $1.35. When inflation occurs, the purchasing power of the dollar goes down.purchasing power –The real goods and services that a dollar can buy. Deflation also has an impact on the GDP, although this has rarely happened in modern times.Deflation –A prolonged decline in the general price level.

Measures of Inflation Inflation can be measured in several ways by calculating changes in different price indexes. The three most commonly used measurements of inflation are: –The consumer price index (CPI)consumer price index (CPI) About 80,000 specific goods and services make up the market basket.market basket The CPI is compiled monthly starting with prices from a base year so there is a point of comparison for current-day prices. (The base year is really the average of prices that existed for the three years, ).base year

–The producer price index (PPI)producer price index (PPI) PPI measures the changes in the prices producers charge for the goods they sell. PPI usually increases before the CPI. PPI is mainly from mining, manufacturing and agriculture industries. –The GDP price deflatorGDP price deflator When the price deflator is applied to GDP in any year, the new figure is called real GDP.real GDP

What caused hyperinflation? What were the effects on German citizens?

The juice in this glass is equal to the amount of money in Germany. What happens to the juice if you add water? You get more juice BUT you DILUTE the concentration!

In each country the money in circulation was equal to the amount of gold in the central bank. If you print more money than you are worth, the money is no longer worth the paper it is printed on! To combat this, businesses raised their prices so then the government has to print more money.

Germany decided not to borrow money to pay for World War 1. They figured they would pay back their war expenses once they won and took money from the Allied countries they defeated. Unfortunately (for Germany) they did not win and had to pay reparations to the Allied countries. Difficult economic conditions prevented Germany from keeping up with the payments.

When payments to France and Belgium were late in January 1923, French and Belgian troops occupied Germany’s industrial center. Without a military to fight back, the German government urged citizens to fight back using nonviolent means, so they went on strike. The German government printed more money to support the striking workers. Businesses then raise their prices but then wages must be raised again which leads to the government needing to print more money. The more money the government printed, the more it diluted its value. Eventually the money became worthless. This is HYPERINFLATION!

Although the German government eventually negotiated with France and Belgium, the occupation of the industrial center sparked an economic crisis in Germany. By printing money to support strikers, the German government increased the inflationary pressures that had been growing since before the war. By late 1923, the German Mark (historically valued at four Marks to the US dollar) became worth less than the paper on which it was printed.

Workers wages got higher and higher. Some people collected their wages in a wheelbarrow!

But the prices of food went up higher than people’s wages. People waited in line for food while others starved! Workers were paid 3 times a day—wives would wait outside the factory for husbands to hand them money and then they would run to the stores, prices increased sometimes in a matter of minutes. Waiting or window shopping could be the difference between paying 2 billion marks for a loaf of bread or 3 billion marks. Those with savings suffered the most—their savings were worth nothing!

So they burnt it to keep warm.

Or they let their children used it as toys.

Or they used their money as wallpaper.

Or they just threw it away.

Some people benefitted from hyperinflation—those in debt could easily pay off their IOU’s as wages increased. Hyperinflation led many to deal only in trade. However in the end, hyperinflation was so bad that that it led to high unemployment.

A medal commemoratin g Germany's 1923 hyperinflation. The engraving reads: "On 1st November pound of bread cost 3 billion, 1 pound of meat: 36 billion, 1 glass of beer: 4 billion."