1. Economic Performance

2. Judging the Economy......

3. Indictators Leading Predict what the economy will do Coincident Current status of the economy Lagging After the fact, explains what has happened.

5. GDP Gross Domestic Product Final Output. EG Sale of pen included, but not the manufacture of casing or ink. Manufactured during current year. Used cars or second hand clothes excluded. National Borders.

6. GDP Continued National Borders Includes all production regardless of who produces it. Toyotas built in U.S. factories. Excludes items built or financed by Americans outside of the U.S. Coke Plant in Europe.

7. U. S. GDP Quarterly Data

11. How to measure GDP 3 Ways 1 - Expenditure Approach Sum of purchases by final users. 2 - Income Approach If final price = all income & costs incurred. 3 - Value-added Approach Total sales - value of intermediate goods.

12. How to measure GDP

13. Expenditure Approach to GDP GDP = C + I + G + ( X - M ) C = Personal Consumption Expenditures I = Gross Investment G = Government Purchases X = Exports M = Imports

14. Expenditure Method Components C = Consumption All final products I = Investments Capital investments Inventory investments G = Government Purchases Excludes transfer payments X = Exports M = Imports Trade surplus is a positive number Trade deficit is a negative number

15. Other Points of Notes Inflation Nominal GDP Not adjusted for inflation. Real GDP Adjusted for inflation

16. Nominal vs. Real GDP YearNominalReal 2006$44,572$37,859 2007$46,328$38,369 2008$46,674$37,954

17. Calculating Nominal GDP Nominal GDP = Sum of TR (P*Q) of all goods = (A P2 )*(A Q2 )+(B P2 )*(B Q2 ) Nominal Prices * Quantity Nominal prices are prices from tear of sale. Calculates size of economy for a period in dollars from that period EG GDP for 2007 in 2007 dollars.

18. Calculating Real GDP Real GDP = Sum of TR using original prices with current quanity = (A P1 )*(A Q2 )+(B P1 )*(B Q2 ) Real Prices * Quantity Real prices are prices from original or base year Calculates size of economy for a period in dollars from a base period EG GDP for 2007 in 2001 dollars.

19. Inflation & Deflators Inflation – Amount that prices rise for the same goods. Deflator – A measure that adjusts the GDP for inflation. (Nominal GDP / Real GDP) * 100

20. Example – BBQ GDP Hot Dogs Hamburgers Year Price Amount Price Amount 2006 $1 100 $2 50 2007 $2 150 $3 100 2008 $3 200 $4 150

21. Nominal GDP Nominal GDP = (P 1 )*(Q 1 )+(P 2 )*(Q 2 ) Nominal Prices * Quantity 2006 = 1*100+2*50 = $200 2007 = 2*150+3*100 = $600 2008 = 3*200+4*150 = $1,200

22. Real GDP Real GDP = (P B )*(Q 1 )+(P B )*(Q 2 ) Real (base year) prices * quantity 2006 = 1*100+2*50 = $200 2007 = 1*150+2*100 = $350 2008 = 1*200+2*150 = $500

23. GDP Deflator (Nominal GDP)/(Real GDP)*100 2006 = (200/200)*100 = 100 2007 = (600/350)*100 = 171 2008 = (1,200/500)*100 = 240

24. Other Points of Note Limitations Accuracy of information Timeliness of information Non-market activities Underground economy

25. Related Production Measurements GNP - Gross National Product NNP - Net National Product NI - National Income PI - Personal Income DPI - Disposable Personal Income See hand-out for mathematical relationships.