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Economic Performance

Economic Performance. Judging the Economy. Indictators. Leading Predict what the economy will do Coincident Current status of the economy Lagging After the fact, explains what has happened. GDP. Gross Domestic Product Final Output.

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Economic Performance

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  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.

  4. 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.

  5. 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.

  6. U. S. GDP Quarterly Data

  7. 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.

  8. How to measure GDP

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

  10. 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

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

  12. Nominal vs. Real GDP

  13. Calculating Nominal GDP • Nominal GDP • = Sum of TR (P*Q) of all goods • = (AP2)*(AQ2)+(BP2)*(BQ2) • 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.

  14. Calculating Real GDP • Real GDP • = Sum of TR using original prices with current quanity • = (AP1)*(AQ2)+(BP1)*(BQ2) • 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.

  15. 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

  16. 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

  17. Nominal GDP • Nominal GDP = (P1)*(Q1)+(P2)*(Q2) • Nominal Prices * Quantity • 2006 = 1*100+2*50 = $200 • 2007 = 2*150+3*100 = $600 • 2008 = 3*200+4*150 = $1,200

  18. Real GDP • Real GDP = (PB)*(Q1)+(PB)*(Q2) • Real (base year) prices * quantity • 2006 = 1*100+2*50 = $200 • 2007 = 1*150+2*100 = $350 • 2008 = 1*200+2*150 = $500

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

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

  21. 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.

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