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Economic Goals and how we measure them

Economic Goals and how we measure them. Growth Unemployment Inflation. Growth—measured in GDP. Gross Domestic Product GDP is the monetary measure of the total market value of all final goods and services produced within a country in one year. .

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Economic Goals and how we measure them

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  1. Economic Goals and how we measure them • Growth • Unemployment • Inflation

  2. Growth—measured in GDP • Gross Domestic Product • GDP is the monetary measure of the total market value of all final goods and services produced within a country in one year.

  3. GDP includes only final products and services • it avoids double or multiple counting by eliminating any intermediate goods • GDP is the value of what has been produced, not what was actually sold

  4. What does GDP exclude? • Purely financial transactions are excluded. • stocks or money transfers (they are not producing anything) • Intermediate products • Secondhand sales are excluded • Non-market transactions—mowing your lawn, the work of a homemaker or other home repair • Underground economy

  5. Two methods of measuring GDP • Expenditures Approach • How much did all of the things produced cost • Income Approach • How much was earned in the process of making all of the things that were produced.

  6. GDP = C + I + G + Xn • GDP is divided into the categories of buyers in the market • Personal Consumption—(C) • Durable consumer goods—cars, TV's. • Non-durable consumer goods—food, fuel • Services—doctors, lawyers • Gross Private Domestic Investment—(I) • All final purchases of machines, tools, and equipment used by businesses • All construction • Changes in inventories

  7. GDP = C + I + G + Xn • Government Purchases– (G) • Includes Federal, State, and Local • Net Exports—(Xn) • Exports (X) – Imports (M) • If it is not made here it is not part of GDP • if it is a factory owned by the U.S. but is outside the boarders, it does not count.

  8. How do we compare one year to the next? • Real Vs. Nominal GDP • Real GDP is what GDP would be if prices had not changed from the base year. • A.K.A. GDP adjusted for inflation • Consumer Price Index, measures inflation • Select a base year to compare price changes • Market basket of goods (aprox. 80,000 goods in 364 categories) • Changes occasionally in order to modernize the market basket

  9. The base year index will always be 100 Price index Price index in given year = X Price of same market basket in base year 100 Price of market basket in _____specific year____

  10. How do we use the index number to find Real GDP? Real GDP = _Nominal GDP X 100__ Price index

  11. What does GDP miss? • The Underground Economy • Who has the largest underground economy based on a percentage of GDP? • Greece ~ 30% • Increase in leisure (decrease in work) • Increased product quality • Impact of production on the environment • Is the production good for society and is it distributed equitably

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