Economic Performance
Judging the Economy . . . . . .
Indictators
Leading Predict what the economy will do
CoincidentCurrent status of the economy
LaggingAfter the fact, explains what has happened.
GDP
Gross Domestic ProductFinal 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.
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.
Year Quarter GDP % 2007 Q4 1.7 2008 Q1 -1.8
Q2 1.3 Q3 -3.7 Q4 -8.9
2009 Q1 -6.7 Q2 -0.7 Q3 1.7 Q4 3.8
2010 Q1 3.9 Q2 3.8 Q3 2.5 Q4 2.3
2011 Q1 0.4 Q2 1.3 Q3 1.8
U. S. GDP Quarterly Data
How to measure GDP
3 Ways1 - 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.
How to measure GDP
Expenditure Approach to GDP
GDP = C + I + G + ( X - M )C = Personal Consumption Expenditures I = Gross InvestmentG = Government PurchasesX = ExportsM = Imports
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
Other Points of Notes
Inflation
Nominal GDP Not adjusted for inflation.
Real GDP Adjusted for inflation
Nominal vs. Real GDP
Year Nominal Real
2006 $44,572 $37,859
2007 $46,328 $38,369
2008 $46,674 $37,954
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.
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.
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
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
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
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
GDP Deflator
(Nominal GDP)/(Real GDP)*100
2006 = (200/200)*100 = 100
2007 = (600/350)*100 = 171
2008 = (1,200/500)*100 = 240
Other Points of Note
Limitations
Accuracy of informationTimeliness of informationNon-market activitiesUnderground economy
Related Production Measurements
GNP - Gross National ProductNNP - Net National ProductNI - National IncomePI - Personal IncomeDPI - Disposable Personal Income
See hand-out for mathematical relationships.