chapter 11: measuring macroeconomicmeasuring …

Economics for Managersby Paul Farnhamy

Chapter 11:Measuring MacroeconomicMeasuring Macroeconomic

Activity

11.1© 2005 Prentice Hall, Inc.

Measuring Gross D ti P d t (GDP)Domestic Product (GDP)

GDP: the market value of all currently produced final goods y p gand services within a country in a given period by all resourcesCircular flow: derived from market transactions of goods and gservices between demanders and suppliers


Circular Flow in an O Mi d EOpen Mixed Economy

Mixed economy: both private sectors (firms and households) ( )and public sector (government)Open economy: both domesticOpen economy: both domestic and foreign sectorClosed economy: only a domesticClosed economy: only a domestic sector


Circular Flow in anO Mi d EOpen Mixed Economy

Expenditure or output approach: sum of consumption, investment, government, and net expenditure, with export spending minus import spending (E = C+I+G+M X)spending (E = C+I+G+M-X)Aggregate expenditure: sum of C, I, G and X on total amo nt of realG, and X on total amount of real output produced in an economy in a given time period


given time period

Circular Flow in anO Mi d EOpen Mixed Economy

Earnings or income approach: measures overall economic activity by adding earnings or income generated by selling the

t t d d i thoutput produced in the economyThe terms aggregate expenditure, gg g p ,output, and income are interchangeable


Managerial Rule of Thumb: diSpending Patterns

Aggregate spending decisions influence overall macroeconomic environment of all firmsChanges in spending patternsChanges in spending patterns affect firm's competitive strategies because they alter the g yeconomic environment in which firms do business


National Income A ti S tAccounting Systems

Measure economic activity in real-world economiesProduced by the Bureau of Economic Analysis in the U.S.Economic Analysis in the U.S. Department of Commerce


Characteristics of GDPCharacteristics of GDP

Monetary measure of economic activityyIncludes only final goods and servicesservicesCalculated in dollar/CZK terms



Includes final, but not intermediate, goods and services , gThe value added approach is used (only value added to each stage of(only value added to each stage of production is counted)Includes only those goods andIncludes only those goods and services currently produced in that period


that period


D t i l d d dDoes not include underground economic activities or transfer payments, or health status, p y , ,environmental conditionsGDP can increase because of• Price of goods and services while

quantities are held constantQuantities of goods and services• Quantities of goods and services increase while the prices are held constant


• Both prices and quantities increase


GDP deflator: measure of price changes in the economy that

th i f h ’compares the price of each year’s output of goods and services to the price of that same output in athe price of that same output in a base yearBusiness cycle: periodic ups andBusiness cycle: periodic ups and downs in overall economic activity reflected in production, emplo ment profits and prices


employment, profits, and prices


Expansion: rising phase of business cycle in which direction of economic indicators turn upwardindicators turn upwardRecession: falling phase of business cycle in which economicbusiness cycle in which economic indicators turn downwardIndicators include business salesIndicators include business sales, industrial production, unemployment rate, nonfarm employment and personal income


employment, and personal income

Personal Consumption E ditExpenditures

Durable goods: commodities that can be stored for at least three years Nondurable goods: last less than th d dthree years and are consumed very quicklyS i dit itServices: non-commodity items such as utilities, private education, medical care, etc.


education, medical care, etc.

Personal Consumption E ditExpenditures

Durable Goods Nondurable GoodsFigure 11.5

1959

Durable Goods, Nondurable Goods,and Services Share

1996195913% 12%

1996

40%47% 58% 30%

DurablesNondurables

DurablesNondurables


NondurablesServices Services

Investment ExpendituresInvestment Expenditures

Gross private domestic investment spending includes:p g

• Business or nonresidential fixed investmentinvestment

• Residential fixed investment Ch i b i i t i• Changes in business inventories produced but not sold in a given year


year

Investment ExpendituresInvestment Expenditures

Business fixed investment: structures, equipment, and software that provide capacity tosoftware that provide capacity to produce goods and servicesResidential fixed investment: newResidential fixed investment: new construction of privately owned family dwellingsy gChanges in business inventories: goods produced in a given time but


g p gnot sold

Government Consumption E ditExpenditures

Includes federal, state, and local government purchases of finished g pproducts plus all direct purchases of resourcesDivided into two categories: consumption and investmentp


Net Export SpendingNet Export Spending

Difference between spending by other countries on domestically

d d d d i dproduced goods and services and spending by domestic residents on goods and services producedon goods and services produced in the rest of the world


Real GDP GrowthReal GDP Growth

1996-2000Figure 11.6

1996 20004% avg.

5

2001-20032% avg.

3

4

2

3

0

1


0

'96

'97

'98

'99

'00

'01

'02

'03

Income or E i A hEarnings Approach

National income consists of:• Compensation of employees• Compensation of employees• Proprietors’ income• Rental income• Corporate profitsCo po ate p o ts• Net interest


Personal Income or E i A hEarnings Approach

Di bl iDisposable incomeYd = Y - Tp where

Yd = disposable incomeY = personal incomeT = personal taxesTp= personal taxes

SavingsYd = C + S whereYd = C + S where

Yd = disposable incomeC = personal consumption expenditure


C = personal consumption expenditureS = saving

Price Level MeasuresPrice Level Measures

Relative prices: price of one good in relation to price of another goodAbsolute price level: measure of overall level of prices using indices to

ll imeasure all pricesInflation: sustained increase in price l llevelDeflation: sustained decrease in price level


level

Annual Percent Changei th GDP D fl tin the GDP Deflator

Figure 11.8

2001-20031.8% avg.

1996-20001.7% avg.

3

2

1

0

6 7 8 9 0 1 2 3


1996

1997

1998

1999

2000

2001

2002

2003

Consumer Price IndexConsumer Price Index

Measures combined price consumers pay for goods in a p y ggiven period relative to combined price of identical goods in a base

i dperiodUses fixed market basket of goods reflecting a “typical” consumer


Producer Price IndexProducer Price Index

Shows rate of price increases at an earlier stage than the CPIMeasures prices firms pay for intermediate goods and servicesThree indices:• Crude materialsCrude materials• Intermediate materials

Finished goods11.25© 2005 Prentice Hall, Inc.

• Finished goods

Employment and U l tUnemployment

Current Population Survey: monthly survey of a sample of approximately 60 000 households60,000 householdsLabor force: people over 15 years old who are working or actively seeking o a e o g o act e y see gemploymentEmployed: people who did any work ffor payUnemployed: people who are not working


working

Employment and U l tUnemployment

Discouraged workers: not considered because they are not yactively seeking employment as they believe work is not availableNatural rate of employment: minimum level of unemployment p yachieved with full usage of production factors


Major Macroeconomic P li IPolicy Issues

What factors influence the spending behavior of different sectors in the economy?economy?How do behavior changes in these sectors influence the level of outputsectors influence the level of output and income in the economy?Can policy makers maintain stableCan policy makers maintain stable prices, full employment, and adequate growth over time?


Major Macroeconomic P li I

H d fi l t d b l

Policy Issues

How do fiscal, monetary, and balance of payment policies influence the economy?economy?• Fiscal policy• Monetary policy• Monetary policy• Balance of payments

Wh t i t d thWhat impact do these macro changes have on different firms and industries?


industries?

Summary of Key TermsSummary of Key Terms

Absolute price levelAggregate expenditureB l f iBalance of payments issuesBusiness cyclesB i fi d i t tBusiness fixed investmentCapital flowsChanges in business inventoriesChanges in business inventoriesCircular flowCompensation of employees


Compensation of employees


Consumer Price IndexCore rate of inflationC fiCorporate profitsCurrency exchange rateD fl tiDeflationDiscouraged workersDisposable incomeDisposable incomeDurable goodsEarnings or income approach


Earnings or income approach


Equilibrium level of output and incomeExpenditure or output approachExport spendingFinal goods and servicesFiscal policyGDP deflatorGovernment consumption and

dit11.32© 2005 Prentice Hall, Inc.

expenditures


Gross investmentGross domestic product Gross private domestic investment spendingI t diImport spendingImputed valueInflation and recessionInflation and recessionIntermediate goods and servicesLabor force


Labor force


MacroeconomicsMixed economyM liMonetary policyNational incomeN t l t f l tNatural rate of unemploymentNet export spendingNet interestNet interestNominal GDP and real GDPNondurable goods


Nondurable goods


Open economyPersonal consumption expendituresP l iPersonal incomeProducer Price IndexR id ti l fi d i t tResidential fixed investmentSavingTrade balanceTrade balanceTransfer paymentsUnderground economy


Underground economy

chapter 11: measuring macroeconomicmeasuring …

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