Chapter 11: Activity

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1 Economics for Managers by Paul Farnham Chapter 11: Measuring Macroeconomic Activity 11.1

2 Measuring Gross Domestic Product (GDP) GDP: the market value of all currently yproduced final goods and services within a country in a given period by all resources Circular flow: derived from market transactions of goods and services between demanders and suppliers 11.2

3 Circular Flow in an Open Mixed Economy Mixed economy: both private sectors (firms and households) and public sector (government) Open economy: both domestic and foreign sector Closed economy: only a domestic sector 11.3

4 Circular Flow in an Open 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) Aggregate expenditure: sum of C, I, G, and X on total amount of real output produced in an economy in a given time period 11.4

5 Circular Flow in an Open Mixed Economy Earnings or income approach: measures overall economic activity by adding earnings or income generated by selling the output t produced d in the economy The terms aggregate g expenditure, output, and income are interchangeable 11.5

6 Managerial Rule of Thumb: Spending Patterns Aggregate spending decisions influence overall macroeconomic environment of all firms Changes in spending patterns affect firm's competitive strategies because they alter the economic environment in which firms do business 11.6

7 National Income Accounting Systems Measure economic activity in realworld economies Produced by the Bureau of Economic Analysis in the U.S. Department of Commerce 11.7

8 Characteristics of GDP Monetary measure of economic activity Includes only final goods and services Calculated in dollar/czk terms 11.8

9 Characteristics of GDP Includes final, but not intermediate,,goods and services The value added approach is used (only value added to each stage of production is counted) Includes only those goods and services currently produced in that period 11.9

10 Characteristics of GDP Does not include underground d economic activities or transfer payments, or health status, environmental conditions GDP can increase because of Price of goods and services while quantities are held constant Quantities of goods and services increase while the prices are held constant Both prices and quantities increase 11.10

11 Characteristics of GDP GDP deflator: measure of price changes in the economy that compares the price of each year s output of goods and services to the price of that same output in a base year Business cycle: periodic ups and downs in overall economic activity reflected in production, employment, ment profits, and prices 11.11

12 Characteristics of GDP Expansion: rising phase of business cycle in which direction of economic indicators turn upward Recession: falling phase of business cycle in which economic indicators turn downward Indicators include business sales, industrial production, unemployment rate, nonfarm employment, and personal income 11.12

13 Personal Consumption Expenditures Durable goods: commodities that can be stored for at least three years Nondurable goods: last less than three years and are consumed very quickly Services: non-commodity items such as utilities, private education, medical care, etc

14 Personal Consumption Expenditures Figure 11.5 Durable Goods, Nondurable Goods, and Services Share % 12% 40% 47% 58% 30% Durables Nondurables Services Durables Nondurables Services 11.14

15 Investment Expenditures Gross private domestic investment spending includes: Business or nonresidential fixed investment Residential fixed investment Changes in business inventories i produced but not sold in a given year 11.15

16 Investment Expenditures Business fixed investment: structures, equipment, and software that provide capacity to produce goods and services Residential fixed investment: new construction of privately owned family dwellings Changes in business inventories: goods produced in a given time but not sold 11.16

17 Government Consumption Expenditures Includes federal, state, and local government purchases of finished products plus all direct purchases of resources Divided into two categories: consumption and investment 11.17

18 Net Export Spending Difference between spending by other countries on domestically produced d goods and services and spending by domestic residents on goods and services produced in the rest of the world 11.18

19 5 Real GDP Growth % avg. Figure % avg '96 '97 '98 '99 '00 '01 '02 '

20 Income or Earnings Approach National income consists of: Compensation of employees Proprietors income Rental income Corporate profits Net interest 11.20

21 Personal Income or Earnings Approach Disposable income Y d = Y - T p where Y d = disposable income Y = personal income T p = personal taxes Savings Y d =C+S where Y d = disposable income C = personal consumption expenditure S = saving 11.21

22 Price Level Measures Relative prices: price of one good in relation to price of another good Absolute price level: measure of overall level of prices using indices to measure all prices Inflation: sustained increase in price levell Deflation: sustained decrease in price level 11.22

23 Annual Percent Change i th GDP D fl t in the GDP Deflator Figure % avg % avg

24 Consumer Price Index Measures combined price consumers pay for goods in a given period relative to combined price of identical goods in a base period Uses fixed market basket of goods reflecting a typical consumer 11.24

25 Producer Price Index Shows rate of price increases at an earlier stage than the CPI Measures prices firms pay for intermediate goods and services Three indices: Crude materials Intermediate materials Finished goods 11.25

26 Employment and Unemployment Current Population Survey: monthly survey of a sample of approximately 60, households Labor force: people over 15 years old who are working or actively seeking employment Employed: people who did any work for pay Unemployed: people who are not working 11.26

27 Employment and Unemployment Discouraged workers: not considered because they are not actively seeking employment as they believe work is not available Natural rate of employment: minimum level of unemployment achieved with full usage of production factors 11.27

28 Major Macroeconomic Policy Issues What factors influence the spending behavior of different sectors in the economy? How do behavior changes in these sectors influence the level of output and income in the economy? Can policy makers maintain stable prices, full employment, and adequate growth over time? 11.28

29 Major Macroeconomic Policy Issues How do fiscal, monetary, and balance of payment policies influence the economy? Fiscal policy Monetary policy Balance of payments What impact do these macro changes have on different firms and industries? 11.29

30 Summary of Key Terms Absolute price level Aggregate expenditure Balance of payments issues Business cycles Business fixed investment t Capital flows Changes in business inventories Circular flow Compensation of employees 11.30

31 Summary of Key Terms Consumer Price Index Core rate of inflation Corporate profits Currency exchange rate Deflation Discouraged workers Disposable income Durable goods Earnings or income approach 11.31

32 Summary of Key Terms Equilibrium level of output and income Expenditure or output approach Export spending Final goods and services Fiscal policy GDP deflator Government consumption and expenditures 11.32

33 Summary of Key Terms Gross investment Gross domestic product Gross private domestic investment spending Import spending Imputed value Inflation and recession Intermediate goods and services Labor force 11.33

34 Summary of Key Terms Macroeconomics Mixed economy Monetary policy National income Natural rate of unemployment Net export spending Net interest Nominal GDP and real GDP Nondurable goods 11.34

35 Summary of Key Terms Open economy Personal consumption expenditures Personal income Producer Price Index Residential fixed investment t Saving Trade balance Transfer payments Underground economy 11.35

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