The branch of economic theory dealing with the economy as a whole and decision making by governments.

Ch 13- Measuring the Economy’s Performance Section 1: National Income

Accounting- The measurement of the national economy’s performance, dealing with the overall economy’s output and income

Five Major Stats that Measure the National Economy Gross Domestic Product (GDP) Net Domestic Product (NDP) National Income (NI) Personal Income (PI) Disposable Personal Income (DPI)

GDP

Total dollar value of all goods and services produced in a nation in a single year

4 aspects of GDP Measuring Value Measuring Final Goods and Services Computing GDP Weaknesses of GDP

Measuring Value

Must measure value of all products and services, not numbers of products and services

Ex- one country produced 5 million paperclips; the other produces 3 million computers, which one has a greater GDP?

Measuring Final Goods and Services Must not double count goods;

instead measure the final product Ex- are you going to measure the

number of bike tires and the number of bikes made if you’re only going to sell the bikes?

Computing GDP

Four categories of expenditures are added together to compute GDP Consumer goods and services Investment (Business) goods and

services Government goods and services Net Exports

Weaknesses of GDP

Does not measure the value of products and services of those who work off the books or buy off the books

NDP

Value of a nation’s total output (GDP) minus the total value lost through depreciation on equipment

Depreciation- loss of value because of wear and tear to durable and capital goods Ex- cost to replace conveyor belt in

factory Cost of recall of automobiles with faulty

parts

National Income

Total income earned by everyone in the economy

Personal Income

Total income that individuals receive before personal taxes are paid

Includes transfer payments – welfare, social security, Medicaid, Medicare, disability insurance, etc.

Disposable Personal Income Income remaining for people to

spend or save after all taxes have been paid

Ch 13- Section 2- Correcting Statistics for Inflation

Inflation- Prolonged rise in the general price level of goods and services

The Purchasing Power of Money The real goods and services that

money can buy As inflation increases, the purchasing

power of money decreases

Measures of Inflation

Consumer Price Index (CPI) Producer Price Index (PPI) GDP Price Deflator

Consumer Price Index

Measure of the change in price over time of a specific group of goods and services used by the average household

The government tracks inflation on a monthly basis using a market basket ( 80,000 goods and services that the typical household uses)

Consumer Price IndexItem A Item B Item C

Year 1 112.50 225.00 110.00Year 2 121.50 243.00 128.00Change in Index Points

9.00 18.00 18.00

Percent Change

9.00/112.50*100=8

18.00/225.00*100=8

18.00/110.00*100=16.4

Consumer Price Index

1999 2000 2001

Food 164.1 167.8 173.6

Clothing 131.3 129.6 127.3

Housing 163.9 169.6 200.6

Medical 250.6 260.8 272.8

Producer Price Index

Measure of the change in price over time that US producers charge for their goods and services

GDP Price Deflator

Price index that removes the effect of inflation from GDP so that the overall economy in one year can be compared to another year provides the government with the Real GDP a real measure of the value of goods produced in a single year in comparison with years past.

Ch 13- Section 3: Aggregate Demand and Supply

Aggregates

The summing up of all the individual parts of the economy

Averages

Aggregate Demand

Total quantity of goods and services in the entire economy that all citizens will demand at any single time

Aggregate Supply

Real domestic output of producers based on the rise and fall of the price level

Demand and Supply Curve

As aggregate demand increases, aggregate supply decreases, and inflation increases

Ch 13- Section 4: Business Fluctuations Business Fluctuations- Ups and

downs in the economy

The Business Cycle

Peak/boom Contraction Recession Trough Expansion/ Recovery

NY1 | 24 Hour Local News | Year In Review | <i>2008 In Review:</i> U.S. Economy Stumbles Through Recession

Ch 13-Section 5: Causes and Indicators of Business Fluctuations Causes of Business Fluctuations

Business Investment Government Activity ( Fiscal and

Monetary Policy) External Factors (War; Limited

Resources, Natural Disasters) Psychological factors ( Aftermath of

September 11th fear less spending)

http://www.cnn.com/video/?iref=videoglobal

AC 360: Economic Woes Is the stimulus working?

Economic Indicators

Statistics that measure variables in the economy

3 Types Leading Indicators Coincident Indicators Lagging Indicators

Leading Indicators

Statistics that point to what will happen in the economy

Exs- changes in the average number of hours for production workers in manufacturing; changes in stock prices, etc.

Coincident Indicators

Economic indicators that usually change at the same time as changes in overall business activity

Serve as evidence of the stage of the cycle you are in

Exs- changes in disposable personal income

Lagging Indicators

Indicators that seem to lag behind changes in overall business activity

Effects of changes in business cycle Exs- changes in average length of

unemployment; change in the average interest rate charged by banks to their best customers

http://www.channelone.com/onair/ Dec 08 special broadcast Nov 25 special broadcast 3:00 left