Chapter 11 - Measuring Economic Performance PDF

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Measuring Economic Performance...

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Chapter 11 1. Define Gross Domestic Product (GDP) and discuss how it is used as a measure of living standard and the limitations of its use. GDP is defined as the value of all final goods and services produced within a country during a given period of almost always one year. The word value is determined by the market prices at which goods and services sell. When we calculate de GDP in the economy, we are measuring the value of total production and the total income of everyone in the economy. That is because every dollar of spending by some buyer ends up being a dollar of income for some seller. In short, expenditures must equal income. GDP includes all private and public consumption, government outlays, investments, private inventories, paid-in construction costs and the foreign balance of trade (exports are added, imports are subtracted) and it is used as a broad measurement of a nation’s overall economic activity to indicate the economic health of a country as well as a gauge of a country’s standard for living. Since the mode of measuring GDP is uniform from a country to another, GDO can be used to compare the productivity of various countries with high accuracy. GDP can also be tracked over long spans of time and used in measuring if an economy is expanding or contracting, measuring the nation’s overall economic growth. Of course, there are drawbacks to using GDP as an indicator. Some limitations of GDP as a measure are: 

It does not account for several unofficial income sources. GDP relies on official data, so it does not take into account the extent of the underground economy, which can be

significant in some nations that have high “under the table” employment to black market and illegal activities that can generate a lot of income. 

GDP can be an imperfect measure in come cases. GDP does not consider profits earned in a nation by overseas companies that are remitted back to foreign investors. This can overstate a country’s actual economy output.

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Calculating GDP can be a problem when we compare GDP over time. For example: Between 1970 and 1978 GDP in the United States rose more than 100, in a period of high inflation. Unfortunately, the U.S. dollar also changed in value over this period. A dollar in 1979 would certainly not buy as much as a dollar in 1970 because the overall price level for goods and services increased.

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It emphasizes economic output without considering economic well-being. GDP growth alone cannot measure a nation’s development or its citizens’ well-being. A nation may be experiencing rapid GDP growth, but this may impose significant cost to society in terms of environmental impact and increase in income disparity.

2. What other indicators (list at least 3) can be used to supplement GDP as a measure of welfare? 

Gross national product: It is the difference between net income of foreigners and GDP.

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Net national products: The total value of goods produced and services provided in a country during one year, after the depreciation of capital goods.

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National income: It is the measure of the income earned by owners of resources-factor payments. It includes payments for labor services, rent and profits

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Personal income: Measures the amount of income received by households (including transfer payments) before income taxes.

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Disposable personal income: It is the personal income available to individuals after taxes.

3. What is the difference between a final good and an intermediate good The word “final” means that the good is ready for its designated ultimate use. Many goods and services are called “intermediate” goods or services used in the production of other goods.

Review Sheet Exam #2 Classical economics and stabilization policy A stabilization policy is a macroeconomic strategy enacted by governments and central banks to keep economic growth stable, along with price levels and unemployment. Ongoing stabilization policy includes monitoring the business cycle and adjusting benchmark interest rates to control aggregate demand in the economy. The goal is to avoid erratic changes in total output, as measured by gross domestic product (GDP) and large changes in inflation; stabilization of these factors generally leads to moderate changes in the employment rate as well.

Keynesian policy for a recession Keynesian economics (/ˈkeɪnziən/ KAYN-zee-ən; sometimes called Keynesianism) are the various macroeconomic theories about how in the short run – and especially during recessions – economic output is strongly influenced by aggregate demand (total demand in the economy). In the Keynesian view, aggregate demand does not necessarily equal the productive capacity of the economy; instead, it is influenced by a host of factors and sometimes behaves erratically, affecting production, employment, and inflation. Keynesian economists generally argue that, as aggregate demand is [1]

volatile and unstable, a market economy will often experience inefficient macroeconomic outcomes in the form of economic recessions (when demand is low) and inflation (when demand is high). These can be mitigated by economic policy responses, in particular, monetary policy actions by the central bank and fiscal policy actions by the government, which can help stabilize output over the business cycle. Keynesian economists generally advocate a managed market economy – [3]

predominantly private sector, but with an active role for government intervention during recessions and depressions.

[4]

Factors that influence investment spending 1. 2. 3. 4. 5. 6.

Interest rates (the cost of borrowing) Economic growth (changes in demand) Confidence/expectations Technological developments (productivity of capital) Availability of finance from banks. Others (depreciation, wage costs, inflation, government policy)

Definition, Components and Computation of GDP

Policies to correct a recessionary gap When an economy is in a recession, expansionary fiscal policy is in order. Typically this type of fiscal policy results in increased government spending and/or lower taxes. A recession results in a recessionary gap � meaning that aggregate demand (ie, GDP) is at a level lower than it would be in a full employment situation. In order to close this gap, a government will typically increase their spending which will directly increase the aggregate demand curve (since government spending creates demand for goods and services). At the same time, the government may choose to cut taxes, which will indirectly affect the aggregate demand curve by allowing for consumers to have more money at their disposal to consume and invest. The actions of this expansionary fiscal policy would result in a shift of the aggregate demand curve to the right, which would result closing the recessionary gap and helping an economy grow.

Know everything about the aggregate demand curve including what cause it to shift

I nmacr oeconomi cs,t hef oc usi sont hedemandandsuppl yofal lgoodsands er v i ces pr oduc edbyanec onomy .Accor di ngl y ,t hedemandf oral li ndi v i dualgoodsandser v i ces i sal socombi nedandr ef er r edt oasaggr egat edemand.Thes uppl yofal li ndi v i dual goodsandser v i cesi sal socombi nedandr ef er r edt oasaggr egat esuppl y.Li k et he demandands uppl yf ori ndi v i dual goodsandser v i ces ,t heaggr egat edemandand aggr egat esuppl yf oraneconomycanber epr esent edbyaschedul e,ac ur v e,orbyan al gebr ai cequat i on Theaggr egat edemandcur ver epr es ent st het ot alquant i t yofal lgoods( andser vi ces) demandedbyt heeconomyatdi ffer entpr i cel ev el s. As hi f tt ot her i ghtoft heaggr egat edemandc ur v e.f r om AD 1 t oAD 2,meanst hatatt he s amepr i cel ev el st hequant i t ydemandedofr ealGDPhasi ncr eased.Ashi f tt ot hel ef tof t heaggr egat edemandcur v e,f r om AD1 t oAD 3,meanst hatatt hesamepr i c el ev el st he quant i t ydemandedofr ealGDPhasdec r eas ed.Changesi naggr egat edemandar enot caus edbychangesi nt hepr i cel ev el .I nst ead,t heyar ecausedbychangesi nt he demandf oranyoft hecomponent sofr ealGDP,changesi nt hedemandf or consumpt i ongoodsands er v i ces ,changesi ni nv est mentspendi ng,c hangesi nt he gov er nment ' sdemandf orgoodsands er v i ces,orchangesi nt hedemandf ornet ex por t s.

Know everything about the aggregate supply curve including what cause it to shift Theaggr egat esuppl ycur vedepi ct st hequant i t yofr ealGDPt hati ssuppl i edbyt he economyatdi ffer entpr i cel evel s .Ther eas oni ngusedt oc onst r uctt heaggr egat esuppl y

c ur v edi ffer sf r om t her eas oni ngusedt oconst r uctt hesuppl yc ur v esf ori ndi v i dualgoods ands er v i ces .Thes uppl ycur v ef orani ndi vi dualgoodi sdr awnundert heas sumpt i on t hati nputpr i cesr emai nconst ant .Ast hepr i ceofgoodXr i ses ,s el l er s' peruni tcos t sof pr ovi di nggoodXdonotchange,andsosel l er sar ewi l l i ngt osuppl ymor eofgoodX‐ hence,t heupwar dsl opeoft hes uppl yc ur v ef orgoodX.Theaggr egat esuppl ycur v e, howev er ,i sdefinedi nt er msoft hepr i cel ev el .I ncr easesi nt hepr i cel ev elwi l li ncr ease t hepr i cet hatpr oduc er scangetf ort hei rpr oduct sandt husi nducemor eout put .Butan i nc r eas ei nt hepr i cewi l lal sohav easecondeffect ;i twi l lev ent ual l yl eadt oi ncr eas esi n i nputpr i cesaswel l ,whi c h,cet er i spar i bus,wi l lcausepr oducer st oc utback.So,t her ei s s omeuncer t ai nt yast owhet hert heeconomywi l l suppl ymor er ealGDPast hepr i ce l ev elr i ses .I nor dert oaddr esst hi si s sue,i thasbecomecust omar yt odi st i ngui s h bet weent wot ypesofaggr egat esuppl yc ur v es,t heshor t ‐r unaggr egat esuppl ycur ve andt hel ong‐r unaggr egat esuppl ycur ve.

Ani l l ust r at i onoft heway si nwhi c ht heSASandLAScur v escans hi f ti spr ovi dedi n Fi gur es(a) and (b). A shift to the r i ghtof the SAScurve from SAS1 to SAS2of the LAScurve from LAS1to LAS2means that at the same price levels the quantity supplied of real GDP has i nc r eased. A shift to the l ef tof the SAScurve from SAS1 to SAS3or of the LAScurve from LAS1to LAS3 means that at the same price levels the quantity supplied of real GDP has dec r eased. c hangei ni nputpr i ces. ⎮ Anyc hangei nt hequant i t yofanyf act orofpr oduct i onav ai l abl e ( capi t al ,l and,l aborort echnol ogy)cancauseashi f ti nbot ht he l ongr unandshor t r unaggr egat esuppl yc ur v es .

ec onomi cgr owt h. Keynesian and Classical view about price and the aggregate supply curve

Keynesian and Classical view about equilibrium using the aggregate demand and aggregate supply curves Recessionary and inflationary gaps Types of Unemployment: frictional, structural and cyclical Compute real GDP and the GDP deflator Compute GDP growth rate: real and nominal Rule of 70 A nation with greater economic growth will end up with a much higher standard of living. The rule of 70 can tell how long it will take a nation to double its output. Dividing a nation’s growth rate into 70, one gets the approximate time it will take to double the income level. If a nation grows at 3.5% per year, then the economy will double every 20 years. (70/3.5) The convergence hypothesis Compute CPI and Inflation Per capita GDP Unemployment rate Factors influencing productivity growth Real and nominal values Gainers and losers of inflation...