Quick QuizQuick Quiz1) What is one of the five measures of 1) What is one of the five measures of

income?income?

2) What is another?2) What is another?

3) What is one of the four sectors of the 3) What is one of the four sectors of the economy?economy?

4) What is another?4) What is another?

5) How is personal income (PI) determined?5) How is personal income (PI) determined?

What is GDP?What is GDP? How does GDP differ from GNP? How does GDP differ from GNP?

Today we will be examining the different Today we will be examining the different measures of a nation’s incomemeasures of a nation’s income

Measuring a Nation’s Income- GNPMeasuring a Nation’s Income- GNP

The GDP does include The GDP does include production of foreign-production of foreign-owned good produced owned good produced in the US, but in the US, but EXCLUDE US EXCLUDE US production outside the production outside the USUS Hence, it is not a proper Hence, it is not a proper

measure of the total measure of the total income earned by income earned by American citizens!American citizens!

Gross National Product ( GNP)Gross National Product ( GNP)

$ value of all final goods, services, and structures $ value of all final goods, services, and structures produced in one year with labor and property produced in one year with labor and property supplied by USsupplied by US

Largest measure of economy’s total incomeLargest measure of economy’s total income Shift from GDP to GNP must:Shift from GDP to GNP must:

1. Add all payments that Americans receive from 1. Add all payments that Americans receive from outside the USoutside the US

Subtract all payments made to foreign-owned resources Subtract all payments made to foreign-owned resources in the USin the US

GNP, continuedGNP, continued

Ex:Ex: GDP= $7,872GDP= $7,872 +payments to Americans=242+payments to Americans=242 -payments to foreigners=270-payments to foreigners=270 GNP+$7,844 (similar #s; this is usually true for the GNP+$7,844 (similar #s; this is usually true for the

US, but not all nations) WHY do you think so?US, but not all nations) WHY do you think so?

GNP, continuedGNP, continued

Weakness of GNP: says nothing about the Weakness of GNP: says nothing about the production taking place in the US, just production taking place in the US, just supplied by US Residents- Why is this a supplied by US Residents- Why is this a weakness?weakness?

Why is GDP used as the leading indicator of Why is GDP used as the leading indicator of economic health over the GNP? economic health over the GNP?

GDP vs. GNP activityGDP vs. GNP activity

Five Measures BiographiesFive Measures Biographies

-What does the measure show?-What does the measure show? -What is added or subtracted to find the -What is added or subtracted to find the

measure?measure? -To whom would this measure be most -To whom would this measure be most

valuable? Why?valuable? Why?

Economic Sectors and Circular Economic Sectors and Circular FlowsFlows

The economy is made up of various parts, The economy is made up of various parts, called sectors.called sectors.

Sectors receive various components of the Sectors receive various components of the national income, and the sectors use this national income, and the sectors use this income to purchase the total outputincome to purchase the total output

Consumer Sector (C)Consumer Sector (C)

Basic unit- Household (all persons who Basic unit- Household (all persons who occupy a house, apartment or room)occupy a house, apartment or room) Broader than a FAMILYBroader than a FAMILY

Unrelated Individual- lives alone or with non Unrelated Individual- lives alone or with non relativesrelatives

Why important to the US Bureau of Census?Why important to the US Bureau of Census? Consumer sector receives $ after taxes, etc. Consumer sector receives $ after taxes, etc.

Investment Sector (I)Investment Sector (I)

Proprietorship, partnerships, and corporations.Proprietorship, partnerships, and corporations. Brings together the factors of production to Brings together the factors of production to

produce outputproduce output Income is retained earnings and savings Income is retained earnings and savings

borrowed from the consumer sectorborrowed from the consumer sector

Government Sector (G)Government Sector (G)

AKA Public SectorAKA Public Sector Includes local, state, and federal levels of Includes local, state, and federal levels of

governmentgovernment Receives income from indirect business taxes, Receives income from indirect business taxes,

corporate income taxes, Social Security, corporate income taxes, Social Security, personal income taxes from the consumer personal income taxes from the consumer sectorsector

Foreign Sector (F)Foreign Sector (F)

All consumers and producers outside the USAll consumers and producers outside the US Does not have a specific source of income Does not have a specific source of income

Represents the dollar value of goods sent abroad Represents the dollar value of goods sent abroad and the dollar value of goods purchases abroadand the dollar value of goods purchases abroad

If the two are reasonably close, the foreign sector will If the two are reasonably close, the foreign sector will appear to be fairly small, when there are a large number appear to be fairly small, when there are a large number of goods and services being tradedof goods and services being traded

Output-Expenditure ModelOutput-Expenditure Model

GDP= C+I+G+FGDP= C+I+G+F

Explains and analyzes the performance of the Explains and analyzes the performance of the economy. economy.

Shows how separate sectors of the economy are Shows how separate sectors of the economy are interrelatedinterrelated

Why are the sectors critical links in economic Why are the sectors critical links in economic activity?activity?

How are each of the sectors used in How are each of the sectors used in determining the performance of the nation’s determining the performance of the nation’s economy?economy?

Write down three Write down three questions and the questions and the answers about answers about something you learned something you learned today. You can write today. You can write them in any format- them in any format- true/false, mc, short true/false, mc, short answer, etc answer, etc

HomeworkHomework

Write an essay Write an essay comparing GNP and comparing GNP and GDP as measures of GDP as measures of economic health and economic health and performance. It should performance. It should be one typed page, be one typed page, double-spaced, tnr, 1-double-spaced, tnr, 1-inch margins. inch margins.

Price IndexPrice Index

What are other ways to measure income What are other ways to measure income besides GDP and GNP? besides GDP and GNP?

A major problems with GDP- subject to A major problems with GDP- subject to distortions b/c of inflationdistortions b/c of inflation Inflation can make output appear to grow w/out Inflation can make output appear to grow w/out

actually doing soactually doing so

Constructing a Price IndexConstructing a Price Index

Price Index- a statistical series that can be used Price Index- a statistical series that can be used to measure changes in prices over timeto measure changes in prices over time Used to reduce inflationUsed to reduce inflation Specific to product or range of itemsSpecific to product or range of items

It’s not that difficult to construct a Price Index…so It’s not that difficult to construct a Price Index…so how do we do it?how do we do it?

Construction of Price IndexConstruction of Price Index

1. Choose a Base Year for comparison1. Choose a Base Year for comparison 2. Select a MARKET BASKET of goods- 2. Select a MARKET BASKET of goods-

must remain fixedmust remain fixed Market Basket= goods representative of the Market Basket= goods representative of the

purchases that will be made overtimepurchases that will be made overtime 3. Prices of each time in market basket are 3. Prices of each time in market basket are

totaledtotaled Total=prices of the market basket base year and Total=prices of the market basket base year and

valued at 100%valued at 100%

Major Price IndicesMajor Price Indices

1. Consumer Price Index (CPI)1. Consumer Price Index (CPI) Reports on price changes on 90,000 items in 364 Reports on price changes on 90,000 items in 364

categoriescategories Sampled- prices for goods and services taken from Sampled- prices for goods and services taken from

85 geographical areas85 geographical areas Complied Monthly by BLSComplied Monthly by BLS

Separate indices for 28 selected areas around the Separate indices for 28 selected areas around the countrycountry

Major Price Indices, continuedMajor Price Indices, continued

2. Producer Price Index (PPI)2. Producer Price Index (PPI) Measures price changes received by domestic Measures price changes received by domestic

producers for their own outputproducers for their own output Samples 3,000 commodities w/based year 1982Samples 3,000 commodities w/based year 1982 Reported Monthly through BLSReported Monthly through BLS

Broken down into subcategoriesBroken down into subcategories

Major Price Indices, continuedMajor Price Indices, continued

3. Implicit GDP Price Deflator3. Implicit GDP Price Deflator Average level of prices for all goods and services Average level of prices for all goods and services

in the economyin the economy Good, long-run indicator of price changes consumers Good, long-run indicator of price changes consumers

faceface Computed quarterlyComputed quarterly

Not useful for month-to-month changes in inflationNot useful for month-to-month changes in inflation Base year 1992Base year 1992

Real vs. Current GDPReal vs. Current GDP

Current (or nominal) GDP- not adjusted for Current (or nominal) GDP- not adjusted for inflationinflation

Real GDP- inflation distortions have been Real GDP- inflation distortions have been removedremoved

Write down three Write down three questions and the questions and the answers about answers about something you learned something you learned today. You can write today. You can write them in any format- them in any format- true/false, mc, short true/false, mc, short answer, etc answer, etc

HomeworkHomework Study for Quiz tomorrow, Study for Quiz tomorrow,

use the websites under Unit use the websites under Unit IV on the Wiki to track IV on the Wiki to track price changes over the last price changes over the last five years for three items five years for three items that you buy regularly. that you buy regularly. Chart how your income Chart how your income (allowance/wages) has (allowance/wages) has changed over the five-year changed over the five-year period. Type a paragraph period. Type a paragraph reflecting on your results reflecting on your results and discuss how you have and discuss how you have been affected by inflation. been affected by inflation.