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national income accounting
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measures economy's overall performance
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Bureau os Economic Analysis
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Compiles national income and product accounts
- assess health of economy
- track long run course
formulate policy
- assess health of economy
- track long run course
formulate policy
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GDP (gross domestic output)
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the primary measure os the economy's performance. it is the annual total output of goods and services or the aggregate output.
GDP is a monetary measure
GDP includes only the market value of final goods.
GDP is a monetary measure
GDP includes only the market value of final goods.
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GDP excludes
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financial transactions
- public transfer payments
- private transfer payments
- stock market transactions
second hand sales
- sell used car to a friend
- public transfer payments
- private transfer payments
- stock market transactions
second hand sales
- sell used car to a friend
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approaches to GDP
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- Income approach
- expenditure approoach
- expenditure approoach
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income approach
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count income derived from production
- wages, rental income, interest income, profit
- wages, rental income, interest income, profit
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Expenditure Approach
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count sum of money spent buying the final goods only!
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GNP (gross national product)
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total market value of all final goods produced by a country's citizens/ residents, even if the production takes place outside the borders.
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Personal Consumption Expenditures
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- Durable goods
- Nondurable goods
- Consumer expenditures for services
- Domestic plus foreign goods produced
- Nondurable goods
- Consumer expenditures for services
- Domestic plus foreign goods produced
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Gross private domestic investment Ig
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- Machinery equipment and tools
- All construction
- Positive and Negative changes in inventories
- creation of new capital assets
- noninvestment transactions excluded
- All construction
- Positive and Negative changes in inventories
- creation of new capital assets
- noninvestment transactions excluded
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Depreciation
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decline in the economic value over time
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G- Government purchases
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included in GDP
expenditures for goods and services
expenditures for publicly owned capital
expenditures for goods and services
expenditures for publicly owned capital
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(Xn)- Net exports
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...
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peak
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business activity has reached a temporary maximum. Here the economy is near or at full employment and the level of real output is at or very close to the economy's capacity. The price level is likely to rise during this phase.
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recession
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is a period of decline in total output, income, and employment. This downturn, which lasts 6 months or more, is marked by the widespread contraction of business activity in many sectors of the economy. Along with declines in real GDP, significant increases in unemployment occur.
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business cycle
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Business cycles are alternating rises and declines in the level of economic activity, sometimes over several years. Individual cycles (one "up" followed by one "down") vary substantially in duration and intensity.
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trough
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In the trough of the recession or depression, output and employment "bottom out" at their lowest levels. The trough phase may be either short-lived or quite long.
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expansion
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A recession is usually followed by a recovery and expansion, a period in which real GDP, income, and employment rise. At some point, the economy again approaches full employment.
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causes of business cycles
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irregular innovation; productivity changes; monetary factors; political events; financial instabilities
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irregular innovation
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Significant new products or production methods, such as those associated with the railroad, automobile, computer, and Internet, can rapidly spread through the economy, sparking sizable increases in investment, consumption, output, and employment.
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productivity changes
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When productivity—output per unit of input—unexpectedly increases, the economy booms; when productivity unexpectedly decreases, the economy recedes.
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monetary factors
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Some economists see business cycles as purely monetary phenomena. When a nation's central bank shocks the economy by creating more money than people were expecting, an inflationary boom in output occurs. By contrast, printing less money than people were expecting triggers an output decline and, eventually, a price-level fall.
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political events
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Unexpected political events, such as peace treaties, new wars, or the 9/11 terrorist attacks, can create economic opportunities or strains. In adjusting to these shocks, the economy may experience upswings or downswings.
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financial instabilities
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Unexpected financial bubbles (rapid asset price increases) or bursts (abrupt asset price decreases) can spill over to the general economy by expanding or contracting lending, and boosting or eroding the confidence of consumers and businesses.
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labor force
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The labor force consists of people who are able and willing to work. Both those who are employed and those who are unemployed but actively seeking work are counted as being in the labor force.
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unemployments rate
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is the percentage of the labor force unemployed:
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part time employment
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The BLS lists all part-time workers as fully employed.
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discouraged workers
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employees who have the labor force because they have not been able to find employment
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frictional unemployment
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voluntarily changing jobs, temporary layoffs, or unemployed workers between jobs.
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structural employment
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Changes over time in consumer demand and in technology alter the "structure" of the total demand for labor, both occupationally and geographically. these workers don't have sufficient skills and are not in a place where work in available.
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cyclical unemployment
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Unemployment that is caused by a decline in total spending
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full employment rate of unemployment or natural rate of unemployment
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the unemployment rate that is consistent with full employment; at the NRU, the economy is said to be producing its potential output. This is the real GDP that occurs when the economy is "fully employed."
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GDP gap
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the difference between actual and potential GDP.
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okuns law
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indicates that for every 1 percentage point by which the actual unemployment rate exceeds the natural rate, a negative GDP gap of about 2 percent occurs. With this information, we can calculate the absolute loss of output associated with any above-natural unemployment rate
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inflation
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a rise in the general level of prices. When inflation occurs, each dollar of income will buy fewer goods and services than before. Inflation reduces the "purchasing power" of money. But inflation does not mean that all prices are rising.
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consumer price index
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the government uses this index to report inflation rates each month and each year. It also uses the CPI to adjust Social Security benefits and income tax brackets for inflation. The CPI reports the price of a "market basket" of some 300 consumer goods and services that are purchased by a typical urban consumer.
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deflation
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In rare cases, the CPI declines from one year to the next. For example, the CPI fell from 215.3 in 2008 to 214.5 in 2009. The rate of inflation for 2009 therefore was −0.4 percent.
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rule of 70
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tells us that we can find the number of years it will take for some measure to double, given its annual percentage increase, by dividing that percentage increase into the number 70. So a 3 percent annual rate of inflation will double the price level in about 23 (= 70 ÷ 3) years. Inflation of 8 percent per year will double the price level in about 9 (= 70 ÷ 8) years.
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demand-pull inflation
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When resources are already fully employed, the business sector cannot respond to excess demand by expanding output. So the excess demand bids up the prices of the limited output,
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cost-pull inflation
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the price level increased even though total spending was not excessive. These were periods when output and employment were both declining (evidence that total spending was not excessive) while the general price level was rising.
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core inflation
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y stripping volatile food and energy prices from the CPI, policymakers isolate so-called core inflation, the underlying increases in the CPI after volatile food and energy prices are removed. If core inflation is low and stable, policymakers may be satisfied with current policy even though changes in the overall CPI index may be suggesting a rising rate of inflation.
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nominal income
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is the number of dollars received as wages, rent, interest, or profit
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real income
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is a measure of the amount of goods and services nominal income can buy; it is the purchasing power of nominal income, or income adjusted for inflation
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unanticipated inflation
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hurt: savers, creditors, fixed income receivers
helped or unaffected: flexible income or debtors
helped or unaffected: flexible income or debtors
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real interest rate
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is the percentage increase in purchasing power that the borrower pays the lender.
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nominal interest rate
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s the percentage increase in money that the borrower pays the lender, including that resulting from the built-in expectation of inflation,
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hyper inflation
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which is extraordinarily rapid inflation, can have a devastating impact on real output and employment.
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aggregate demand
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is a schedule or curve that shows the amount of a nation's output (real GDP) that buyers collectively desire to purchase at each possible price level. These buyers include the nation's households, businesses, and government along with consumers located abroad (households, businesses, and governments in other nations).
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real balances effect
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Causes the downward slope of the demand curve; A change in the price level produces a real-balances effect. Here is how it works: A higher price level reduces the real value or purchasing power of the public's accumulated savings balances.
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interest rate effect
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causes the downward slope of the demand curve; higher price level increases the demand for money. So, given a fixed supply of money, an increase in money demand will drive up the price paid for its use. That price is the interest rate.
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foreign purchases effect
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causes the downward slope of the demand curve; When the U.S. price level rises relative to foreign price levels (and exchange rates do not respond quickly or completely), foreigners buy fewer U.S. goods and Americans buy more foreign goods. Therefore, U.S. exports fall and U.S. imports rise. In short, the rise in the price level reduces the quantity of U.S. goods demanded as net exports.
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determinants of aggregate demand
whats shifts the demand curve?:
consumer spending; investment spending; government spending; net export spending
whats shifts the demand curve?:
consumer spending; investment spending; government spending; net export spending
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Other things equal, a change in the price level will change the amount of aggregate spending and therefore change the amount of real GDP demanded by the economy. Movements along a fixed aggregate demand curve represent these changes in real GDP. However, if one or more of those "other things" change, the entire aggregate demand curve will shift.
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consumer wealth (consumer spending)
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Consumer wealth is the total dollar value of all assets owned by consumers in the economy less the dollar value of their liabilities (debts). Assets include stocks, bonds, and real estate. Liabilities include mortgages, car loans, and credit card balances.
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household borrowing (consumer spending)
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Consumers can increase their consumption spending by borrowing. Doing so shifts the aggregate demand curve to the right. By contrast, a decrease in borrowing for consumption purposes shifts the aggregate demand curve to the left.
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consumer expectations (consumer spending)
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Changes in expectations about the future may alter consumer spending. When people expect their future real incomes to rise, they tend to spend more of their current incomes.
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personal taxes (consumer spending)
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A reduction in personal income tax rates raises take-home income and increases consumer purchases at each possible price level. Tax cuts shift the aggregate demand curve to the right. Tax increases reduce consumption spending and shift the curve to the left.
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aggregate supply
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s a schedule or curve showing the relationship between a nation's price level and the amount of real domestic output that firms in the economy produce. This relationship varies depending on the time horizon and how quickly output prices and input prices can change.
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immediate short run
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both input prices as well as output prices are fixed. (horizontal line)
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short run
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input prices are fixed, but output prices can vary. (curve upward)
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long run
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input prices as well as output prices can vary. (vertical line)
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