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Selling Stock Certificates - PowerPoint

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									    “...I mean just these sixteen accomplishments




6
           or whatever: I mean, we've got a major
               rapport - relationship of economics,
                       major in the security, and all
                              of that, we should not
                                       lose sight of.”
                                        George W. Bush




Measuring Domestic Output and
National Income
Chapter Objectives

 How GDP is Defined and Measured
 Circular Flow
 The Nature and Function of a GDP Price
  Index
 The Difference Between Nominal GDP and
  Real GDP
 Some Limitations of the GDP Measure

                                           2
  Gross Domestic Product

 GDP, or gross domestic product, is the market value of all
  final goods and services produced in a country in a given time
  period.

 US GDP, 2nd quarter 2008 ($ billions) :   (Chg from previous period)

     Nominal GDP             $14,497.8                (+3.5%)
     Real GDP (2005 dollars) $13,415.3                (+1.5%)
 US GDP, 2nd quarter 2009 ($ billions) :
     Nominal GDP             $14,143.3                (- 1.0%)
     Real GDP (2005 dollars) $12,892.5                (- 1.0%)
      Source: www.BEA.gov

                                                                         3
Gross Domestic Product
                                           Market Value
 GDP is a market value -- goods and services are
  valued at their market prices.
 To add sofas and computers, we add the market
  values so we have a total value of output in dollars.
    Year    Annual Output              Market Value
               3 sofas
    2008                     (3) ($500) + (2) ($2,000) = $5,500
             2 computers
               2 sofas
    2009                     (2) ($500) + (3) ($2,000) = $7,000
             3 computers
 Output in 2009 is greater than output in 2008.


                                                                  4
Gross Domestic Product
                Final Goods and Services
A final good (or service), is an item bought by its
 final user during a specified time period.
Only value added is considered in GDP. Excluding
 intermediate goods and services avoids double
 counting.
                           Sales Value   Value Added
Sheep Ranch                   $120          $120
Wool                          $180           $60
Suit Maker                    $220           $40
Macy's Department Store       $350          $130
Total                         $870          $350
                                                       5
 Gross Domestic Product
                Produced Within a Country
GDP measures production within a nation’s borders –
 domestic production – no matter who owns the resources.
  Cars produced in a Japanese-owned factory in the US
    counts in US GDP.
  Cars produced in a US-owned factory in Mexico counts
    in Mexico’s GDP.



How is this different from GNP (Gross National Product)?

                                                           6
Gross Domestic Product
                   In a Given Time Period
GDP measures production during a specific time
 period, normally a year or a quarter of a year.
                  $15,000
                                            Nominal
                                              GDP
                                                      Real
Annual GDP ($B)




                  $10,000
                                                      GDP


                   $5,000




                      $0
                       1988   1993   1998   2003         2008

                                                                7
NOT Counted in GDP
             Non- Production Transactions
Financial:
   Public transfer payments (payments made by US
     government to households for which nothing is
     required in return):
        Social Security/Medicare
        Welfare benefits
        Veteran’s benefits
  Private transfer payments such as cash gifts



                                                     8
NOT Counted in GDP
             Non- Production Transactions
Financial:
   Stock market transactions:
      Buying/selling stock certificates or bonds transfers of
       pieces of paper; it is not producing goods or services.
   Second-hand sales or sales of used goods
      Count production in GDP for the year it is new.
      Buying a used car or a house built in 1995 will NOT
       count in GDP for this year (counted in the year it was
       produced).



                                                                 9
Measuring GDP
                                      Two Approaches
The Expenditure Approach
   Measures GDP as the sum of consumption expenditure,
    investment, government purchases of goods and services,
    and net exports.
   Final-Product or Value-Added
   The sum of the money spent to buy the output.
The Income Approach
   Measures GDP by summing the incomes that firms pay
    households for the factors of production they hire.
     Wages (return to labor)  Interest (return to capital)
     Rent (return to land)        Profits (return to enterprise)

                                                                 10
Expenditure Approach
               C = Personal Consumption
Personal Consumption Expenditures, C
   Durable Consumer Goods (expected life of 3+ years):
     Cars, Appliances, TV’s . . .

   Nondurable Consumer Goods (expected life less than
    3 years):
     Groceries, pencils, toothpaste . . .

   Consumer Expenditures for Services
     Legal advice, healthcare, manicures, education . . .


                                                             11
Expenditure Approach
         Gross Private Domestic Investment
Gross Private Domestic Investment, I
   Machinery, Equipment, and Tools
   All Construction (commercial AND residential)
   Changes in Inventories (unsold goods, unconsumed
    output)

   NOT included - Noninvestment Transactions, such
    as transfer of ownership of assets (like houses,
    stocks, bonds)

                                                       12
Expenditure Approach
                  Government Purchases

Government Purchases, G
  Expenditures for Goods and Services
       Labor, office supplies, uniforms . . .

  Expenditures for Social Capital
       Highways, schools, museums . . .

 Remember: G does not include transfer payments




                                                   13
Expenditure Approach
                                        Net Exports

Net Exports, Xn
  Exports (X=goods sold to other countries)
    Dell computers, haircuts for foreign tourists

  Imports (M=goods bought from other countries)
    Toyota Prius made in Japan, haircut you got in
      Paris

  Xn = Exports (X) – Imports (M)


                                                      14
Two Approaches to GDP

Expenditure Approach          Income Approach
    Consumption                   Wages
   by Households
                                   Rents
     Investment         G
    by Businesses      =D =       Interest

    Government          P         Profits
     Purchases

  Net Expenditures               Statistical
   By Foreigners                Adjustments
                                                15
Expenditure Approach

             Putting It All Together:
             GDP = C + I + G + Xn
Circular Flow of Expenditure and Income
   GDP = production = income = expenditures
   The equality of income and output shows the link
      between productivity and living standards.




                                                       16
 Circular Flow Diagram

 The circular flow diagram shows the transactions among
  households, firms, governments, and the rest of the
  world.




                                                       17
Transactions take place in factor (resource) markets,
      goods markets, and financial markets.




                                                        18
        Firms hire factors of production from households.
The blue flow, Y, shows total income paid by firms to households.




Y = income
                                                                    19
       Households buy consumer goods and services.
      The red flow, C, shows consumption expenditures.




Y = income        C = consumption
                                                         20
            Households save, S, and pay taxes, T.
Firms borrow some of household savings to pay for investment.




                                                           21
           Firms buy capital goods from other firms.
The red flow I represents this investment expenditure by firms.

(I = investment = creation of capital)




                                                              22
  Governments buy goods and services, G, and borrow or
    repay debt if spending exceeds or is less than taxes.

G = government purchases




                                                            23
The rest of the world buys goods and services from us, X and
   sells us goods and services, M: net exports are X – M.

X = exports, M = imports, so X – M = net exports




                                                           24
And the rest of the world borrows from us or lends to us
depending on whether net exports are positive or negative.




                                                        25
The blue and red flows are the circular flow of expenditure
 and income. The green flows are borrowing and lending.




                                                          26
       The sum of the red flows (C + I + G +(X-M))
                 equals the blue flow (Y).

Y = C + I + G + (X-M)




                                                     27
Nominal Versus Real GDP

Nominal GDP
   GDP measured in terms of the price level at the
     time of measurement (NOT adjusted for inflation).
Real GDP
    GDP adjusted for inflation.
    Nominal GDP is deflated (if prices increased) or
      inflated (if prices fell).
    Only real GDP measures changes in output
      accurately, holding price constant.


                                                         28
Nominal Versus Real GDP

   Year          Item     Quantity    Price
   2006          Hats     100         $1.00
                 Bats      20         $5.00

In 2006:
    Expenditure on hats   $100 = (100 x $1.00)
    Expenditure on bats   $100 = ( 20 x $5.00)
    Nominal GDP           $200



                                                 29
Nominal Versus Real GDP

  Year           Item     Quantity     Price
  2007           Hats     160         $0.50
                 Bats      22         $22.50

In 2007:
    Expenditure on hats   $ 80 (160 x $0.50)
    Expenditure on bats   $495 (22 x $22.50)
    Nominal GDP           $575



                                               30
Nominal Versus Real GDP

 Year             Item          Quantity   Price
 2006             Hats          100        $1.00
                  Bats           20        $5.00

 2007             Hats          160        $0.50
                  Bats           22        $22.50

Total spending:          2006    $200
                         2007    $575

                                                    31
Nominal Versus Real GDP

Two Methods for Calculating Real GDP
   1. GDP Price Index Method
   2. Base Year Prices Method

1. GDP Price Index Method
   Price index = measure of price of a specific “market
   basket” of goods in a specific year compared to
   price of identical goods in a base, or reference, year.

    Price          Price of Market Basket
    Index              In Specific Year
    In Given   =    Price of Same Basket
                                             x 100
    Year                 In Base Year
                                                             32
Nominal Versus Real GDP
                  GDP Price Index Method
                   Pizzas      Qty        Price
   Base year       2005         75       $12.00
                   2006         90       $15.00
                   2007        110       $23.50

  Price              Price of Market Basket
  Index                  In Specific Year
  In Given     =      Price of Same Basket
                                                  x 100
  Year                     In Base Year

Note: Value of any index in the base year is ALWAYS 100.
                     Do you see why?
                                                           33
Nominal Versus Real GDP
                  GDP Price Index Method
                Pizzas         Qty       Price
    Base year   2005            75       $12.00
                2006            90       $15.00
                2007           110       $23.50


       Price Index           $15.00
        In 2006        =     $12.00
                                       x 100 = 125

      Price Index          $23.50
       In 2007       =     $12.00
                                      x 100 =195.8

                                                     34
Nominal Versus Real GDP
                Base Year Prices Method
         Pizzas   Qty    Price       GDP      GDP Price Index
Base year 2005    75    $12.00       $900          100
         2006     90    $15.00        year
                                 Base$1,350        125
         2007     110   $23.50      $2,585        195.8

                           Nominal GDP
          Real GDP =
                         GDP Price Index/100

           GDP price index is also known as
                 “GDP deflator”, because
              it “deflates” nominal to real
            (removes influence of inflation)
                                                                35
Nominal Versus Real GDP
                Base Year Prices Method
         Pizzas   Qty       Price        GDP      GDP Price Index
Base year 2005    75        $12.00       $900          100
         2006     90        $15.00        year
                                     Base$1,350        125
         2007     110       $23.50      $2,585        195.8


          Real GDP            $1,350
          In 2006       =       1.25
                                           = $1,08000
         Real GDP             $2,585
         In 2007        =                  = $1,32022
                               1.958



                                                                    36
Nominal Versus Real GDP
                 Base Year Prices Method
  Determine market value of basket in successive years
 assuming the price has not changed from the base year.

Pizza   Quantity Price   Nominal GDP       Real GDP
2005      75     $1200 75x$1200=$900    75x$1200=$900
2006      90     $1500 90x$1500=$1,350 90x$1200=$1,080
2007     110    $2350 110x$2350=$2,585 110x$1200=$1,320


                         Current         Base-Year
                          Prices           Price

                                                          37
Nominal Versus Real GDP
    Calculating Percentage Change in GDP
Reminder: To calculate % change in anything, (New – Old)/Old

Percentage change in real GDP from 2006 to 2007:
($1,320 – $1,080) / $,1080 = 0.222 = 22.2% increase
 Pizza   Quantity Price   Nominal GDP       Real GDP
 2005      75     $1200 75x$1200=$900    75x$1200=$900
 2006      90     $1500 90x$1500=$1,350 90x$1200=$1,080
 2007      110     $2350 110x$2350=$2,585 110x$1200=$1,320
 2008      122     $2600   ____________ ________________

% change in real GDP from 2005 to 2006 = __________________
% change in real GDP from 2005 to 2007 = __________________
                                                               38
Measuring Economic Growth

 The economic growth rate is the percentage change
  in GDP from one year to the next.
 We measure economic growth so we can make:
   Economic welfare comparisons
   International welfare comparisons
   Business cycle forecasts




                                                      39
Shortcomings of GDP
          Economic Welfare Comparisons
 Economic welfare measures the nation’s overall state of
  economic well-being.
 Real GDP is not a perfect measure of economic welfare
  for seven reasons:
  1. Real GDP does not include household production
      (nonmarket activities), that is, productive activities done
      in and around the house by members of the household.

   2. The value of “leisure” (time spent NOT working) is not
      captured in real GDP.


                                                                    40
Shortcomings of GDP
          Economic Welfare Comparisons
 Economic welfare measures the nation’s overall state of
  economic well-being.
 Real GDP is not a perfect measure of economic welfare
  for seven reasons:
  3. Real GDP does not capture the value of improvements in
      quality. (ex, $200 cell phone today is of much higher
      quality than $200 cell phone 10 years ago).

   4. Real GDP does not account for activity in the illegal
      underground economy, or legal activity with unreported
      income.


                                                               41
Shortcomings of GDP
          Economic Welfare Comparisons
 Economic welfare measures the nation’s overall state of
  economic well-being.
 Real GDP is not a perfect measure of economic welfare
  for seven reasons:
  5. Environmental damage is not deducted from real GDP.
  6. Composition and distribution of output is not accounted
      for in real GDP. (ex. an assault rifle and a set of
      encyclopedias is valued equally if prices are equal).
  7. Noneconomic sources of well-being, such as peace time,
      justice, civility, reduced crime, are not included in real
      GDP.


                                                                   42
Key Terms

 GDP (gross domestic product)    consumption expenditures
 intermediate goods               (C)
 final goods                     net exports (Xn)
 value added                     nominal GDP
 expenditures approach           real GDP
 income approach                 leisure
 government purchases            underground economy
  (G)
 domestic investment (I)

                                                              43
Measuring Output and Income
                                          Wrap Up

                  Gross Domestic
                  Product (GDP)

                            Real v.
Definition   Measure                       Evaluate
                            Nominal
             Expenditure    Definition     Shortcomings

               Income       Two Ways
                           to Calculate
              Circular
               Flow          Growth
                                                          44

								
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